Standard Bank Research Team
Standard Bank
FX
Local CPI data for June is due on Wednesday. Kim Silberman (SBGS economist) expects headline inflation to remain at 6.6% y/y. This is slightly below consensus, which has the headline figure rising to 6.7% y/y. Petrol’s contribution to CPI fell from 0.82 percentage points (ppts) in May to 0.76 ppts in June, which will shave 0.06 ppts off headline inflation. In addition, Kim anticipates that food inflation may have peaked in May and moderated slightly in June. Countering these declines, Kim has assumed an increase in rental price inflation and owners’ equivalent rent. A continued rise in vehicle and clothing inflation is also assumed. The SARB has intimated that although its forecasts since January have pointed to a breach of the upper end of the target range in Q2:14, a May print as high as 6.6% y/y was not anticipated. We have previously argued that it might not take much of an inflation scare from where things now sit – that is, above the upper end of the target band – to force the Bank to tighten again.
Last week, the SARB took rates up by 25 bps. Also, the Bank raised its headline inflation forecast for 2014 to 6.3% from 6.2%, a reversal of the changes made at the May meeting. Inflation is still expected to remain above the upper end of the target band until Q2:15, notwithstanding a “slight moderation” in Q3:14. A quarterly average peak is still seen as occurring in Q4:14, although this has been revised up to 6.6% from 6.5% – another reversal of the changes made at the May meeting. The forecast for average inflation in 2015 was raised to 5.9% from 5.8%. This had remained unchanged at the May meeting after being lowered from 6.0% at the March meeting following the January hike. The Bank still views the risks to the inflation outlook to be to the upside, although this time it mentioned that these “have increased”. While the exchange rate was mentioned as “remain[ing] a key factor in this regard”, the threat of a “wage-price spiral” seemed to be particularly front of mind this time. The Bank noted last week that it has to be “mindful of second-round effects of supply side shocks”. One signal of this would be an uptick in core inflation. Consensus expects core inflation to move up to 5.6% y/y in June, from 5.5% y/y in May.
The rand strengthened against the dollar on Friday, closing at USDZAR10.65, compared with Thursday’s close of USDZAR10.76. Local currency appreciation occurred despite a strong performance from the dollar against the major crosses. The rand appreciated into a stronger performance from all of the commodity and most of the EM currencies we monitor for the purposes of this report. The dollar strengthened against the euro, the pound and the yen, with the biggest move seen against the yen (0.2%). All five of the commodity currencies we monitor appreciated on the day. All but one of the EM currencies we monitor for the purposes of this report appreciated on the day. The exception was the INR which depreciated. The rand was the best-performing currency in the commodity currencies category the second-best-performing currency in the EM currencies category (beaten only by the BRL). The rand traded between a low of USDZAR10.6395 and a high of USDZAR10.7671. Support from where the rand opened this morning sits at 10.6250, 10.5800 and 10.5200. Resistance levels sit at 10.7200, 10.7800, 10.8200 and 10.8600.
Turning to commodity prices, copper fell by 1.2%, platinum fell by 0.8%, and gold and Brent both fell by 0.6%. The ALSI fell by 0.2%, while the EM MSCI rose by 0.1%. The EMBI spread compressed by 7 bps and the SA CDS 5yr spread compressed by 5 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 17.1%.
Non-residents were mild net buyers of local equities (ZAR354 million) and were aggressive net sellers of local bonds (-ZAR1 259 million) on the day. Selling was seen in the 7-12 (-ZAR1 855 million) year bucket. Buying was meanwhile seen in the 1-3 (ZAR413 million), 3-7 (ZAR180 million) and 12+ (ZAR4 million) year segments. Bond yields fell on the day by between 5 bps (R203) and 6 bps (R208, R186 and R214). The 3-month Jibar rose by 13 bps from 5.833% to 5.958%, the day after the SARB raised the repo rate by 25 bps. The 3x6, 6x9 and 12x15 FRAs fell by 5 bps, 7 bps and 9 bps respectively.
