CPI touches the ceiling

FX

Local CPI inflation touched the SARB’s target ceiling of 6.0% in March, accelerating mildly from February’s 5.9% increase, data published yesterday revealed. The March outcome was slightly higher than consensus expectations, which were for a steady headline reading at 5.9%. As we have previously argued, anxieties on the MPC will run higher than usual when inflation sits at or above 6.0%. In this sense, there is both a linear and a threshold dimension to the relationship between local inflation and monetary policy, with the threshold dimension kicking in when inflation approaches, touches or breaches, the bands of 3.0% to 6.0%. We do not believe that it would take much of an inflation scare from where things now sit to get the Bank to tighten once again, and we think that the most likely source of any inflation scare would more likely than not come from the currency market. The SARB has named the rand as the main upside risk to domestic inflation. It has also said that its decisions will be very data-dependent. Otherwise put, we think that the Bank’s implicit tolerance for currency weakness in the coming months will be running pretty low. This is rand positive. CPI inflation excluding food, non-alcoholic beverages, petrol and energy rose to 5.5% in March from 5.3% in February, a level at which it had sat for six months in a row. This could be taken by the SARB as a further signal of a pick-up in exchange rate pass through (ERPT). The Bank indicated in its March MPC Statement that it had noticed that, while pass through had been muted up till then, there was “some evidence that it [was] accelerating”. The main contributor to the acceleration in headline inflation was the food and non-alcoholic beverages category. It added 1.1 percentage point to the y/y change compared with a contribution of 0.8 of a pp in February. This was in part on base effects of a 0.1% m/m decline in March 2013, but food prices advanced by a sturdy 1.4% m/m in March 2014, with the heftier increases recorded in respect of unprocessed food (2.1%). There was some additional pressure from the housing and utilities (1.4 pps versus 1.3 pps in February), largely arising from hikes in owners’ equivalent rent and actual rentals for housing. Price categories moderating the acceleration in y/y inflation were transport – thanks to base effects of a big fuel price hike in March 2013 – as well as alcoholic beverages and tobacco.

The preliminary reading on Eurozone manufacturing activity (Markit PMI for April) released yesterday came in at 53.3, slightly better than the Bloomberg consensus forecast of 53.0. The services activity barometer also improved by more than anticipated, coming in at 53.1 (Bloomberg consensus: 52.5). The composite measure, at 54.0, consequently exceeded expectations (Bloomberg consensus: 53.0). All these measures showed an improvement on their respective March readings. While the headline figures might suggest that the recovery in the Eurozone is gaining momentum, the subcomponent and country data reveal that significant vulnerabilities remain. Price indices continue to disappoint, keeping the spectre of deflation ever present. Services prices, for instance, remained below 50 at 48.8. Individual country numbers suggest persistent divergence. Looking at the region’s two largest economies, Germany’s composite PMI rose to 56.3 from 54.3, while the French composite PMI fell to 50.5 from 51.8. Growth divergence among Eurozone economies and the threat of deflation, both reaffirmed by PMI results, suggest it is likely that the ECB will have to ease at some point this year. According to a Bloomberg survey (conducted 4 to 8 April), 77.5% of analysts predict that the ECB will ease by the middle of this year. The respondents were also asked to indicate what easing steps they felt the ECB might take. The most popular choices were non-sterilisation of Securities Market Program (SMP) bond purchases and an extension of long-term refinancing operations (LTROs). A cut in the refi rate and asset purchases (that is, quantitative easing) also ranked high among the options proffered. Of those believing that quantitative easing is probable, almost all felt that purchases of asset-backed securities, as opposed to government bond purchases, would be the ECB’s most likely course. 39.0% of respondents said that easing would likely involve the use of multiple measures. Another question posed was whether the ECB would act to prevent the euro from strengthening and, as a follow-up, what level of the euro might prove a threshold for such action. Most respondents (59.5%) were of the opinion that currency strength would provoke an ECB response, with the median upper limit against the dollar indicated as EURUSD1.40.

