Elections boost public sector employment in Q2

FX

According to the June 2014 Quarterly Employment Statistics (QES) survey published by Stats SA, employment in Q2:14 in the formal non-agricultural economy rose by 155k or 1.8% q/q, and by 229k or 2.7% y/y. According to SBGS economist Kim Silberman, this is the largest increase recorded in a single quarter since the 1980s. This was well above consensus, which forecast a 0.1% q/q contraction in Q2:14, and no more than a modest uptick in y/y growth of employment to 0.6% from 0.5% in Q1:12. Of the 155k jobs added in Q2:14, 143k or 92% of these were employed by government, while only 12k were employed by the private sector. Over the last 18 months, persistent job-shedding in mining, manufacturing, transport and construction has been compensated for by persistent increases in public sector employment and, to a lesser extent, by employment in trade and finance. According to the QES data, the 5.8% q/q (9.2% y/y) increase in employment by the public sector was mainly due to increases in employment in other central government activities (IEC’s national elections); universities and universities of technology; provincial departments; national departments; and health and social work. While the elections may account for some of the exceptional increase in public sector employment (and should thus reverse in subsequent numbers), Kim points out that during the last election, in April 2009, public sector employment increased by only 3.8% y/y or 80k (0.8% q/q or 17k). Employment gains in the private sector were not broad-based, and appear to have been affected by strikes in the mining sector. Sectors that shed jobs in Q2:14 were mining (1k), manufacturing (6k), transport and communication (4k) and utilities (1k). Sectors that gained jobs in Q2:14 were construction (5k), trade (17k) and financial services (2k). Average growth in gross earnings slowed to 6.8% y/y in H1:14 from 8.1% y/y in 2013 and 8.8% y/y in 2012. In real terms, growth in gross earnings fell from 3.2% y/y and 2.4% y/y in 2012 and 2013 respectively, to 0.6% y/y in H1:14. Kim notes that growth in quarterly gross earnings divided by the number of people employed indicates that wage inflation is far lower when calculated per worker, and very different across sectors. We would not interpret the improvement in employment numbers in Q2:14 as rand-positive to the extent that they were largely driven by public sector gains and to the extent that a meaningful portion of these gains is likely to prove temporary.

Local money supply and private sector credit extension (PSCE) numbers for August 2014 were published this morning. Y/Y growth in M3 sank to 6.41% from 6.86%, this was despite a low base – in August 2013, M3 rose by just 0.1% m/m on a seasonally adjusted basis. PSCE growth fell to 8.78% y/y from 9.77% y/y, with base effects contributing to the result – in August last year, PSCE expanded by a robust 1.1% m/m (sa). Analysts had expected a slightly milder drop to 8.90% y/y. Growth in total credit extended to households fell to 3.64% y/y from 4.1% in July, its lowest level since February 2010. This occurred notwithstanding base effects of a modest (0.2% m/m gain, unadjusted) gain in August last year. Y/Y growth in credit extended to corporates also fell to 14.55% y/y from 16.3% in July owing to a significant extent to base effects (it rose 2.9% m/m, unadjusted, in August last year). Our longer-term prognosis for credit extension to households is for further deceleration, given slowing growth of household disposable incomes, rising local interest rates and a rising number of households that are falling short of lending criteria. The downdraft in unsecured lending has been especially acute, but growth of instalment sales credit is now at less half the levels seen at the start of 2013 (below 9.0% y/y from close on 20.0% in January 2013). Mortgage growth in respect of households has been consistently sub-3.0% y/y since late 2012; it fell to 2.2% y/y in August from 2.6% in July. Growth of lending to corporates remains much more robust than growth of lending to households. The SARB noted in September that “[g]rowth in corporate sector borrowing during the first half of the year was dominated by the agricultural sector, electricity supply (renewable energy projects) as well as wholesale and retail trade sectors.” However, it appeared concerned about potential impacts here of the recent increase in banks’ funding costs arising from the approach of regulatory deadlines, the Abil debacle and rating action from Moody’s. Weakness in PSCE numbers should be read as rand-negative largely via any perceived consequences for monetary policy (increased reluctance on the part of the SARB to tighten further), notwithstanding some ambiguity via what it might imply for domestic demand, and thus import demand and the current account.