In local labour news, as an update on the strike in the metals and engineering sector (which began on 1 July), it has been reported that a revised wage proposal from the trade unions has been submitted to the Metal and Engineering Industry Bargaining Council (MEIBC). Solidarity's Marius Croucamp indicated in a statement that the offer was made after facilitation by the CCMA and the Department of Labour. The new proposal includes a three-year agreement with “an increase of 10% for wage rates F, G and H for year one; a 10% increase in year two for wage rates G and H; and a 10% increase for wage rate H in year three”. Karl Cloete, Numsa deputy general secretary, said, "[w]e want to respect Seifsa having to consult their counsel on Monday."
FI
After last week’s rate hike and the aggressive moves in R186, we expect today’s focus to be on potential for the R186 to break below 8.00%. Wednesday’s CPI release for June should provide some mid-week direction; Bloomberg consensus is for a 6.7% print, up from May’s 6.6%, while Standard Bank forecasta an unchanged rate from May. Any higher-than-expected print would provide further evidence to support last week’s SARB move, while a print lower than May’s 6.6% would likely see the market adjust their expectations for rate hikes even lower. This is the first of three inflation prints that the SARB will see prior to their September MPC meeting.
Friday’s ILB auction of the I2025, I2038 and I2046 saw a week-on-week decline in total bids, to ZAR1.22bn (bid/cover 1.5x) from the previous week’s offering of ZAR1.39bn (1.7x). Pricing was mixed, with only the I2046 outperforming against the MTM closing yield. The I2046 cleared at 1.905%, 1.00 bp stronger than the market. The I2025 cleared at 1.615% and the I2038 cleared 1.855%, both 1.00 bp weaker than MTM levels. The I2025 and the I2038 were also auctioned last week, and both yields increased week-on-week; the I2025 cleared 1.00 bp higher and the I2038 cleared 3.5 bps higher. Market participation declined to 12 participants at the auction compared with 19 participants the previous week. The I2025 attracted the largest proportion of the bid volumes, with 41% of bids going to the bond, followed by the I2046, which received 34% of bids, while the I2038 received the remaining 25%.
Turnover of ZAR16.17bn was recorded in nominal SAGBs and ZAR1.98bn in inflation-linked SAGBs. Turnover was concentrated in the R186 (27.50% of turnover), R2023 (15.75%) and R208 (9.74%). The curve bull flattened further on Friday, with the R186/R157 spread flattening by -1.00 bp, while the belly flattened by 1.5 bps. The moves were led by the R2023, R2030 and R213, which tightened by 7.5 bps. Over the past five days, back-end bonds have moved over 30 bps lower, with the R2030 tightening by 36.0 bps and the R213 by 35.5 bps. The benchmark R186 moved 28.5 bps lower to close Friday at 8.06%. Despite Thursday’s hike, FRAs followed bonds on Friday and moved aggressively lower as well, readjusting post-hike. The 3x6 FRA moved 5 bps lower, 9x12 moved 8 bps lower, 12x15 moved 9 bps lower and 18x21 moved 10 bps lower. 3m Jibar adjusted higher to 5.958%, from the pre-hike level of 5.833%. Markets are now pricing 13 bps over one MPC meeting, 30 bps over two meetings, 52 bps over three meetings and 56 bps over four meetings, so we have seen some fairly significant repricing, after pre-hike levels were suggesting 25 bps of hikes per meeting.
Offshore investors were net sellers of -ZAR1.26bn of nominal bonds on Friday, primarily due to large selling in the R2023 (-ZAR1.86bn), R204 (-ZAR948.55m) and R186 (-ZAR401.37m). This was partly offset by purchases in the R208 (+ZAR644.78m) and front-end purchases of the R157 (+ZAR413.48m) and R203 (+ZAR388.83m). This meant particularly strong selling in the 7-12 year bucket of -ZAR1.86m and buying in the 1-3 year bucket of +ZAR413.48m.
In EM space, South Africa had the best-performing five-year local currency bond and second-best-performing ten-year local currency bond. The average five-year EM local currency bond widened by +0.2 bps, with China, Russia and India leading the weakness. The average move amongst ten-year EM local currency bonds was -1.0 bp, with Brazil, South Africa and Hungary particularly strong and Turkey, China and India leading the weakening moves.