The US Markit manufacturing PMI released yesterday was slightly disappointing. The preliminary reading for April came in at 55.4, below consensus predictions (56.0) and slightly weaker than the March reading (55.5). There was not much of a reaction to the Markit data. This is perhaps because readings well above the 50 threshold still indicate a strong rebound after the weather disruptions during winter. In addition, the ISM numbers, which will be published next week, generally receive much more attention. Currently, Bloomberg consensus pegs the April ISM reading at 54.0, moderately up from March’s 53.7. Today, US durable goods orders data will be published. Another decent increase in the total orders number is expected in March (2.0% m/m, following the 2.2% m/m gain seen in February). Steve Barrow is biased towards expecting strong data which he thinks could weigh on treasuries and lift the dollar.

The rand weakened further against the dollar yesterday, closing at USDZAR10.59, compared with Tuesday’s close of USDZAR10.55. This occurred into a mixed performance from the dollar against the major crosses, and despite weaker performance from all of the commodity currencies and most of the EM currencies we monitor for purposes of this report. The dollar weakened slightly against the euro and the yen, while strengthening against the pound. The rand weakened against all of the major crosses, with the biggest move seen against the euro (0.6%). All but two of the EM currencies we track – the exceptions being the BRL and RUB – weakened. The rand was the worst-performing commodity currency, and was the third-worst-performing EM currency (beating only the IDR and the INR) on the day. The rand traded between a low of USDZAR10.5283 and a high of USDZAR10.6263. Support from where the rand opened this morning sits at 10.4800, 10.3500 and 10.2500. Resistance levels sit at 10.5800, 10.6800 and 10.7400.

Turning to commodity prices, platinum and gold rose by 0.3% and 0.01% respectively. Brent meanwhile fell by 0.2% and copper was unchanged. The ALSI edged lower by 0.01% and the EM MSCI fell by 0.5%. The EMBI spread widened by 4 bps and SA’s five-year CDS spread widened by 2 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 0.6%.

Non-residents were fairly aggressive net buyers of local equities (ZAR1 047 million) and were meaningful net buyers of local bonds (ZAR607 million) on the day. Buying of bonds was seen in the short-dated 3-7 (ZAR752 million) and 1-3 (ZAR12 million) year buckets. Mild selling of bonds was meanwhile seen in the longer-dated 7-12 (-ZAR79 million) and 12+ (-ZAR77 million) year segments. The yield curve flattened from the short end. Bond yields were flat (R214) to 4 bps higher (R203). The 3x6 and 12x15 FRAs both rose by 4 bps, and the 6x9 rose by 3 bps.

In local labour unrest news, platinum producers Amplats, Implats and Lonmin in a brief statement issued yesterday said that representatives from the companies and AMCU would reassemble today in a process assisted by the Minister of Labour. Discussions aimed at resolving the wage strike continued at an unrevealed location in Johannesburg yesterday. There was no signal as to whether or not there was a breakthrough with respect to negotiations. Jimmy Gama, AMCU chief negotiator, said yesterday via an SMS, "[t]here is no final offer as yet, parties are still talking." The platinum producers presented an offer last week of annual wage increases of between 7.5% and 10%. This would see the minimum cash remuneration for entry-level underground workers rise to R12,500 per month (or to R150,000 per annum by July 2017).

FI

Turnover remains moribund, with less than ZAR13bn traded in SAGBs yesterday. Bonds reacted slightly negatively to the higher than expected CPI print, but came back later in the day. Nominal SAGB yields rose by between 0.50 of a bp and 4.00 bps, with more pronounced incremental weakening at the short-end of the curve. The longest-dated R2048 was the only bond to strengthen on the day (-0.50 of a bp) to 9.25%, while yields of the R209 (2036) and the R214 (2041), remained unchanged from their prior day levels. The yield on the R157 rose by the largest increment (+4.00 bps), to 6.84%, and the R186 rose by 1.00 bp to 8.49%. The R203 and the R2023 both rose by 3.50 bps on the day, and the R204 and R208 both rose by 3.00 bps each. The front-end of the curve flattened by 3.00 bps yesterday, with the spread on the R186/R157 compressing to 165.00 bps, while the belly of the curve flattened marginally as the R213/R186 spread declined by 0.50 of a bp to 48.50 bps. At the long-end, the spread on the R2048/R186 flattened by 1.50 bps to 76.00 bps. SA’s 5-year CDS spread deteriorated yesterday to 182.73 bps from 181.05 bps on Tuesday.

