FOMC: steady as she goes

FX

The official FOMC policy statement will be released today. No major changes to the Fed’s current policy path are anticipated; a further USD10 billion reduction in the Fed’s asset purchases is expected. The FOMC meeting is not accompanied by a press conference, and consequently without the opportunity to explain its decisions, we doubt that there will be any explicit indications in the official statement released after the meeting regarding the policy normalisation measures that might follow the conclusion of the Fed’s bond-buying programme. The minutes of the meeting, to be released on 20 August, might be more telling in this regard. This week also sees the release of the July Employment Situation Report and June PCE deflator data, both on Friday. Payrolls growth is anticipated to continue its strength, with consensus predicting a 231k gain. The unemployment rate is expected to hold steady at 6.1%. Headline PCE inflation is seen falling slightly to 1.7% y/y, from 1.8% y/y. The core inflation reading is also expected to come off slightly, from 1.5% y/y to 1.4% y/y. As we saw with last week’s consumer inflation data, a drop in inflation numbers could ease any lingering concerns that accelerating inflation might prompt the Fed to tighten policy sooner than currently anticipated, which could be to the benefit of risky assets.

The rand weakened further against the dollar yesterday, closing at USDZAR10.60, compared with Monday’s close of USDZAR10.56. Local currency depreciation occurred in tandem with a strong performance from the dollar against the major crosses. The rand depreciated alongside a weak 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 pound, the euro and the yen, with the biggest move seen against the yen (0.3%). As mentioned before, all five commodity currencies we monitor depreciated on the day. All but two of the EM currencies we monitor for the purposes of this report depreciated on the day. The exceptions were the IDR and the INR, both of which remained unchanged. The rand ranked second (depreciated to a lesser extent when compared with the NZD, the CAD and the NOK) in the commodity currencies category (beaten only the AUD) and took up the middle position in the EM currencies category. The rand traded between a low of USDZAR10.5557 and a high of USDZAR10.6263. Support from where the rand opened this morning sits at 10.5650, 10.4850, 10.4560 and 10.4025. Resistance levels sit at 10.6500, 10.7400 and 10.8500.

Turning to commodity prices, platinum and copper both fell by 0.5% and gold fell by 0.4%. Brent meanwhile rose by 0.1%. The ALSI rose by 0.6% and the EM MSCI rose by 0.1%. The EMBI spread widened by 4 bps, while the SA CDS 5yr spread compressed by 3 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 5.7%.

Non-residents were mild net buyers of local equities (ZAR206 million) but were net sellers of local bonds (-ZAR353 million) on the day. Selling was seen in the 3-7 (-ZAR253 million) and 12+ (-ZAR136 million) year buckets. Buying was meanwhile seen in the 1-3 (ZAR33 million) and 7-12 (ZAR3 million) year segments. Bond yields performance was mixed on the day. The R208 and the R186 both rose by 1 bp, while the R214 fell by 1 bp and the R203 remained more or less unchanged. The 3x6 and 6x9 FRAs both rose by 1 bp and the 12x15 FRA rose by 2 bps.

In local labour news, strikes in the metals and engineering sector ended when about six unions signed a wage deal with most employers yesterday. However, Neasa (with 22 members who employ approximately 70 000 workers) refused to sign the offer. The employer body believed it had been “side-lined” in the negotiation process which was facilitated by the Department of Labour. Jaco Swart, Neasa's national collective bargaining coordinator, has thus indicated, “[t]he dispute still exists and our lock-out remains in place." Irvin Jim, Numsa’s general secretary, has called on its members to continue picketing outside Neasa plants. Workers not returning to work and the “continuation” of the strike should be viewed as rand negative in that it may increase anxieties regarding trade deficit compression, as well as perhaps stimulate rising concerns over the country’s growth prospects.

FI

Today sees the release of the SA Budget. Preliminary fiscal figures suggest a budget surplus of +ZAR26.11bn for June 2014/15. This compares to previous June figures of +ZAR12.56bn, +ZAR18.19bn and +ZAR16.43bn for 2011/12, 2012/13 and 2013/14 respectively. The April and May numbers reflected a combined fiscal deficit of -ZAR62.47bn, almost ZAR9bn worse than the first two months of the previous fiscal year. The improved June figure is expected to take the fiscal deficit for the first quarter of 2014/15 to -ZAR36.37bn, slightly better than the first quarter of 2013/14, which stood at -ZAR37.09bn. Revenue in June is important, as it is the first month of the fiscal year where substantial corporate taxes are received.

In early trade yesterday, SAGBs continued to follow the weaker trend of the rand and US Treasuries; however, there was a turnaround in SAGBs in line with USTs, that saw SAGBs end the day either marginally weaker day-on-day (front-end and mid-segment bonds), or stronger overall (longer-dated SAGBs). The rand continued to trend weaker, which was in line with the general EM currency momentum, although the local market did not seem to react to the worse than consensus unemployment numbers, which printed at 25.5% for Q2:14 (consensus: 25.4%; previous: 25.2%). USDZAR depreciated by 4c to 10.60, but was not the worst performer relative to the EM currencies we monitor.

