ZAR holds steady as SA GDP data disappoints

• Markets have stabilised but are still nervous because the impact of policy intervention is uncertain. While the rand has found some stability from international developments, yesterday’s weak SA GDP print for Q2:15 is rand-negative, and interest-rate-positive. 

• The People’s Bank of China cut interest rates by 25 bps after markets closed on Tuesday and also cut the one-year savings rate by the same amount. It also said that it would lower the reserve requirement ratio for large banks by 50 bps in September to inject liquidity into the banking sector. The rate cut did not give the boost to stocks that was intended, with the indices swinging wildly throughout the day. 

• The rand saw some strength on the back of the rates cut announcement, and traded below 13.00 in spite of the disappointing SA GDP data released earlier in the day. It traded between a low of USDZAR12.9828 and a high of USDZAR13.2501. 

• Stats SA has released both June mining production data and Q2:15 GDP data. The mining production data surprised on the upside, coming in above Bloomberg consensus expectations of 3.1% y/y. Mining output came in at 4.0% y/y in June from 2.7% y/y in May. PGM (platinum group metals) once again drove the positive growth rate. 

• GDP growth contracted -1.3% q/q in Q2:15 from positive growth of 1.3% q/q in Q1:15 and against Bloomberg consensus expectations of 0.6% q/q. The slowdown was broad-based, with only two sectors contributing more to growth in Q2:15 than they did in Q1:15 on a q/q (saar) basis.

International developments

Markets have stabilised, but remain nervous as the impact of policy intervention remains uncertain. While the rand has found stability in international developments, yesterday’s weak GDP print for Q2:15 is rand-negative, and interest- rate-positive. However, the net impact of a weak rand and low growth on the SARB’s decision in September will depend ultimately on how the inflation outlook changes between weak growth and a weak rand. We maintain our view of no rate hike in September. SAGBs also found some support, which we expect to remain in place given the weak SA growth data.

The People’s Bank of China cut interest rates by 25 bps after markets closed on Tuesday and also cut the one-year savings rate by the same amount. It also said that it would lower the reserve requirement ratio for large banks by 50 bps in September to inject liquidity into the banking sector. These rates cuts came on the heels of two days of global market instability precipitated by fears about the slowdown of the Chinese economy.

The rate cut did not give the boost to stocks that was intended, with the indices swinging wildly throughout the day. However, the cuts have had some effect, as most markets have started to recover slightly. At the time of writing, the Shanghai Composite was up 3.2%, the Shenzhen Composite was up 2.1%, the Japanese Nikkei was up 3.6%, and the Hong Kong Hang Seng was up 1.1%. The American markets haven’t yet recovered, with the S&P index down 1.4% and the Dow Jones down 1.3% at the time of writing. This makes the sixth straight day of losses for the S&P Index, its longest losing streak since 2012. The S&P and Dow Jones futures contracts points to a positive open today.

The rand saw some strength on the back of the rates cut announcement, and traded below 13.00 in spite of the disappointing GDP data released earlier in the day.

The VIX index has fallen 11.6% to 36 at time of writing. This implies that market volatility is decreasing, although it still has some way to go to drop back to regular levels.

In the bond markets, we have seen some pressure on USTs, with the 10-year yield pushing from just above 2% to 2.10%. Worth noting is that the 5-year real interest rate as implied by the US bond market remains anchored around the 0.5% level. This also implies that the breakeven inflation rate in the US has come down sharply in recent weeks to levels last seen at the start of the year. The lower nominal bond yields in the US should support local SAGBs.

The day is light in data today. In the US today, we would look at US durable goods orders data. However, most attention should be on the performance global equity markets.

Local developments

Stats SA released both the June mining production data and the Q2:15 GDP data yesterday. The mining production data surprised on the upside, coming in above Bloomberg consensus expectations of 3.1% y/y. Mining output came in at 4.0% y/y in June from 2.7% y/y in May. PGM once again drove the positive growth rate as strike action in the sub-sector during H1:14 resulted in favourable base effects and supported June’s print. Notably, PGM have been the primary driver of the positive and robust y/y growth rates in mining in 2015 (with the exception of January’s print).

Despite these robust growth rates since February 2015, on a q/q basis, mining output in Q2:15 contracted 2.0% q/q (seasonally adjusted), down from positive growth of 2.4% q/q (seasonally adjusted) in Q1:15. This subtracted 0.5 ppts from Q2:15 GDP (revealing that the economy contracted 1.3% q/q on an annualised basis). This was down from the 0.7 ppts added by mining in Q1:15 GDP. The q/q underperformance was driven by contraction in coal and iron ore, which carries large weights in the mining production index.