Non-residents were net buyers of +ZAR607m of nominal SAGBs yesterday. Overall net buying in the 3-7 year maturity bucket (+ZAR752m) was offset by marginal net selling in the remaining three categories. In the 3-7 year segment, there was particular foreign interest in the R207 (+ZAR540m) and the R208 (+ZAR171m). Notable transactions were also recorded across individual bonds comprising the 12+ year segment; foreigners sold the R186 (-ZAR187m) on a net basis, and bought the R213 (+ZAR104m) and R2030 (+ZAR101m) on a net basis.

While there had been some hope earlier in the week for a settlement of the platinum strike, negotiations are expected to continue today. Comments coming out of yesterday’s negotiations do not suggest that an imminent settlement is likely. Anglo American Platinum released its Q1 production statistics. The firm has lost 185,000 oz of platinum production due to the strike and refined platinum production from its own mines is down 57%. Their three mines most affected by the strike action, Rustenburg, Amandelbult and Union, have seen production decrease by 84%, 75% and 86% respectively. The firm has started drawing down its inventory pipeline and processing operations have thus so far not been affected by the strike.

With the exception of the yield on the 2yr US Treasury, which rose by 4.25 bps to 0.44%, US yields strengthened yesterday. The 5yr UST yield fell by less than 1.00 bp to 1.72%, and the 10yr UST yield fell by 1.18 bps to 2.70%. The 30yr UST yield fell by the largest increment (-1.58 bps), to 3.48%. However, this morning, all UST yields are trading at weaker levels. In EM FI, average 5yr local currency bond yields fell by 0.61 of a bp, and 10yr yields fell by an average of 0.54 of a bp. Brazil recorded the best performance across the EMs we cover for the purposes of our reports, with the 5yr yield declining by 12.40 bps and the 10yr yield declining by 11.50 bps. Mexico was the second-best performer, with its 5yr and 10 yr yields declining by 8.10 bps and 3.50 bps respectively on the day, while Thailand came off third-best, with 1.10 bps and 2.20 bps declines in its respective 5yr and 10yr yields. SA’s 5yr yield recorded the second-worst 5yr performance, with the yield rising by 4.40 bps. The worst performer in the shorter term space was Hungary, whose yield climbed by 5.00 bps. In the 10yr space, SA delivered a middle of the pack performance, but still worse than the average, with the local currency yield rising by 1.40 bps. Russia’s 10yr bond recorded the worst performance across the EMs, with the yield increasing by 3.75 bps, followed by Hungary at 3.00 bps.

Turkey’s central bank (CBT) will conclude its monetary policy meeting today. Bloomberg market consensus is for an unchanged benchmark repurchase rate of 10.00%. The market also expects the CBT to leave the overnight lending rate unchanged at 12.00%, and the overnight borrowing rate unchanged at 8.00%.

The Bank of Thailand (BoT) held its monetary policy meeting yesterday, opting to leave its benchmark interest rate unchanged at 2.00%. In its statement, the Bank highlighted that signs of moderating growth was being observed in emerging market economies. It stated that “growth in China decelerated from investment, with increased risks in the financial sector”, and that domestic demand in Asian economies fell, but “exports benefited further from a recovery in major economies”. In Thailand’s economy in particular, the monetary policy committee noted that private investment and tourism continues to be negatively impacted by the ongoing political turmoil. The committee also stated that “growth of the Thai economy in the first quarter of 2014 is expected to contract by more than previously assessed from domestic demand”. Thai exports, although recording an improvement, was not enough to offset the “overall subdued growth”. While the BoT has stated that current financial conditions are accommodative, “the committee deems prolonged political uncertainties to be the main cause for higher downside risks to growth”. The stance of the monetary policy council will be that of providing “sufficient support to the economy”.

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