Standard Bank Research Team
Standard Bank
FX
Today, US CPI data for June might garner some interest. Consumer price inflation is expected to hold steady at 2.1% in y/y terms (Bloomberg consensus), with a slight deceleration in the m/m numbers – from 0.4% m/m in May to 0.3% m/m in June. Core inflation is seen slowing to 0.2% m/m from 0.3% m/m. Fed Chair Janet Yellen has dismissed recent climbs in the inflation rate as “noise”. The Fed targets a long-run inflation objective of 2.0%. It must be kept in mind that the Fed’s preferred measure of inflation, against which it calibrates policy, is the PCE measure. The PCE numbers for June will be published next week Friday. The May reading for PCE inflation came in at 1.8% y/y, after April’s rise to 1.6% y/y from 1.1% y/y in March.
Existing home sales data for the US will also be published today. The data is expected to show a 1.9% m/m increase in existing home sales for June. Tomorrow, new home sales data (also for June) will be released – this is expected to fall 5.8% m/m. After last week’s disappointing housing starts and building permits data, the market is likely wondering whether the Fed might be growing more concerned about the housing sector. During her testimony to Congress last week, Yellen was asked what her main concern at the moment might be. Reiterating comments from her prepared remarks, she mentioned the disappointing progress in the housing sector since last year’s increase in mortgage rates. However, she did add that weakness here was not seen as quantitatively large enough to undo the progress in overall economic activity that the FOMC was currently anticipating.
The rand strengthened further against the dollar yesterday, closing at USDZAR10.60, compared with Friday’s close of USDZAR10.65. Local currency appreciation occurred into a mixed performance from the dollar against the major crosses. The rand appreciated despite a weaker performance from most of the commodity currencies and into a strong performance from the EM currencies we monitor for the purposes of this report. The dollar strengthened against the pound and the yen, while remaining unchanged against the euro. Two of the five commodity currencies we monitor – namely the ZAR and the NZD – appreciated on the day. The remaining three – namely the CAD, NOK and the AUD – depreciated on the day. The EM currencies we monitor for the purposes of this report (with the exception of three) appreciated on the day. The exceptions were the INR, MXN and RUB, all of 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 THB). The rand traded between a low of USDZAR10.5985 and a high of USDZAR10.6695. 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, Brent and gold rose by 0.6%, 0.4% and 0.1% respectively. Platinum was largely unchanged. The ALSI fell by 0.6%, while the EM MSCI remained unchanged. The EMBI spread widened by 4 bps and the SA CDS 5yr spread widened by 2 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 6.2%.
Non-residents were aggressive net buyers of local equities (ZAR1 731 million) and were meaningful net sellers of local bonds (-ZAR828 million) on the day. Selling was seen in the 7-12 (-ZAR580 million), 3-7 (-ZAR206 million) and 12+ (-ZAR142 million) year buckets. Buying was meanwhile seen in the 1-3 (ZAR100 million) year segment. Bond yields rose on the day by between 4 bps (R208) and 8 bps (R214). The 3x6, 6x9 and 12x15 FRAs rose by 2 bps, 3 bps and 4 bps respectively.
In local labour news, as an update on the strike in the metals and engineering sector (which began on 1 July), Numsa will announce details today of the wage offer proposed by the Department of Labour. Mildred Oliphant. Minister of Labour took over the role of mediation after Numsa and employer boards Seifsa and Neasa found no resolution to the dispute. Neasa’s Gerhard Papenfus stated that, “[w]hat is particularly disappointing is that the ministerial team proposed a settlement arrangement which may satisfy the trade unions but accelerate job losses in the metal industry.”
FI
Auction day today, where NT will auction ZAR1.1bn in the R2030, ZAR900m in the R214 and ZAR350m in the R2044. Prior to tomorrow’s June inflation print, we could see a quiet auction while market participants wait for the inflation number. Consensus is for June’s CPI print to come in at 6.7%, compared to May’s 6.6%. We are slightly more optimistic, expecting an unchanged 6.6% print again. Over the past two weeks, we have seen breakeven rates adjust slightly lower, with R2023/R197 moving to around 6.28%, from a recent peak of 6.67%. In today’s auction, we could see R214 being the pick of the stock, while the new R2044 is likely to see some demand for the illiquidity discount. R214s are looking more attractive on an ASW perspective, compared to the R213. In addition, over the past five days, the R214 has been net bought by offshore investors, while they have been selling R213s. Demand was good last week at the R2044’s inaugural issue, with a smaller illiquidity discount being priced in. In addition, the R2044 also had a full 50% non-competitive auction take-up. This coincided with a stronger local FI market on the day, and good demand for all the bonds that were auctioned at the formal offering on Tuesday.
