Negative local data adds to rand's woes

FX

Local mining and manufacturing production data for May was published yesterday. Mining production contracted 6.5% y/y and 3.1% m/m (seasonally adjusted) in May after having rebounded to 2.0% y/y (revised from 0.2%) and 6.3% m/m in April. The May reading was worse than market expectations (Bloomberg consensus: 4.9%y/y contraction). Strike-related declines in PGM production remained the key drag to mining output, contracting 48.5% y/y in May and subtracting 10.4 percentage points (pps) from total production growth. Growth in non-PGM mining output also slowed, adding only 3.9 pps to the total, down from a 4.5 pps contribution in April. SBGS Economist Kim Silberman calculates that using only April and May’s data, mining would contribute approximately 0.1 of a percentage point to Q2:14’s q/q GDP growth rate.

Manufacturing also disappointed expectations (Bloomberg: -1.6% y/y), contracting 3.7% y/y in May, worse than April's 1.9% y/y contraction. Manufacturing activity data continues to be negatively affected by the re-tooling of the Mercedes Benz plant, which resulted in a further 16% y/y contraction in motor vehicle production in May, after the sector contracted 15% y/y in April and 5.3% y/y in March. Rubber products (mainly tyres) also fell 16% y/y, after a 28% y/y contraction in April. The re-tooling should have been completed in June, and we expect that data for the vehicle manufacturing sector will start to recover strongly. However, as Kim points out, the motor vehicle sector contributed -1.6 pps to May's total y/y growth rate, such that, excluding the sector (albeit crudely), manufacturing would still have declined 2.1% y/y. The more broad-based contraction in manufacturing is probably due to strikes in the complementary industry of mining. In particular, general and special- purpose machinery declined 24% y/y and 15% y/y respectively, and electrical machinery fell 6.9% y/y. Heavy transport equipment may also have been affected. Looking ahead, June should provide a month's reprieve due to the resumption in production at the Mercedes Benz factory. However, strikes by NUMSA are likely to dampen data in July and possibly August. In addition, the end of the mining sector strikes may only start to impact manufacturing more positively in Q4:14, as the mines may take up to four months to return to full capacity.

Weakness in mining and manufacturing is unambiguously currency-negative, especially given that these are key export sectors. The poor performance of these sectors raises doubts regarding whether the required rebalancing of growth, necessary to narrow the current account, is occurring. To the extent that the market anticipates that the SARB might have to force any required rebalancing, weaker economic activity indicators could also weigh on the rand since they might be perceived as deepening the SARB’s reluctance to tighten monetary policy.

The rand weakened slightly against the dollar yesterday, closing at USDZAR10.70, compared with Wednesday’s close of USDZAR10.67. Local currency depreciation occurred alongside a mixed- to stronger performance from the dollar against the major crosses. The rand depreciated into a weak performance from almost all of the commodity currencies and most of the EM currencies we monitor for the purposes of this report. The dollar strengthened against the euro and the pound, while weakening against the yen. All but one of the commodity currencies we monitor depreciated on the day; the exception was the CAD, which appreciated slightly. All but two of the EM currencies we monitor for the purposes of this report depreciated on the day; the exceptions were the IDR (appreciated) and the RUB (remained unchanged). The rand took up the middle ground in both categories. Although rand weakness occurred into widespread selling of EM currencies, worse than expected local mining and manufacturing data may have added to the rand’s woes. The rand traded between a low of USDZAR10.6622 and a high of USDZAR10.7544. Support from where the rand opened this morning sits at 10.6700, 10.6150, 10.5800, 10.5000 and 10.2800. Resistance levels sit at 10.7800, 10.8200, 10.8650, 10.9600 and 11.0000.

Turning to commodity prices, gold rose by 0.6%, both copper and platinum rose by 0.5% and Brent rose by 0.4%. The ALSI fell by 0.8%, while the EM MSCI fell by 0.1%. The EMBI spread and the SA CDS 5yr spread both widened by 3 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 8.1%.

Non-residents were moderate net sellers of local equities (-ZAR600 million) but were mild net buyers of local bonds (ZAR310 million) on the day. Buying was seen in the 3-7 (ZAR551 million) and 1-3 (ZAR116 million) year buckets. Selling was meanwhile seen in the 12+ (-ZAR197 million) and 7-12 (-ZAR161 million) year segment. Bond yields rose on the day by between 1 bp (R203) and 4 bps (R214). The 6x9 and 12x15 FRAs fell by 1 bp and 2 bps respectively, while the 3x6 FRA remained unchanged.

In local labour news, with regard to the strike in the metals and engineering sector, it has been reported that General Motors (GM) indicated yesterday that the strike by Numsa members has obstructed the supply of components to its production line, causing a six-day loss of production. Gishma Johnson, GM communications manager, said that “parts and accessories operations are running as normal.” Alisea Chetty, Ford spokesperson, said that production at Ford Motor Company's Silverton assembly plant is “not affected by the current industrial action”. The National Employers Association of South Africa (NEASA) warned that it will go to court to contest any attempts to extend a possible wage deal between Numsa and the Seifsa (Steel and Engineering Industry Federation of South Africa) to all companies in the metal sector.

FI

This morning we are seeing some minor weakness in the ZAR, after the currency strengthened in afternoon trade, post weaker-than-expected local manufacturing and mining data. This morning bonds are likely to open slightly weaker; the Numsa strike is continuing and yesterday saw worries in Portugal about a potential default linked to Banco Espirito Santo SA, the country’s second-largest bank. This could bring worries about the health of the Portuguese banking system to the fore again and put pressure on perceived riskier assets.

