Standard Bank Research Team
Standard Bank
FX
Today, local mining production data for June will be released. With the resolution to the PGM strike occurring only at the end of June, mining production for the month was likely soft. However, there could be some offset to strike impacts from favourable base effects. In June 2013, mining production sank 3.1% on a seasonally adjusted m/m basis. Consensus has the y/y change in mining production set at -5.8% y/y, a mild easing in the pace of contraction seen in May (-6.5% y/y). The median view regarding the m/m (sa) change sits at -2.1%. Ongoing weakness in mining output numbers would be read as currency market negative principally via the signal it sends regarding current account performance in Q2:14 and foreign investor sentiment towards the sector. Between what it means for the current account and the currency versus what it says about growth, it would have ambiguous consequences for local interest rates.
Local retail sales data published yesterday showed no growth y/y in June, representing a marked slowdown from the 2.6% y/y increase seen in May. This was below consensus expectations for 2.0% growth y/y. In m/m terms, retail sales contracted 0.4% (sa). The 3mma of y/y growth rate in sales slowed from 1.8% to 1.5%. SBGS economist Kim Silberman expects this measure of the trend in retail sales will continue to decline in Q3:14 and that growth of household consumption expenditure will average 1.7% y/y in 2014, down from 2.5% y/y in 2013. The slowdown in the June retail sales numbers was broad-based; contractions were experienced in the textiles and clothing (-1.5% y/y), furniture and appliances (-9.2% y/y) and specialised food (-3.7% y/y) categories, while slower growth was experienced in the general dealers (1.0% y/y), pharmaceuticals (0.6% y/y) and other goods (2.4% y/y) segments. The only category to show improved growth was hardware, which grew 5.2% y/y, a material swing compared with 1.5%y/y contraction in May. Several indicators imply mounting stress in the retail sector: growth of credit extended to households slowed from 5.2% y/y in Q1:14 to 4.4% in Q2:14 and retail inflation has accelerated, with goods CPI rising from 5.9% in Q1:14 to 6.5% in Q2:14. Kim notes that the wholesale deflator slowed in May, which, if sustained, may limit the extent to which retail inflation could still accelerate. In addition, the 50 bps interest rate increase in January may have begun to affect leveraged consumers. While signals of weakness in consumer demand could be seen as positive from a current account perspective, we expect that their interest rate consequences (positive) should dominate any currency market reaction (negative).
The first estimate of GDP in the Eurozone for Q2:14 dominates the international calendar today. The consensus call is for GDP to rise 0.1% q/q. This would leave the annual rate at 0.7% after 0.9% in Q1:14. Steve Barrow, our G10 FIC Strategist, points out that the Bloomberg survey of 37 analysts is pretty symmetrical around the 0.1% median, but we are likely to find that the market itself could skew its view following the release of the German and French GDP numbers earlier today. A 0.1% quarterly rise would keep the economy’s head above water, just as we have seen since over the past year. But growth is clearly very sluggish indeed and, with some survey data – like the recent ZEW survey – suggesting that Q3:14 could take a hit from geopolitical events, there may be fears that any positive GDP print today won’t last into Q3:14.
The rand strengthened against the US dollar yesterday, closing at USDZAR10.57, compared with Monday’s close of USDZAR10.63. The rand appreciated despite a strong performance from the dollar against the major crosses, which in turn occurred notwithstanding the releases of soft US retail sales numbers yesterday. The local currency strengthened alongside strength across all of the commodity currencies and into a mixed performance among the EM currencies we monitor for the purposes of this report. The dollar strengthened against the euro, the pound and the yen. The biggest move in the USD was seen against the pound (-0.7. At yesterday’s release of the BoE’s Inflation Report, Governor Carney stressed that the Bank would not rush to raise interest rates, and that the hiking cycle would be “gradual and limited”. This contrasted somewhat with comments he made in June, when he warned that rates could rise sooner than the market expected. %). The pound was also adversely impacted by an unexpected slip in euro zone industrial production numbers and weak UK wages data, both of which were released yesterday. The rand strengthened against all of the major crosses, with the biggest move seen against the pound (-1.3%). Four of the nine EM currencies we monitor – namely, the ZAR, the RUB, the THB and the TRY – appreciated on the day. Four of the remaining five EM currencies - the HUF, IDR, BRL and INR - depreciated, while the MXN was unchanged. The rand was the best-performing currency in both categories. The rand traded between a low of USDZAR10.5662 and a high of USDZAR10.6429 yesterday. Support from where the rand opened this morning sits at 10.5650, 10.5500, 10.4850 and 10.4560. Resistance levels sit at 10.6800, 10.7200, 10.7700, and 10.8700.
Turning to commodity prices, Brent and gold rose by 1.2% and 0.3% respectively. Copper and platinum meanwhile fell by 1.2% and 0.1%, respectively. The ALSI fell by 0.4%, whereas the EM MSCI rose by 0.6% yesterday. The EMBI spread compressed by 1 bp and the SA CDS 5yr spread compressed by 6 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 8.7%.
