FOMC minutes: as you were!

FX

The minutes of the FOMC’s 18 to 19 March meeting, which were released overnight, appeared to assuage fears (that arose immediately after the meeting) of a possible more hawkish tilt in the Fed’s stance. The upward shift in the consensus of FOMC participants’ projections for the fed funds rate (released after the March meeting) caused some consternation in the market, and was on balance taken as a signal of more aggressive and/or more immediate tightening than had been originally discounted. The FOMC consensus projections for the end-2015 and end-2016 fed funds rate both shifted up, by 25 bps and 50 bps, respectively, since the December meeting. During the post-meeting press conference Yellen downplayed this shift in fed funds rate projections, saying that not too much should be read into “only [a] very limited upward drift”. The more important signal, she stated, was that the fed funds rate was seen remaining “notably below … the normal longer-run level for nominal short-term rates” over the forecast horizon, adding that this view was now endorsed for the first time as the Committee’s view, as encapsulated in its official statement. The FOMC statement is “the primary way in which the Committee wants to or is speaking about policy to the public” and not the “dot plots”, she said, warning that “these dots are going to move up and down over time a little bit this way or that”. These thoughts were reiterated by the Committee in the minutes released yesterday. This appears to have been the main source of consolation that markets have drawn from the release, which fuelled appetite for risk overnight. Some Committee participants anticipated that this shift in the projections could be “misconstrued” as “a move … to a less accommodative reaction function”. Some noted that “the increase in the median projections overstated the shift in the projections”. Lastly, a “number of participants” pointed out that the shift was “arguably warranted by the improvement in participants’ outlooks for the labor market since [the] December [meeting]” and consequently “need not be viewed as signifying a less accommodative reaction function”. Perhaps the market has also been comforted by the apparent omission of any explicit discussion regarding the “six months” Yellen mentioned in her post-FOMC press conference. Yellen intimated that the “considerable time” referred to in the official statement at which the target fed funds rate would remain at the lower bound after the conclusion of bond-purchases could mean “something on the order of around six months or that type of thing”.

Trade numbers for China were released earlier this morning. Exports for March fell 6.6% y/y, considerably less than the 18.1% y/y fall in February (which was largely due to the impact of the Lunar New Year), but far short of the rebound to 4.8% y/y growth that analysts had been expecting (Bloomberg consensus). This might heighten anxiety around the strength of China’s manufacturing sector, as well as the broader economy. However, Capital Economics suggests that the number might not be as bad as it first appears due to distortions in y/y growth rates caused by the over-invoicing of trade last year. They point out that exports to Hong Kong and Taiwan, via which most of this over-invoicing occurred, fell 42.0% y/y in March. Exports excluding Hong Kong and Taiwan grew 7.8% y/y. On the import side, though, the numbers were unequivocally disappointing. Imports fell 11.3% y/y, well below an expected 3.9% y/y increase, and a considerable deterioration from the 10.1% y/y growth recorded in February (although they were also likely distorted, albeit positively, by the Lunar New Year). Import numbers could weigh on commodities and commodity currencies today. China’s CPI and PPI data will be released overnight. Price pressures are viewed to be relatively benign for now, with little threat of provoking any monetary policy action from the PBoC. The more important data with regard to PBoC action could be money supply and loan growth data, which should be published in the coming days (no specific date is provided by Bloomberg). This should give some insight into the PBoC’s efforts at clamping down on excessive credit expansion. Uncertainty surrounding the extent to which tightening credit conditions might negatively impact China’s growth prospects has many market participants particularly sensitive to money supply and credit numbers.

The BoE concludes its monetary policy meeting today. No change in policy is anticipated. Given the strength of the UK recovery, the BoE’s next move is likely tightening, although such a move is not expected until next year – Q2:15, according to our G10 Strategist Steve Barrow.

Local manufacturing and mining output numbers, both for February, will be published today. Consensus pins growth of mining output shrinking by 3.4% m/m on a seasonally adjusted basis, and shrinking by 0.5% y/y. Note that the number of respondents is larger in the case of the y/y change, which results in a disconnect between the m/m and y/y forecasts; more attention should be paid to the latter. Y/Y growth of mining output slowed to 3.1% from an upwardly revised 12.2% in December 2013. Y/Y growth of PGMs slowed to 4.0% from 14.0%, but the overall deceleration in growth of mining output was fairly broad-based. Decelerating y/y growth of PGM output in January might already have started to reflect strike activity still plaguing the industry. However, given that work stoppages commenced only towards the end of the January (the 23rd to be precise), we expect that the impacts should intensify from February onwards. However, in February 2013, mining output contracted by 3.7% on a seasonally adjusted, which limits the downside for the y/y number. Consensus foresees manufacturing output expanding by 0.5% on a seasonally adjusted basis in February 2014, and forecasts an acceleration in y/y growth to 4.0% y/y from 2.5% in January. Note that the number of respondents is once again larger in the case of the y/y change. In February 2013, output shrank by 1.7% m/m on a seasonally adjusted basis. This establishes a low base for the February 2014 y/y result, and thereby argues for some acceleration. The signal in the manufacturing PMI for February is also positive; it pushed passed the key 50.0 expansion/contraction threshold, rising to 51.7 from 49.9 in January; it subsequently fell to 50.3 in March. That said, the correlation between the PMI – which is seasonally adjusted – and the m/m (sa) change in manufacturing output does not appear to have been especially reliable for some time. Y/Y growth of manufacturing output decelerated to 2.5% from an upwardly revised 2.8% in December 2013. Participants will look to manufacturing results to ascertain whether rand weakness is offering any material competitive support to local industry. Any strength in manufacturing numbers should be read as rand positive, via what it signals regarding the current account and/or their implications for domestic interest rates. Any weakness in mining numbers would have the opposite effect.

