US PCE next up

We expect markets to start focusing on US core Personal Consumption Price Index (PCE) (due out tomorrow) as well as long-term surveyed inflation expectations because both these measures are key inflation indicators for the Fed.
South Africa’s trade balance for April is also due for release tomorrow; consensus expects a deficit of -R4.9bn. A print wider than this, combined with a strong PCE number from the US, could see the rand test higher ground.
Brent crude continues to edge down. As pointed out yesterday, speculative length in the futures market has increased substantially since February this year.
Stats SA will release PPI April data at 11h30 today.
The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, behind only the NZD, and the best performance amongst the EM currencies.
USDZAR support is at 11.9820 and 11.8432. Resistance is at 12.0900 and 12.1500.

International developments

News has broken that 14 top FIFA officials have been arrested. For the past 24 hours, international markets have taken a back seat as FIFA’s bribing scandal has dominated the wires.

While FIFA news is likely to denominate the wires today, too, we expect markets to start focusing on tomorrow’s US core Personal Consumption Price Index (PCE) as well as long-term surveyed inflation expectations because both these measures are key inflation indicators for the Fed.

If PCE comes out higher, it would most likely add further strength to the dollar and put the rand on the back foot. Expectations are for 0.9% q/q (SAAR). Keep in mind that tomorrow will also see the release of South Africa’s trade balance for April; consensus expects a deficit of -R4.9bn. A print wider than this, combined with a strong PCE number from the US, could see the rand test higher ground.

On the US inflation side, recall that preliminary data earlier this month showed that long-term inflation expectations crept higher in May, to 2.8%. Long-term US inflation expectations, according to University of Michigan survey, have been steady around 2.8%, despite the fall in the oil price in December and January. However, between February and April, these expectations slid from 2.8% in January to 2.6% in April. This is consistent with the performance of the bond market in the US over the past month.

Brent crude continues to edge down. As pointed out yesterday, speculative length in the futures market has increased substantially since February this year. If the dollar continues to strengthen, it may trigger some long liquidation, which could put the oil price under pressure.

Local developments

On the local front today, Stats SA will release PPI April data at 11h30. Bloomberg consensus expects an improvement to 3.4% y/y in April, from 3.1% y/y in March (with a range of estimates between 2.6% and 3.8%). We expect PPI to have picked up, in line with the pick-up in CPI.

Markets

The rand strengthened on Wednesday, closing at 12.03, compared to Tuesday’s close of 12.08. The rand’s appreciation against the greenback occurred despite dollar strength against most of the major currencies; the dollar posted gains against the yen (0.5%) and the pound (-0.2%), but weakened against the euro (0.3%). The rand gained ground against all of the major crosses: the yen (0.9%), the pound (-0.6%) and the euro (-0.2%). The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, behind only the NZD, and the best performance amongst the EM currencies. The rand traded between a low of USDZAR12.0199 and a high of USDZAR12.1636.

Commodity prices were mixed on Wednesday. Platinum and copper were down by 0.8% and 0.4% respectively, while gold closed lower, by 0.1% on the day. The price of Brent closed 2.6% lower, at $62.06/bbl. The developed world MSCI was up by 0.7% on Wednesday, while the MSCI EM was down by the same amount on the day. The ALSI was down by marginally, by 0.1% on the day. The EMBI spread widened by 4 bps, while SA’s 5yr CDS widened by 2 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 5.6%.

Latest SA publications

SA Macroeconomics: Unemployment rises to 26.4%: Trade sheds 201k jobs; finance adds 156k jobs by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 May 2015)

SA Macroeconomics: Q1 GDP slows to 1.3% q/q: Is SA in a downward phase of the business cycle? by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 May 2015)

SA Macroeconomics: GDP to slow to 1.0% q/q and the trade deficit to widen: Details of public sector's wage deal indicate fiscal slippage by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 May 2015)

SA FIC Weekly: Public sector wages: the real deal not all that bond-positive by Walter de Wet and Shireen Darmalingam (25 May 2015)

Credit & Securitisation Weekly: Clarification on e-tolls by Steffen Kriel and Varushka Singh (22 May 2015)

SA FIC: MPC Comment: The MPC “stands ready to act when appropriate” by Walter de Wet (22 May 2015)

SA Macroeconomics: Mar retail sales 2.0% y/y, down from a revised 3.7% in Feb: Hardware grew 9.9% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 May 2015)

SA Macroeconomics: CPI 4.5%, below expectations: Core starts to moderate by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 May 2015)

SA Macroeconomics: SARB to remain on hold: Relatively resilient SA consumer; wage negotiation risks and EM assets weather the storm by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 May 2015)

SA FIC Weekly: Three risks facing the SARB by Walter de Wet and Shireen Darmalingam (18 May 2015)

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