We look for lower CPI in SA, and further easing from the ECB

Markets eagerly await the ECB announcement around QE tomorrow. Gold continues to move higher, in anticipation. Key will be the details of the QE programme: will it be tied to an inflation target (i.e. QE open-ended until the target is reached), or will the QE be a fixed amount?
Japan keeps monetary policy, and QE, largely unchanged, in line with market expectations.
Against market expectations, Turkey yesterday cut the benchmark rate yesterday from 8.25% to 7.75%. We see the move by the Central Bank of Turkey and the Reserve Bank of India to cut rates in the past few days as something the SARB will take notice of, but not something that will sway the SARB’s rates decision this month.
Local CPI will be published today. Bloomberg consensus is at 5.5% y/y for December. We expect 5.3%.
We expect that the bond market would react favourably should the print come out in line with our forecast. Even a 5.5% print would likely give a small positive impetus to the market.
The rand is marginally stronger this morning, trading just below 11.5900. Our mid-point for the rand in Q1:15 remains at 11.50.
Technicals for the rand suggest that support levels, from where the rand opened this morning, are at 11.5300, 11.4500, 11.3900 and 11.3500. Resistance levels are at 11.6700, 11.7200 and 11.7750.

International developments

This morning, the Bank of Japan kept its monetary policy and asset purchase programme largely unchanged, only tweaking two loan facilities for banks.

But the market remains focused on the ECB’s announcement regarding QE tomorrow. There seems to be general consensus that an asset purchase programme will be announced tomorrow, but the devil is in the detail. We do think that the there are three main reasons to do QE: to support asset prices, to lower yields and to create inflation through currency weakness. Yesterday Steve Barrow discussed the announcement in more detail (see Steve’s G10 Daily). Should the ECB could make the size of QE dependent on achieving the (near) 2% inflation target; that would weaken the euro even more, in our view. Our view on the rand with respect to the EUR and JPY remains unchanged; with the prospect of continued and possibly stepped-up monetary accommodation from the ECB and BoJ, we think that consideration could be given to short EUR and JPY positions versus the rand into bouts of pronounced and broad-based rand weakness.

On the EM front, Turkey’s unexpected 50 bps rate cut yesterday will start seeing markets question whether we are approaching the start of an EM rate cutting cycle; first India, now Turkey. That said we see the move by the Central Bank of Turkey and the Reserve Bank of India to cut rates in the past few days as something the SARB will take notice of, but not something that will sway the SARB’s rates decision this month. We expect the SARB to remain on hold next week.

Local developments

Stats SA released its November mining production data yesterday. Bloomberg consensus estimated mining production to have contracted by 0.3% y/y in November, from the 1.1% y/y contraction in October. The release revealed that mining production contracted by 0.4% y/y with the largest negative growth emanating from PGMs (-14.3% y/y), diamonds (-14.2% y/y), gold (-10.1% y/y) and copper (-10.1% y/y). Measured on a 3-month seasonally adjusted basis, mining output growth improved, increasing by 6.2% compared with the 3 months ending in September at 3.5%. While yesterday’s data didn’t garner significant market attention, the 3-month seasonally adjusted numbers suggests that mining’s contribution to overall GDP growth in Q4:14 is likely to be positive.

Today sees the release of the final CPI data print for December and the final CPI average for 2014. The data will be released at 10h00. Bloomberg consensus expectations are for CPI to have moderated to 5.5% y/y in December. Standard Bank’s view is for CPI to come in at 5.3% y/y from 5.8% y/y in November (see our Economics Weekly for more detail). This would result in an average for the year print of 6.1%. Our economist Kim Silberman attributes the moderation (in large part) in the December print to the lower petrol price which fell from R12.98/l to R12.29/l. On its own, this shaved 0.38ppts off November’s 5.8% y/y inflation rate. Petrol fell a further 127c/l in January 2015, which, all things being equal, will shave 0.7ppts off December’s inflation rate. Kim also expects a moderation in food prices in December, from 7.7% y/y to 7.1%y/y, accounting for another 0.09ppt reduction in CPI.

Markets

The rand strengthened on Tuesday, closing at USDZAR11.59, compared with Monday’s close of USDZAR11.56. Rand appreciation against the dollar occurred despite dollar strength against some of the major crosses; the dollar strengthened against the euro (0.5%) and against the yen (1.1%). The dollar, however, weakened against the pound (-0.2%). The rand strengthened against all of the other major crosses, with the biggest increase seen against the yen (1.5%), the euro (0.9%) and the dollar (0.4%). The rand put in the best performance amongst the commodity currencies we monitor and the third-best performance amongst the EM currencies, behind the BRL and HUF. The rand traded between a low of USDZAR11.5722 and a high of USDZAR11.6858 intraday.

Yesterday’s bond auction was considerably better bid than the first auction of the year last week. Total bids amounted to R7,325m (R4,530m last week), for a bid-cover of 3.12x. The R2030 cleared at 7.845% (0.5 bps below market trading level), the R2032 at 8.015% (at market level) and the R214 at 8.12 (-1.5 bps below market trading level). Of the 49 bids for the R2030, 31% were allocated; 29% of the 56 bids for the R2032 were allocated, while 32% of the 47 bids for the R214 were allocated. In pre-auction trade, we saw very little trading with the FI market fairly unchanged. Going into the auction, bonds had already rallied by around 10 bps from the prior auction’s levels.

Turnover was extremely low yesterday at R22.4bn in nominal SAGBs, especially considering it was an auction day. 25% of turnover was in the R186, 14% in R203 and 24% from the three auction stock bonds. Offshore investors were net buyers of R1.9bn in SAGBs, with the only major selling in the R203 (-R192m). The main buying was in the R186 (+R513m), R2032 (+R383m), R2030 (+R259m), R2023 (+R232m), R204 (+R203m) and R214 (+R167m). This would suggest some buying from offshore in the auction.

The curve bull flattened as the back-end rallied by 4.0 – 4.5 bps and front-end rallied by 1.5 – 2.5 bps. Less than 5 bps of hikes is priced into FRAs over the next 12 months, with a 40% - 50% probability of a 25 bps cut priced into the front-end of the curve. A stronger than expected CPI print this morning will move front-end FRAs even further.

Commodities were mostly up on the day. Gold increased by 1.5% while platinum and copper increased by 1.4% and 0.3% respectively. Brent was down by 1.7% to close at $47.99/bbl. The developed market MSCI was up by 0.2% on Tuesday, while the MSCI EM was up by 0.5% on the day. The ALSI increased by 0.2% on the day. Non-residents were net sellers of equities on yesterday (-ZAR740 million). The EMBI spread widened by 1 bps, while SA’s 5yr CDS spread narrowed by 1 bp.

Latest SA publications

SA FIC Thematic: Ratings matter; a quantitative approach by Walter de Wet, Asher Lipson and Shireen Darmalingam (21 January 2015)

SA Fixed Income Weekly: Disinflation in H1 2015 by Asher Lipson (16 January 2015)

Credit & Securitisation Weekly: Mounting pressure on Eskom by Steffen Kriel and Varushka Singh (16 January 2015)

SA Fixed Income ALBI note: ALBI MD to increase in February by Asher Lipson (9 January 2015)

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