The rand strengthened against the dollar for the fourth consecutive day yesterday, closing at USDZAR10.38 compared with Tuesday’s close of USDZAR10.46. This occurred into a mixed to weaker performance from the dollar against the major crosses and a rise in global risk appetite on the release of the FOMC minutes out of the US, and a strong performance across all of the commodity currencies and most of the EM currencies we track for purposes of this report. The dollar weakened against the euro and the pound, while strengthening against the yen. The rand strengthened against all of the major crosses, with the biggest move seen against the yen (1.0%). All but three of the EM currencies we track strengthened on the day, the exceptions were the IDR, the INR and the TRY. The rand was the top performer across both the commodity and EM currency categories. The rand traded between a low of USDZAR10.3652 and a high of USDZAR10.4961. Support from where the rand opened this morning sits at 10.3750, 10.3425 and 10.2300. Resistance levels sit at 10.5000, 10.5250, 10.5500 and 10.6700.

Turning to commodity prices, Brent rose by 0.3%, and gold and platinum both rose by 0.2%. Copper meanwhile fell by 0.8%. The ALSI rose by 0.5% and the EM MSCI by 0.3%. The EMBI spread compressed by 4 bps, while the SA’s five-year CDS spread widened by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 7.2%.

Non-residents were net buyers of local equities (ZAR535 million) and were mild net buyers of local bonds (ZAR326 million) on the day. Buying of bonds was seen in the 7-12 (ZAR371 million) and 3-7 (ZAR48 million) year buckets. Selling of bonds was meanwhile seen in the 12+ (-ZAR91 million) and 1-3 (-ZAR3 million) year segments. Bond yields rose by between 1 bps (R203 and R208) and 7 bps (R214) into a bear curve steepening. The 3x6, the 6x9 and 12x15 FRAs rose by 5 bps, 4 bps and 3 bps respectively.

The probability that platinum bosses will succumb to demands from the striking workers appears to be diminishing, according to Fin24. Companies will need to do major damage control with regard to the losses seen by the industry, due to the downing of tools which has just entered its twelfth week, the agency suggests. Amplats, Implats and Lonmin may have no choice but to sell or close mines that are simply incurring costs while they lie idle. The platinum producers would have to double entry-level pay over the next three years to R12,500 a month to meet ANCU’s demand – a demand they have thus far refused.

FI

The rand strengthened against the dollar for the fourth consecutive day yesterday, closing at USDZAR10.38 compared with Tuesday’s close of USDZAR10.46. This occurred into a mixed to weaker performance from the dollar against the major crosses and a rise in global risk appetite on the release of the FOMC minutes out of the US, and a strong performance across all of the commodity currencies and most of the EM currencies we track for purposes of this report. The dollar weakened against the euro and the pound, while strengthening against the yen. The rand strengthened against all of the major crosses, with the biggest move seen against the yen (1.0%). All but three of the EM currencies we track strengthened on the day, the exceptions were the IDR, the INR and the TRY. The rand was the top performer across both the commodity and EM currency categories. The rand traded between a low of USDZAR10.3652 and a high of USDZAR10.4961. Support from where the rand opened this morning sits at 10.3750, 10.3425 and 10.2300. Resistance levels sit at 10.5000, 10.5250, 10.5500 and 10.6700.

Turning to commodity prices, Brent rose by 0.3%, and gold and platinum both rose by 0.2%. Copper meanwhile fell by 0.8%. The ALSI rose by 0.5% and the EM MSCI by 0.3%. The EMBI spread compressed by 4 bps, while the SA’s five-year CDS spread widened by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 7.2%.

Non-residents were net buyers of local equities (ZAR535 million) and were mild net buyers of local bonds (ZAR326 million) on the day. Buying of bonds was seen in the 7-12 (ZAR371 million) and 3-7 (ZAR48 million) year buckets. Selling of bonds was meanwhile seen in the 12+ (-ZAR91 million) and 1-3 (-ZAR3 million) year segments. Bond yields rose by between 1 bps (R203 and R208) and 7 bps (R214) into a bear curve steepening. The 3x6, the 6x9 and 12x15 FRAs rose by 5 bps, 4 bps and 3 bps respectively.

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