Preliminary September Eurozone CPI data will be published this morning, and Steve Barrow (our G10 FIC Strategist) thinks it could come through a bit above the 0.3% y/y consensus. However, Steve notes that, even if it stayed at the 0.4% y/y level that we saw in August, it would hardly be seen as a positive result for the ECB. Yesterday’s German EU-harmonised data came through a tenth above consensus; it was flat in September in m/m terms against calls for a 0.1% fall. The y/y reading for harmonised German CPI came in at 0.8%, the same as August’s reading and slightly better than consensus expectations (0.7%). Other countries that have reported September CPI data show similarly modest price gains. Steve thinks that one key issue will be energy prices, since we have seen a steep fall in prices through July and August; this could cause the CPI undershoot. But, on the other side, the euro has fallen sharply as well, which could leave the price of fuel pretty static in euro terms in the month of September. The answer to this question could hold the answer to whether the overall CPI is steady in annual terms or lower than last month. Steve favours the former outcome.

The US Chicago PMI will be watched as we start the release of September data in the US. However, the Chicago numbers have recently been all over the place, and this might diminish the usefulness of the data. For instance, last month, the numbers were super-strong at 64.3, but this comes after a pretty weak-looking 52.6 in July. For September, the market consensus is for 62.0 and, given the volatility of the data, the range of estimates is wide at 58.0 through to 65.0. Steve sees an upside risk here, but the impact on the market is likely to be limited given the volatility of the series. Yesterday's US personal spending data was a bit above expectations in August at 0.5% m/m and July revised results up as well (to 0.0% m/m from -0.1% m/m), which is going to help nudge up Q3:14 GDP estimates. Personal income growth was in line with the 0.3% m/m consensus. The PCE headline and core price indices were a little bit above expectations - albeit still comfortably below the targeted 2.0% y/y level at 1.5% y/y for both.

The rand depreciated against the US dollar yesterday for the third consecutive trading day, closing at USDZAR11.28, compared with Friday’s close of USDZAR11.23. Intraday, the USDZAR broke through two resistance levels (USDZAR11.25 and USDZAR11.31), spiking to a level of 11.3136, a level last seen in late January 2014. The rand’s depreciation against the greenback occurred into a mixed performance from the dollar against the major crosses, and into weakness across almost all of the commodity and EM currencies we monitor. The dollar strengthened against the pound and the yen, while weakening against the euro. The rand depreciated against all of the major crosses, with the biggest move seen against both the dollar and the euro (0.5%). All but one of the commodity currencies we monitor for the purposes of this report depreciated on the day; the exception was the NOK (which appreciated). All but one of the EM currencies we monitor depreciated on the day; the exception was the HUF (which appreciated). The rand took up the middle position in the commodity currencies category and was the fourth-best performing currency in the EM currencies category (beaten only by the HUF, the THB and the MXN). The rand traded between a low of USDZAR11.2112 and a high of USDZAR11.3136 on the day. Support from where the rand opened this morning sits 11.1800, 11.1200, 11.0500 and 10.9600. Resistance levels sit at 11.3100, 11.3550 and 11.4000.

With regard to commodity prices, platinum, copper and Brent rose by 0.5%, 0.4% and 0.2% respectively. Gold meanwhile fell by 0.2%. The ALSI fell by 0.6% and the EM MSCI fell by 1.4%. The EMBI spread widened by 13 bps and SA’s 5yr CDS spread widened by 5 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 7.6%.

Non-residents were significant net buyers of local equities (ZAR846 million) but were aggressive net sellers of local bonds (-ZAR2 770 million). Selling of bonds was seen in the 12+ (-ZAR1 972 million), 3-7 (-ZAR656 million), 1-3 (-ZAR126 million) and 7-12 (-ZAR15 million) year buckets. Bond yields rose on the day by between 6 bps (R214) and 11 bps (R208). The 3x6 and 6x9 FRAs both rose by 2 bps, and 12x15 FRA rose by 3 bps.

FI

Today sees the release of SA’s twin deficit data: the trade and budget balance are both released at 14:00 SA time. Bloomberg consensus on the trade balance is -ZAR8.7bn, from the prior month’s -ZAR6.9bn, while Standard bank is forecasting a significantly worse -ZAR12.0bn. Our view of the preliminary budget numbers show a likely budget deficit of -ZAR1.30bn for August, from a prior month’s -ZAR69.65bn. Bloomberg consensus is -ZAR2.00bn. The trade balance, as the best indicator of the current account deficit, is likely to be the focus for the market. We expect some initially quiet trade in the morning, but the risk remains that foreign selling of SAGBs would put additional pressure on the currency.