Non-residents were meaningful net buyers of local equities (ZAR947 million) but were aggressive net sellers of local bonds (-ZAR1 638 million) on the day. Selling of bonds was seen in the 3-7 (-ZAR1 322 million), 7-12 (-ZAR283 million) and 1-3 (-ZAR165 million) year buckets. Buying was meanwhile seen in the 12+ (ZAR133 million) year segment. Bond yields fell by between 1 bp (R214) and 3 bps (R203) on the day into a mild bull curve steepening. 3-month Jibar rose by approximately 2 bps from 6.033% to 6.058%. The 6x9 and 12x15 FRAs fell by 4 bps and 7 bps, respectively, while the 3x6 FRA was unchanged. The improvement in local interest rate expectations was likely due to disappointing retail sales data for June and the perceived disinflationary benefits of rand strength on the day.
FI
Yesterday’s release of US retail sales saw immediate strengthening across US Treasuries, which took the local currency and FI markets stronger, potentially on the likelihood that market participants would interpret the worse than expected outcome as impetus to delay monetary policy normalisation in the US. The SA retail sales print did little to inspire the local market, which largely shrugged off the print. The strengthening momentum following the US print was seen in the broader EM space, with respective markets performing well yesterday following the release. The exception was Brazil, with reports that a presidential candidate was in a plane crash late yesterday afternoon (local time). This saw the Brazilian real sell off significantly.
The local FI market was likely supported by local investors yesterday, as non-residents sold -ZAR1.64bn worth of nominal SAGBs on the day. There was a bull steepening of the local yield curve as bond yields fell by between 1.00 bp and 3.00 bps across the curve, with the incremental strengthening declining with bond tenor. The yield on the R157 fell by 2.50 bps to 6.66% and the R203 fell by the largest increment (3.00 bps) to a yield of 7.07%. The benchmark R186 fell by 2.00 bps, ending the day at a yield of 8.30%, and the R213 fell by 1.50 bps to 8.75%. The remaining bonds comprising the 12+ year category recorded 1.00 bp declines in their respective yields on the day.
The yield curve steepened overall yesterday; at the front- and back-ends, the spreads on the R186/R203 and R2048/R186 widened by 1.00 bp each, ending the day at 123.00 bps and 76.00 bps respectively; the spread on the R213/R186 at the belly widened by a marginal 0.50 of a bp, to 44.50 bps. SAGB turnover improved slightly, to ZAR16.55bn yesterday, from ZAR15.59bn the day before. The R186 contributed 29% to yesterday’s trading volumes, with the R203 (22%) and the R207 (14%) also recording notable turnover volumes. The rand appreciated by 6c to USDZAR10.57, recording the best performance across the EM currencies we monitor for the purposes of this report. There was a 4.34 bps improvement in the SA 5yr CDS spread to 189.95 bps.
Auction participants are eligible to take up 100% of their allocations in the R2032 and the R2044 at today’s non-competitive auction, with the temporary larger allocation on these two bonds. Buyers in the R2037 are still only eligible to make use of a 50% non-competitive auction level.
Non-residents were significant net sellers of nominal SAGBs yesterday for a total of -ZAR1.64bn. Foreigners sold -ZAR1.32bn in the 3-7 year segment, with notable outflows recorded in the R207 (-ZAR744m) and R203 (-ZAR620m). -ZAR282m was sold in the R2023 in the 7-12 year segment, and -ZAR165m was sold in the R157 in the 1-3 year segment. The 12+ year segment was the only maturity bucket to record net foreign buying on the day, with notable inflows recorded into the R2037 (+ZAR178m), R209 (+ZAR160m) and R214 (+ZAR160m); this was partially offset by net selling in the R186 (-ZAR116m), R2030 (-ZAR81m) and R213 (-ZAR77m), as well as through marginal amounts of net selling in the R2044 and R2032.
The US Treasury curve flattened yesterday, as USTs strengthened overall on the back of the worse than expected US retail data release. At the shorter-end, the yield on the 2yr UST fell by 2.00 bps to 0.41% and the 5yr UST fell by 4.27 bps to 1.58%. At the longer-end, the yield on the 10yr UST fell by 3.25 bps to 2.42%, and the 30yr note fell by 3.33 bps, to a yield of 3.24%.
SA delivered a middle of the pack performance in the FI space yesterday compared with the EMs we monitor for the purposes of our reports. EM FI markets strengthened on balance yesterday, as 5yr yields fell by 2.83 bps on average and 10yr yields fell by 1.83 bps on average in line with US Treasury yields. SA’s 5yr yield fell by 1.90 bps (underperforming relative to the 5yr average), and the 10yr yield fell by 2.00 bps (outperforming the EM average). Russia’s 5yr yield recorded the best performance in this shorter-dated tenor, with the yield declining by 7.71 bps. Poland’s FI market recorded the second-best performance in the 5yr space, with the yield declining by 6.90 bps, followed by India’s 5yr yield, which fell by 6.00 bps. In the 10yr space, India recorded the best performance, with the yield declining by 7.60 bps, followed by a 6.56 bps decline in Russia’s 10yr note, and a 6.00 bps decline in Turkey’s note. FI markets in Hungary and Mexico weakened marginally yesterday.
The SA rand was the best-performing EM currency yesterday, appreciating by 0.55%. This was followed by a 0.45% appreciation in the Russian ruble, and a 0.40% appreciation in the Thai bhat. The Polish zloty was the only other currency to appreciate notably on the day, by 0.26%. EM currencies that depreciated yesterday were the Indian rupee (0.22%) and the Brazilian real (0.20%).
The monetary policy committee of Bank Indonesia (BI) concluded their monetary policy meeting this morning, announcing an unchanged BI reference rate of 7.50%. This was in line with Bloomberg consensus forecasts.
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