Yesterday was a fairly slow turnover day, with less than ZAR14bn traded in nominal SAGBs and under ZAR500m traded in inflation-linked bonds. The belly bonds took the majority of focus, led by the R186 (27.41% of turnover), R2023 (12.93%), R208 (12.23%) and R213 (10.95%). The turnover coincided with offshore selling in this area of the curve, particularly in R208, R2023 and R186. After two strong days at the end of the week, Monday saw some selling as the curve generally bear steepened. Bonds from the R2030 and longer-dated sold off by more than 8 bps, peaking with the R2048 selling by 9.5 bps. The benchmark R186 sold off by 5.5 bps. Bonds did not react in the late afternoon to the stronger rand. FRAs also followed the widening FI trend, moving 2 – 5 bps higher. The US Treasury curve flattened yesterday, as shorter-dated notes weakened and longer-dated notes strengthened. The yields on the 2yr and 5yr USTs rose by 1.22 bps and 0.83 of a bp respectively, to 0.49% and 1.68%. At the longer-end, the yields on the 10yr and 30yr notes declined by 1.35 bps and 3.18 bps, to 2.47% and 3.26% respectively.
Non-residents were net sellers of nominal SAGBs yesterday, for a total of -ZAR828m. Foreigners were notable sellers in the mid- to long-segments of the curve, with large outflows recorded in the R208 (-ZAR876m), R2023 (-ZAR580m), R186 (-ZAR336m), R2048 (-ZAR141m) and R2032 (-ZAR109m). In contrast, meaningful inflows were recorded into the R203 (+ZAR399m), R204 (+ZAR277m) and R157 (+ZAR100m) at the front of the curve. The exception was the R214, which recorded net foreign buying of +ZAR413m yesterday.
EM FI markets delivered a mixed performance yesterday, with ongoing geopolitical tensions around Russia and the Ukraine creating some concern. 5yr EM local currency bond yields rose by 1.05 bps on average; however, 10yr yields fell by 1.52 bps on average. SA’s FI market recorded a poor performance (second-worst), going against the general EM trend, with the 5yr yield rising by 3.10 bps, and the 10yr yield rising by 5.50 bps (and also underperformed relative to the EM average). Russia’s FI market recorded the worst overall performance, with the 5yr and 10yr yields rising by 22.33 bps and 20.59 bps respectively. In contrast, India recorded the best performance in the 5yr space, with the yield declining by 7.20 bps and Brazil recorded the best performance in the 10yr space, with the yield declining by 14.60 bps. Hungary’s FI market recorded the second-best performance overall, with the 5yr and 10yr yields declining by 7.00 bps and 13.00 bps respectively.
EM currencies strengthened on balance yesterday. The rand appreciated by 0.41% recording the second-best performance, following a 0.77% appreciation in the Thai bhat. Other EM currencies to appreciate yesterday were the Indonesian rupiah (0.37%), Turkish lira (0.28%) and Brazilian real (0.23%). The Hungarian forint and Polish zloty recorded modest appreciation of 0.09% and 0.07% respectively. The Russian ruble (0.23%) and Mexican peso (0.18%) depreciated yesterday.
Hungary’s central bank meeting concludes today; Bloomberg consensus forecasts peg a 10 bps decline in the official central bank rate to 2.20%. The Bank began easing monetary policy in August 2012 and has lowered rates by a cumulative 480 bps since then. Initially, the bank lowered rates in 25 bps increments until July 2013 when it began to reduce the rate by 20 bps at a time. In January and February of this year, the Hungarian central bank lowered the interest rate by 15 bps each, and thereafter began to implement cuts of 10 bps. The Hungarian economy has recorded deflationary prices over the past four months, with the latest CPI inflation print recorded at -0.30% y/y. Hungary’s central bank targets an inflation rate of 3.00%.
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