Today’s nominal SAGB auction has ZAR850m on offer in the R2037, ZAR500m on offer in the R214 and ZAR1.00bn in the R2044. No additional non-competitive amounts were issued in the R2044 at last Friday’s auction, but with ZAR1.00bn on offer in the bond at today’s offering, the non-competitive limit has returned to the default 50%. No SAGBs are currently eligible for the 100% non-comp limit going forward as all bonds in issue will have more than ZAR10.00bn outstanding. Remaining coupon payments for the month of September are due today, stemming from the R208 (ZAR2.94bn), R209 (ZAR2.55bn) and R210 (ZAR383m). The R2044 has seen good demand from offshore investors over the past five days and could be the pick of the auction at current levels.

Bonds finally relented yesterday, after staying stable during a period of currency strength. However, the USDZAR move through 11.23 appeared to be the trigger for bonds to sell off, amidst some large offshore selling. Turnover came in at ZAR23.7bn of nominal SAGBs, but 60% was due to the R186 after heavy foreign selling in the bond (-ZAR1.90bn). The second-highest contributor to turnover was the R208, accounting for a considerably smaller 7% of turnover. The pressure on the curve came in the short to belly area with moves of 10.5 – 11.0 bps in the R207, R208 and R2023. The benchmark R186 moved 8.0 bps weaker, resulting in a bear flattening of the curve. FRAs ticked up only slightly higher on the day. The sovereign CDS followed the weakening bias of the currency, with the CDS moving 6.1 bps higher on the day and 24.5 bps higher over the past five days.

Non-residents were substantial net sellers of nominal SAGBs yesterday for a total of -ZAR2.77bn, with outflows recorded in all four maturity categories. Foreign selling of -ZAR1.97bn was recorded in the 12+ year maturity category due to significant net selling in the R186 (-ZAR1.90bn), with notable outflows also recorded in the R2030 (-ZAR253m) and the R213 (-ZAR110m); this was partially offset by net purchases in the R209 (+ZAR180m) and the R2048 (+ZAR133m) within this category. The 3-7 year segment recorded net selling of -ZAR656m yesterday, with foreigners selling -ZAR460m in the R204 and -ZAR261m in the R208. Foreigners sold -ZAR126m in the 1-3 year segment, primarily due to net selling in the R203 of -ZAR191m.

The US Treasury curve bull flattened yesterday, as yields across the curve fell. The 2yr UST fell by the smallest increment of 0.40 of a bp to a yield of 0.57%. The yield on the 5yr UST fell by 3.93 bps to 1.76%. At the longer-end, the 10yr UST note fell by the largest increment of 5.05 bps to 2.48%, while the 30yr note fell by 4.93 bps to 3.16%.

EM sentiment remained on the back foot yesterday, with both FI and currency markets weakening. Brazil delivered a particularly weak performance in both spaces, possibly a reaction to the release of the September election poll data, ahead of the 5 October 2014 general election. In the FI space, 5yr local currency sovereign yields rose by 16.11 bps on average, and at the long-end, 10yr yields rose by 8.70 bps on average. Brazil’s 5yr yield recorded the worst performance, with the yield rising by 59.90 bps, followed by Turkey (+31.00 bps) and Indonesia (+19.80 bps). SA outperformed in the 5yr space, with the yield rising by 8.30 bps. SA’s FI market underperformed in 10yr tenor, with the yield rising by 10.10 bps behind larger moves in Turkey (+34.00 bps) and Indonesia (+16.60 bps).

EM currency markets depreciated on average yesterday. The exceptions were the Hungarian forint (0.28%) and the Polish zloty (0.10%), which both appreciated on the day. The Brazilian real led the moves weaker, depreciating by a substantial 1.14% on the day, followed by the Indonesian rupiah (1.00%), the Turkish lira (0.76%) and the Russian ruble (0.71%). The Indian rupee (0.60%), SA rand (0.46%), Mexican peso (0.39%) and Thai baht (0.21%) depreciated relatively less on the day.

This morning, the Reserve Bank of India (RBI) concluded its monetary policy meeting, opting to hold its respective benchmark rates unchanged. In particular, the RBI repurchase rate was left at 8.00%. This was in line with Bloomberg consensus expectations.

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TX Thematic: The Fed, the SARB & the rand: life after “lift-off” by Bruce Donald (15 September 2014)

FX Weekly: FOMC & MPC: you go first by Bruce Donald, Marc Ground and Varushka Singh (15 September 2014)

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