Fed FOMC leaves rates unchanged; ZAR under pressure

• As widely expected, the Fed did not raise the Fed funds rate yesterday.
  However, indications are that they still will raise interest rates this year. While US equity markets shrugged off the possibility of a rate hike, USTs came under pressure, with the 10-year bond yield now back above 2.31%.

• Yesterday’s statement indicated that employment continues to make “solid” gains and that the slack in the job market is diminishing.

• Although the rand remains below the 12.60 level, the currency did come under some pressure following the release of the FOMC statement, depreciating from around 12.52 to the current level of 12.58. The rand traded between a low of USDZAR12.4686 and a high of USDZAR12.5998.

• The SARB released the M3 money supply and PSCE data yesterday. M3 came in ahead of expectations (8.6% y/y) at 8.9% y/y in June from 8.4% y/y in May. PSCE growth, however, slowed to 8.14% y/y in June from a revised 9.42% y/y (previously 9.53% y/y).

• We believe that the economic environment remain challenging. The protracted rise in the repo rate tends to affect household credit with a 12-month lag and, more importantly, the deluge of regulation will reduce the availability, and increase the cost, of credit.

• Stats SA’s release of the Quarterly Labour Force Survey (QLFS) for Q2:15 saw the unemployment rate decline to 25.0% from 26.4% in Q1:15.

• While employment increased by 198,000 jobs on a quarterly basis, a substantial 563,000 jobs were added on an annual basis.

International developments

As widely expected, the Fed did not raise the Fed funds rate yesterday. However, indications are that they still will raise interest rates this year. While US equity markets shrugged off the possibility of a rate hike, USTs came under pressure, with the 10-year bond yield now back above 2.31%. The S&P and the Dow closed 0.73% and 0.69% higher respectively.

Yesterday’s statement indicated that employment continues to make “solid” gains and that the slack in the job market is diminishing. Also key is that the Fed sees the growth outlook for the US economy as nearly balanced, perhaps indicating that they seem less concerned about the impact of external events such as Greece and concerns over Chinese growth on the US economy.

Although the rand remains below the 12.60 level, the currency did come under some pressure following the release of the FOMC statement, depreciating from around 12.52 to the current level of 12.58. The prospect of a US rate hike – which we pencil in for September - will keep the rand on the back foot. That said, the market remains split about the possibility of a rate hike in September or December. Higher UST yields and a weaker rand may put local bonds under pressure.

Yesterday the Brazilian central bank raised the benchmark rate by 50 bps. This is the 5th rate hike this year; they have raised the benchmark rate from 7.25% in March’13 to the current level of 14.25%. The central bank has been battling to contain inflation over the past 12 months. CPI inflation moved from just under 6% in March last year to the current 8.9%. The central bank did, however, indicate that they might pause now for a while. Like the rand, the Brazilian real (BRL) has also been under considerable pressure in recent months as commodity prices tumbled. Brazil was particularly hard hit by the decline in iron ore prices as well as a major corruption scandal at the state-owned energy giant, Petrobras. Since the start of the year, the BRL has depreciated by 25% against the greenback. In contrast, the rand depreciated by only 8.7% YTD against the dollar.

In broader market developments, it is worth noting that equity markets in Asia are mixed this morning. Most importantly is that the Shanghai Composite – a source of recent market volatility – remains largely unchanged on the day after ending yesterday in the green.

Data wise we will look at US GDP for Q2:15. Expectations are for a print of 2.5% q/q SAAR. There will also be the usual weekly US jobless claims numbers. In the Eurozone, we look at business and consumer confidence numbers for July.

Local developments

The SARB released the M3 money supply and PSCE data yesterday. M3 came in ahead of expectations (8.6% y/y) at 8.9% y/y in June from 8.4% y/y in May. PSCE growth, however, slowed to 8.14% y/y in June from a revised 9.42% y/y (previously 9.53% y/y).

The moderation in PSCE was driven by corporate credit, which slowed sharply to 12.9% y/y in June down from a slightly revised 16.0% y/y (previously 16.2%) in May. Our SBGS Economist, Kim Silberman, thinks that weaker business confidence, if sustained, will be a drag on corporate credit. She notes that much of the corporate credit extended to SA companies is used for expansion offshore, particularly in the rest of Africa, and that the fall-off in commodity prices may have started to affect credit appetite.

Credit extended to households accelerated to 3.5% y/y in June from 3.2% y/y in May. Unsecured credit (15% of total household credit) accelerated to 4.9% y/y in June from 3.2% y/y in May. Overdraft growth, which has been in negative territory since March 2015, rebounded significantly to 0.4% y/y, from -8.2% y/y in May. Mortgages, which account for 59% of total household credit, grew marginally to 2.8% y/y (same as April) from 2.7% y/y in May. Other categories of household credit slowed, with instalment sales reaching 4.0% y/y from 5.5% y/y in May. Credit cards, slowed marginally to 8.8% y/y from 8.9% y/y in May.