Turnover remains in the doldrums, with the JSE recording only ZAR11.4bn traded yesterday. Turnover was led by the R186 (ZAR2.3bn), R2037 (ZAR1.6bn), R2048 (ZAR1.6bn) and R203 (ZAR1.1bn). No other bond traded for more than ZAR1bn yesterday. Bonds weakened for the first time in several days, with the front-end and belly of the curve steepening by 1 bp. The R213, R209, R2037 and R214 moved by 3.5 bps, while the R186 widened by 2.5 bps. FRAs marginally tightened, following the currency, and the 1x4 is now pricing in 26.5 bps of hikes, while the 2x5 is pricing in 31.5 bps over the next MPC meeting.

At today’s ILB auction, NT is planning to raise up to ZAR800m across the I2025, I2038 and I2050. Following Tuesday’s nominal SAGB auction, NT raised an additional ZAR1.10bn through the non-competitive bidding process yesterday. An additional ZAR250m was raised in the R2032, representing a full (50%) take up of the individual allowable limit, ZAR476m (50%) was raised in the R2037 and ZAR370m (41%) was raised in the R2048. This represents a 47% take-up at the non-competitive auction, slightly below the 50% allowable limit. Treasury has also announced next week’s auction stock: ZAR1.2bn of R2030, ZAR800m of R2032 and ZAR350m of R2044. This is a decent increase in size for the R2032 and will be the first auction of the R2044.

Non-residents were net buyers of nominal SAGBs yesterday, for a total of +ZAR310m. Foreigners were notable buyers at the short-end of the curve, while net outflows were recorded in the bonds comprising the belly and long-end of the curve. Foreigners purchased +ZAR551m in the 3-7 year segment, due to inflows recorded in the R203 (+ZAR632m) and R208 (+ZAR162m); this was partially offset by net selling in the R204 (-ZAR243m). +ZAR116m was purchased in the R157 in the 1-3 year category. Foreigners sold -ZAR197m in the 12+ year segment, with selling seen in the R214 (-ZAR294m) and R213 (-ZAR159m), which was marginally offset by buying in the R2037 (+ZAR138m) and R2032 (+ZAR101m) within this category. Foreigners sold -ZAR161m in the R2023 in the 7-12 year category.

US Treasury yields strengthened yesterday in a bull curve flattening of the curve. At the shorter-end, the yield on the 2yr UST strengthened by the largest increment, of 2.20 bps to 0.45%, and the 5yr note fell by 1.81 bps to 1.65%. At the longer-end, the yield on the 10yr UST fell by 1.44 bps to 2.54% and the yield on the 30yr note fell by 0.42 of a bp to 3.37%.

At the conclusion of the Bank Indonesia (BI) Board of Governors’ meeting yesterday, the BI benchmark rate was left unchanged at 7.50%. This was in line with Bloomberg consensus estimates, in which all 21 surveyed analysts called for unchanged rates. In its official statement, the Board noted that “[s]uch policy is consistent with efforts to steer inflation towards the target corridor of [3.5% - 5.5%] in 2014 and [3.0% - 5.0%] in 2015, as well as reduce the current account deficit to a more sustainable level.” However, the Bank remains concerned about the management of both external and domestic risks in moving towards a desirable level of domestic inflation that is in line with the BI’s targeted levels. In this regard, “Bank Indonesia will tirelessly strengthen its monetary and macroprudential policy mix, coupled with policy measures to reinforce the structure of the domestic economy and manage external debt.”

EM FI and currency markets that we monitor for the purposes of our reports weakened overall yesterday. 5yr EM bond yields rose by 1.50 bps on average, and 10yr yields rose by 2.92 bps on average. SA’s FI market recorded a middle of the pack performance, with the 5yr yield rising by 1.40, and the 10yr yield rising by 2.30 bps (still outperforming the EM average). Russia’s FI market recorded the worst performance, with the 5yr yield rising by a relatively large 14.93 bps and the 10yr yield rising by 12.87 bps. Brazil’s 10yr note recorded the second-worst performance in this longer-dated space, rising by 12.70 bps, followed by Turkey’s 10yr note, which rose by 4.00 bps. India’s 5yr yield recorded the second-worst performance in this tenor, rising by 5.10 bps, with SA recording the third-worst performance. Indonesia’s FI market recorded the best performance in the 5yr and 10yr spaces, with the 5yr yield declining by 3.00 bps and the 10yr yield declining by 2.80 bps, on the back of both the conclusion of the country’s presidential election and BI’s decision to hold the reference rate at 7.50%. Notably, the results of the presidential election will be formally announced on 22 July 2014.

EM currencies depreciated on balance yesterday. The only exception was the Indonesian rupiah, likely due to the reasons we noted above, which appreciated by 0.45% yesterday. Yesterday, we had noted that the rupiah did not trade on Wednesday (the election day); however, on Tuesday, the currency appreciated by 0.74%, following an appreciation of 1.35% on Monday. The rand depreciated by 0.28% yesterday, compared with larger moves weaker seen in many of the other EM currencies we monitor. The Indian rupee led the moves weaker, recording a 0.75% depreciation on the day, followed by the Polish zloty, which depreciated by 0.66%. Other EM currencies that depreciated meaningfully on the day were the Turkish lira (0.42%), the Brazilian real (0.35%), the Hungarian forint (0.31%) and the Mexican peso (0.18%). Fitch yesterday affirmed the long-term foreign currency (FC) and local currency (LC) issuer default ratings on Brazil at BBB each, retaining the stable outlook. Fitch rates SA the same as Brazil on a FC basis, while SA carries a one-notch higher rating by the agency on a LC basis, at BBB+.

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