Latest SA publications
Fixed Income Weekly: Bonds rally as SARB's stagflation bind tightens by Asher Lipson and Kuvasha Naidoo (19 July 2014)
Credit & Securitisation Weekly: Market still quiet by Robyn MacLennan and Steffen Kriel (18 July 2014)
SA FICC Strategy: MPC meeting: doing what is required by Marc Ground and Varushka Singh (17 July 2014)
Credit & Securitisation Flash Note: Eskom Holdings SOC Ltd by Robyn MacLennan and Steffen Kriel (16 July 2014)
Credit & Securitisation Flash Note: Eskom Holdings SOC Ltd by Robyn MacLennan and Steffen Kriel (14 July 2014)
FX Weekly: Doing the work: the rand or the SARB? by Marc Ground and Varushka Singh (14 July 2014)
Credit & Securitisation Special Report: Durable goods retail sector by Robyn MacLennan and Steffen Kriel (10 July 2014)
FI Flash Note: Fixed Income ALBI note: August ALBI reweighting by Asher Lipson and Kuvasha Naidoo (9 July 2014)
Certification
The analyst(s) who prepared this research report (denoted by an asterisk*) hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst’s(s’) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report.
Conflict of Interest
It is the policy of The Standard Bank Group Limited and its worldwide affiliates and subsidiaries (together the “Standard Bank Group”) that research analysts may not be involved in activities in a way that suggests that he or she is representing the interests of any member of the Standard Bank Group or its clients if this is reasonably likely to appear to be inconsistent with providing independent investment research. In addition research analysts’ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts cannot be subject to the supervision or control of anyone in the Standard Bank Group’s investment banking or sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those sales and trading departments may conflict with your interests.
Legal Entities
To U. S. Residents
Standard New York Securities, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is also a member of the FINRA and SIPC. Standard Americas, Inc is registered as a commodity trading advisor and a commodity pool operator with the CFTC and is also a member of the NFA. Both are affiliates of Standard Bank Plc and Standard Bank of South Africa. Standard New York Securities, Inc is responsible for the dissemination of this research report in the United States. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Standard New York Securities, Inc.
To South African Residents
The Standard Bank of South Africa Limited (Reg.No.1962/000738/06) is regulated by the South African Reserve Bank and is an Authorised Financial Services Provider.
To U.K. Residents
Standard Bank Plc is authorised and regulated by the Financial Services Authority (register number 124823) and is an affiliate of Standard Bank of South Africa. The information contained herein does not apply to, and should not be relied upon by, retail customers.
To Turkey Residents
Standard Unlu Menkul Degerler A.S. and Standard Unlu Portfoy Yonetimi A.S. are regulated by the Turkish Capital Markets Board (“CMB”). Under the CMB’s legislation, the information, comments and recommendations contained in this report fall outside of the definition of investment advisory services. Investment advisory services are provided under an investment advisory agreement between a client and a brokerage house, a portfolio management company, a bank that does not accept deposits or other capital markets professionals. The comments and recommendations contained in this report are based on the personal opinions of the authors. These opinions might not be appropriate for your financial situation and risk and return preferences. For that reason, investment decisions that rely solely on the information contained in this presentation might not meet your expectations. You should pay necessary discernment, attention and care in order not to experience losses.
To Singapore Residents
Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.
Important Regional Disclosures
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company(ies) within the past 12 months.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors:
The non-U.S. research analysts (denoted by an asterisk*) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts (denoted by an asterisk*) may not be associated persons of Standard New York Securities Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an asterisk*) is a Non-U.S. Analyst. The analyst is a research analyst employed by The Standard Bank Group Limited.
General
This research report is based on information from sources that Standard Bank Group believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or member of the Standard Bank Group gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this document (except with respect to any disclosures relative to members of the Standard Bank Group and the research analyst’s involvement with any issuer referred to above). All views, opinions and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Members of Standard Bank Group may act as placement agent, advisor or lender, make a market in, or may have been a manager or a co-manager of, the most recent public offering in respect of any investments or issuers referenced in this report. Members of the Standard Bank Group and/or their respective directors and employees may own the investments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. This report is intended solely for clients and prospective clients of members of the Standard Bank Group and is not intended for, and may not be relied on by, retail customers or persons to whom this report may not be provided by law. This report is for information purposes only and may not be reproduced or distributed to any other person without the prior consent of a member of the Standard Bank Group. Unauthorised use or disclosure of this document is strictly prohibited. By accepting this document, you agree to be bound by the foregoing limitations. Copyright 2011 Standard Bank Group. All rights reserved.
Recommended Content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.