Looking ahead, Kim thinks that the economic environment will continue to be challenging. The protracted rise in the repo rate tends to affect household credit with a 12-month lag and, more importantly, the deluge of regulation will reduce the availability, and increase the cost, of credit.

Stats SA’s release of the Quarterly Labour Force Survey (QLFS) for Q2:15 saw the unemployment rate decline to 25.0% from 26.4% in Q1:15. Bloomberg consensus had expected an increase to 26.5%. While employment increased by 198,000 jobs on a quarterly basis, a substantial 563,000 jobs were added on an annual basis. The largest quarterly contributors to the decline in unemployment from 5.5m in Q1:15 to 5.2m in Q2:15 were: community and social services, which added 98,000 jobs (0.5% y/y), construction, adding 79,000 jobs (18.5% y/y), trade, which added 73,000 jobs (-1.9% y/y), transport, which added 24,000 jobs (-2.7% y/y), and mining, adding 3,000 jobs in the quarter (6.5% y/y).

The unofficial unemployment rate declined to 34.9% in Q2:15 from 36.1% in Q1:15 despite a slight increase in discouraged job seekers. This comes on the back of a decline in the number of unemployed people in absolute terms. Despite an increase in the number of jobs lost, to 1.9m in Q2:15 from 1.8m in Q1:15, the number of unemployed people fell by 305,000 to 5.23 million due to fewer new entrants, job leavers (resignations) and re-entrants – all symbolic of difficult employment conditions.

Kim notes that with above-inflation wage settlements in the mining industry last year, in addition to strained labour relations and declining commodity prices, she anticipates job losses in the mining sector. Lonmin and Anglo American have already stated their intention to lower their respective employment bases, close shafts and reduce assets. We have already seen job-shedding in the manufacturing sector in the Q2:15 unemployment data, and we expect that the sector will continue to be negatively impacted by ongoing load-shedding and electricity tariff increases. This does not bode well for the labour market in H2:15.

Markets

The rand strengthened further on Wednesday, closing at 12.53, compared to Tuesday’s close of 12.57. The rand’s appreciation against the greenback occurred in line with dollar strength against all of the major currencies; the dollar posted gains against the euro (-0.7%), the yen (0.3%) and the pound (-0.1%). The rand gained ground against all of the major crosses; the euro (-0.9%), the yen (0.5%) and the pound (-0.3%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-best performance amongst the EM currencies, behind only the RUB and BRL. The rand traded between a low of USDZAR12.4686 and a high of USDZAR12.5998.

Commodity prices were up on Wednesday. Copper and platinum were up on Wednesday, by 0.6% and 0.2% respectively. Gold was up 0.1% on the day. Brent closed the day 0.2% higher, at $53.38/bbl. Both the developed world MSCI and the MSCI EM were up on Wednesday, by 0.8% and 1.0% respectively. The ALSI was down by 1.6% on the day. Non-residents were net sellers (-ZAR259 million) of equities on Wednesday. The EMBI spread narrowed by 9 bps on Wednesday, and SA’s 5yr CDS narrowed by 4 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 7.0%.

Latest SA publications

SA Macroeconomics: Q2 unemployment falls to 25%: 563,000 jobs were created Y/Y, & 198,000 Q/Q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 July 2015)

SA Macroeconomics: June PSCE 8.14% y/y: HH unsecured credit accelerates, corporate credit slows to 12.9% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 July 2015)

SA Macroeconomics: EM portfolio flows: Portfolio flows in H1:15 are down 32% on H1:14 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (28 July 2015)

SA Macroeconomics: SA trade surplus expected: $0.3Bn net outflows from EMs: SA saw net debt & equity inflows by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 July 2015)

SA FIC Weekly: Despite the oil price decline, the cyclical underpin for the rand is still far from reliable by Walter de Wet and Shireen Darmalingam (27 July 2015)

SA FIC: The SARB: still hawkish, but more dovish by Walter de Wet (23 July 2015)

SA Macroeconomics: SARB hikes repo 25bps to 6.0%: Statement supportive of our view for rates on hold until 2H:2016 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 July 2015)

SA FIC Trade Idea: Time to revisit the receiver trade by Walter de Wet (23 July 2015)

SA Macroeconomics: May CPI rises to 4.7% y/y: Core falls to 5.5%, food to 4.3% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 July 2015)

SA Macroeconomics: MPC to hike & CPI to rise: Net inflows to EMs over the past week: SA receives lion's share of equity inflows & debt outflows by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 July 2015)

SA FIC Weekly: A 25 bps hike and then a pause by Walter de Wet and Shireen Darmalingam (20 July 2015)

Credit & Securitisation Flash Note: Transnet SOC Ltd by Steffen Kriel (17 July 2015)

Credit & Securitisation Weekly: Another Transnet secondee to Eskom by Steffen Kriel and Varushka Singh (17 July 2015)

SA Macroeconomics: May retail sales growth 2.4% y/y down from 3.4% in Apr: General dealers slowed 2.3% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (15 July 2015)

SA Macroeconomics: Greece reaches a deal, China opens stronger, Oil falls to $56.5: SA consumption expected to slow by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 July 2015)