Our economics team is of the view that the poor performance in mining production (except in PGM which are being spurred by base effects) is due to a combination of the decline in commodity prices due to a slowdown in demand from China, alongside domestic constraints. These are expected to reduce mining volumes over the medium term, especially as China’s growth prospects continues to come into question — exacerbated by the recent sharp decline in China’s equity market as well as the devaluation of the renminbi, both of which have resulted in EM contagion and shaken global market sentiment.

As mentioned above, GDP growth contracted by -1.3% q/q in Q2:15 from positive growth of 1.3% q/q in Q1:15 and against Bloomberg consensus expectations of 0.6% q/q. The slowdown was broad-based, with only two sectors contributing more to growth in Q2:15 than they did in Q1:15 on a q/q (saar) basis, and both of these are driven by public sector spending. Our economics team noted that the biggest surprise was the 0.4% contraction in the trade and hospitality sector, which they had anticipated would grow around 5.0%. They assume that this is related to weak activity in the tourist-related industries as opposed to retail and wholesale consumption.

New legislation put in place in June 2014 requiring that tourists to SA from countries that require a visa must appear in person during the visa application process in order to obtain a biometric visa. The contribution to GDP by tourism is likely to decline further in H2:15 as the Department of Home Affairs effected new legislation, as of 1st June 2015, requiring that potential tourists under the age of18 present an unabridged birth certificate in addition to a passport, and a visa where applicable.

The fall in manufacturing (-4.7% q/q) was driven by lower production in electricity intensive sectors, i.e. basic iron & steel, non-ferrous metals and metal products and machinery, as well as petroleum based products. Our economics team notes that SA’s ongoing de-industrialisation has made it clear that this trend is likely to continue, even if government takes steps to protect SA manufacturers from dumping and rising costs. Manufacturing faces both structural and cyclical headwinds, as commodity prices continue to slide and mining companies look to reduce their exposure to SA.

It’s a quiet day today ahead of the July PPI data out tomorrow.

Markets

The rand strengthened on Tuesday, closing at 13.20, compared to Monday’s close of 13.23. The rand’s appreciation against the greenback occurred despite dollar strength against all of the major currencies; the dollar posted gains against the euro (-0.9%), the pound (-0.6%) and the yen (0.4%). The rand strengthened against all of the major crosses; the rand gained ground against the euro (-1.2%), the pound (-0.8%) and the yen (0.6%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in a mixed performance amongst the EM currencies. The rand traded between a low of USDZAR12.9828 and a high of USDZAR13.2501.

Commodity prices were mixed on Tuesday. Platinum and gold were down on Tuesday, by 1.4% and 1.3% respectively, while copper was up 2.3%. Brent closed the day 1.2% higher, at $43.21/bbl. The developed world MSCI was down by 0.4% on the Tuesday, while the MSCI EM was up by 2.2% on the day. The ALSI was up by 2.8%. Non-residents were net buyers (ZAR630 million) of equities on the day. The EMBI spread narrowed on Tuesday, by 15 bps, and SA’s 5yr CDS narrowed by the same amount. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 11.6%.

Latest SA publications

SA Macroeconomics: Mining grows 4.0% in June: Q2:15 contracts 2.0% q/q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 August 2015)

SA Macroeconomics: SA GDP disappoints, -1.3% q/q: Broad based weakness, agric & trade far worse than expected by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 August 2015)

SA FIC Weekly: Yields – when the rand blows, and the SARB is forced to hike by Walter de Wet, Shireen Darmalingam and Penny Driver (24 August 2015)

SA Credit & Securitisation Flash Note: Robust ACSA FY:15 results — but regulatory concerns linger by Steffen Kriel (20 August 2015)

SA Macroeconomics: Eskom Holdings SOC Ltd: Fragile liquidity position by Steffen Kriel and Kim Silberman (18 August 2015)

SA Credit & Securitisation Flash Note: Eskom Holdings SOC Ltd by Steffen Kriel and Kim Silberman (18 August 2015)

SA Macroeconomics: SA's terms of trade under increasing pressure in 2H2015 : We consider SA's TOT under 3 commodity price scenarios by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 August 2015)

SA FIC Weekly: When China devalues by Walter de Wet, Shireen Darmalingam and Penny Driver (17 August 2015)

SA Macroeconomics: We revise our commodity price and currency outlook: Risks to commodity prices lie to the downside & we adjust our ZAR forecast weaker by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 August 2015)

SA FX Weekly: Rand weaker as cyclical drivers and EM support wane by Walter de Wet, Shireen Darmalingam and Penny Driver (12 August 2015)

SA Macroeconomics: June manufacturing -0.4% y/y: Q2 contracts -4.9% q/q saar, sending the sector into recession by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 August 2015)