SAGBs with maturities ranging from 2018 to 2031 saw their yields rise by between 0.50 of a bp and 1.50 bps. The R157 (2015) and R2032 remained unchanged at their prior day yields of 6.65% and 8.82% and the yield on the R203 (2017) fell by 0.50 of a bp to 7.06%. At the long- to extended-segment of the curve, the yields on the R209, R2037, R214, R2044 and R2048 all fell by 1.00 bp each. US Treasury yields strengthened overall yesterday. The exception was the yield on the 2yr UST, which rose by 3.93 bps to 0.54%. In contrast, the yields on the 5yr and 10yr USTs fell by 1.49 bps and 2.52 bps respectively, to 1.69% and 2.46%. The yield on the 30yr note fell by the largest increment, of 2.99 bps to 3.22%. This resulted in a flattening of the UST curve.

While the front-end of the local yield curve steepened marginally yesterday, the belly and the back-end of the curve flattened. At the front-end, the spread on the R186/R157 widened by 1.00 bp to 157.50 bps; the spread on the R213/R186 at the belly compressed by 0.50 of a bp ending the day at 45.50 bps; and at the back-end, the spread on the R2048/R186 compressed by 2.00 bps to 79.00 bps. Due to yesterday’s nominal government bond auction, total SAGB turnover rose significantly on the day, to ZAR28.20bn from ZAR4.34bn on Monday. ZAR27.69bn of yesterday’s turnover was due to nominal SAGBs, and 22% of this turnover was recorded in the R186 and 18% was recorded in the R203. The auction bonds also recorded decent turnover levels on the day: R2030 (11%); R2032 (8%); R2044 (4%).

Yesterday’s nominal government bond auction of the R2030, R2032 and R2044 saw a week-on-week increase in auction bids, as well as competitive pricing across all three bonds. Total auction bids improved to ZAR8.15bn, for an auction bid/cover ratio of 3.5x; this compares with bids of ZAR6.91bn at last week’s offering. The R2030 received 45% of the auction’s total bids, while the R214 attracted 42% of the bids and the R2044 received the remaining 13%. The R2030 received a significant 57 participant bids, of which 14 were fully allocated, while the R2032 received 50 bids, of which 10 were fully allocated. Despite only receiving 27 bids in total, investor interest in the R2044 was strong, with only 3 fully allocated bids going to the bond at the auction. Pricing action was strong, with all three bonds clearing between 2.00 bps and 3.00 bps more competitively relative to the secondary market at the time. The R2030 cleared at 8.66%, the R2032 cleared at 8.81% and the R2044 cleared at 9.00%.

Non-residents were net sellers of nominal SAGBs yesterday, for a total of -ZAR353m. Both large inflows and outflows were recorded across individual bonds comprising the curve. At the front-end, inflows were recorded into the R203 (+ZAR519m) and the R207 (+ZAR144m) in the 3-7 year segment, and at the longer-end, inflows were recorded into the R213 (+ZAR630m), R2032 (+ZAR391m) and R2048 (+ZAR209m) in the 12+ year segment. Outflows were meanwhile seen in the R208 (-ZAR859m) in the 3-7 year segment, and in the R186 (-ZAR1.30bn) and R214 (-ZAR109m) in the 12+ year category.

EM FI markets weakened on average yesterday. 5yr EM bond yields rose by 2.10 bps on average, and 10yr yields rose by 4.30 bps on average. Russia’s 5yr note recorded the worst performance, with the yield rising by 13.31 bps on the day, while the 10yr note recorded the second-worst performance, with the yield rising by 10.38 bps, behind an even weaker performance by Hungary’s 10yr yield, which rose by 20.00 bps. The sell-off in Russia was likely due to the sanctions imposed on the country by the EU and as well as by the US on the back of Russia’s involvement in the Ukraine crisis. SA’s 5yr yield remained unchanged yesterday (outperforming the EM average), and the 10yr yield rose by 1.00 bp (also outperforming the EM average). Poland’s FI market recorded the best performance, with the 5yr yield declining by 3.20 bps and the 10yr yield declining by 5.20 bps. China’s FI market recorded the second-best performance, with the 5yr and 10yr yields declining by 3.00 bps and 1.00 bp respectively.

The rand depreciated by 0.36% yesterday, performing better compared with other EMs which saw their currencies sell-off by more on the day. The moves weaker were led by the Hungarian forint, which depreciated by 0.86%, followed closely by a depreciation in the Turkish lira of 0.82%. Other EM currencies to depreciate on the day were the Mexican peso (0.48%), Brazilian real (0.40%), Polish zloty (0.38%), Russian ruble (0.15%) and Thai bhat (0.09%).

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