Local trade data: will it narrow enough?

FX

Preliminary trade numbers, out today, will likely be the main focus of the market – domestic data wise – this week. Participants remain very concerned about persistent breadth in the current account deficit, and stickiness in the response of the shortfall in particular to a significant depreciation of the currency since late Q3:12, especially given likely external financing challenges posed to foreign capital dependent EMs by the prospect of Fed tightening next year. Consensus puts the deficit at -ZAR11.5 billion, to the narrow side of August’s score of -ZAR16.3 billion. SBGS Economist Kim Silberman forecasts a deficit slightly narrower than the consensus at -ZAR11.0 billion. Looking back over the past 10 years, there does not appear to be an obvious seasonal pattern in the trade balance between August and September results; there also does not appear to be a clear seasonal m/m pattern in exports or imports. However, observing readings for various key import and export product categories in August against recent monthly averages, it seems that the risk to the trade deficit is to the narrow side of the August result. On the export side of the account, there is some upside risk in the mineral products and the precious materials category. While weakness in bulk commodity markets, especially the iron ore market, would explain some of the softness in the former, the extremity of the August reading points to a possible partial unwind. As far as we are led to understand, PGM industry production was fully back on line at the start of September; it is possible that this could start to impact export numbers in September trade results. Elevated transport equipment export numbers for August could be repeated, given the likelihood of continued support from higher domestic production at Mercedes Benz. On the import side of the account, the risk from the mineral products category (mainly oil) appears to be more or less symmetrical. There is some risk of a m/m dip in machinery imports following a comparatively elevated August reading. We think that some of the key ingredients for current account deficit compression are already in play, including a more competitive exchange rate, slowing domestic demand (now likely amplified by monetary tightening) and signs of a recovery – albeit uneven and sub-par – in the world economy. Import volumes are already playing ball; deficit compression has been stalled to a significant extent by strikes on output of key export sectors. Any signs that export volumes are starting to normalise would be rand-positive.

PPI inflation for September slowed to 6.9% y/y from 7.2% y/y in August. This was in line with Bloomberg consensus expectations. This marks the fifth consecutive month in which y/y prints of producer inflation have fallen. Base effects contributed modestly to the y/y drop, as the in September 2013 a m/m increase of 0.4% was recorded. In m/m terms, September 2014 PPI grew at 0.1%. Y/Y inflation rates for final manufacturing, electricity and agriculture fell in September, while intermediate manufacturing, mining and fishing inflation rates picked up compared with August. Intermediate manufacturing PPI rose to 7.0% y/y in September, after decelerating to 6.7% y/y in August (from 8.5% y/y in July). Electricity PPI inflation moderated to 7.3% y/y in September, from 8.9% y/y in August. Agricultural PPI inflation also moderated further in September, to 3.8% y/y from August’s print of 3.9% y/y, remaining well below that of manufactured food PPI. Lower inflation results could be viewed as rand-negative, insofar as they would reduce pressure on the SARB to raise interest rates and could increase the bank’s implicit tolerance for currency weakness.

National Treasury’s Statement of Revenue and Expenditure, released yesterday, revealed a better-than-expected September fiscal balance at -ZAR5.4 billion (Bloomberg consensus: -ZAR11.1 billion). This was an improvement on August’s worse-than-expected -ZAR7.3 billion. Revenue collection is currently running at 45.2% of what has been budgeted. This compares slightly unfavourably to FY13/14, where revenues at this stage of the year were running at 45.8% of the budget estimate. Expenditure, however, is also running slightly behind when compared with last year; 48.3% vs 48.4%.

Stats SA’s QLFS survey results for Q3:14 showed the unemployment rate edging slightly lower to 25.4% from 25.5%. Analysts had expected a move in the opposite direction to 25.6%. The moderate softening of unemployment numbers should be ZAR-positive owing to their creditworthiness and interest rate effects.

Q3:14 US GDP, released yesterday, came out much better than consensus at 3.5% q/q (saar). Steve Barrow (our G10 FIC Strategist) points out that with inventories pulling down the headline GDP growth figure by just over 0.5% q/q it leaves final sales at over 4.0% q/q, which is pretty decent. Consumer spending was a touch lower than expected at 1.8% q/q (compared to a consensus of 1.9% q/q), with weakness here made up for in other areas, especially exports and government spending. On the price indices, these were either in line (headline) or lower than consensus (core). But there's still no sign here of any inflation pressure. It is worth noting, that the rates are all down on Q2:14 numbers. For instance, the core PCE price index is 1.4% q/q after 2% q/q last time.

Eurozone CPI data to be released this morning is expected to show a slight increase from 0.3% y/y in September to 0.4% y/y in October. What’s more, the skew on the Bloomberg survey of some 41 analysts suggests that slightly more see an upside risk. This being said, forecasts were made before the German CPI data yesterday, which came in below consensus (0.8% y/y compared to 0.9% y/y). Hence, it is only fair to assume that expectations for the Eurozone CPI data will have edged down since Bloomberg took its survey. With this in mind, Steve tends to think that the consensus is more likely to be 0.3% y/y now – the same as last month. Consumer prices fell in monthly terms in October last year and hence base effects should, in theory, stop the annual CPI figure from falling today. However, Steve is concerned about weakness in energy prices, which could still create an even bigger downside surprise. Steve’s view is that the data is likely to hold at 0.3% y/y which puts it lower than the official consensus but probably at a level that will not provoke a significant response from the market.

The rand strengthened against the US dollar yesterday, closing at USDZAR10.87, compared with Wednesday’s close of USDZAR10.95. Rand appreciation against the greenback occurred despite a strong performance from the dollar against all of the major crosses. Appreciation of the local currency also occurred into a mostly stronger performance from the commodity currencies and the EM currencies we monitor for the purposes of this report. The dollar strengthened against all of the major crosses, with the biggest move seen against the yen (0.3%). The rand strengthened against all of the major crosses, with the biggest move seen against the yen (1.0%). All but one of the commodity currencies we monitor appreciated on the day, the exception was the CAD which depreciated. Most of the EM currencies we monitor for the purposes of this report, appreciated on the day. The exceptions were the THB, the INR and the IDR, all of which depreciated. The rand was the best-performing currency in the commodities currencies category and the fourth-best-performing currency in EM category (beaten only by the TRY, the BRL and the RUB). The rand traded between a low of USDZAR10.8566 and a high of USDZAR10.9963 intraday. Support from where the rand opened this morning sits at 10.8550, 10.8000 and 10.7500. Resistance levels sit at 10.9500, 11.0100, 11.1650, 11.2450 and 11.3100.

Commodity prices were weaker on the day. Platinum fell by 1.2%, gold and copper both fell by 1.1%, and Brent fell by 1.0%. The developed market MSCI rose by 0.2%, the EM MSCI rose by 0.3%, while the ALSI fell by 1.0%. The EMBI spread widened by 2 bps, while SA’s 5yr CDS spread compressed by 1 bp. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell by 4.2%.

Non-residents were moderate net buyers of local bonds (ZAR689 million) on the day. Buying of bonds occurred in the 12+ (ZAR743 million) and 7-12 (ZAR17 million) year buckets. Selling was meanwhile seen in the 1-3 (-ZAR64 million) and 3-7 (-ZAR7 million) year segments. Bond yields rose on the day by between 1 bp (R208 and R186) and 2 bps (R203), while the R214 yield remained unchanged. The 3x6 FRA rose by 4 bps, the 6x9 FRA meanwhile fell by 2 bps and the 12x15 FRA remained unchanged.

FI

The Fed exited stage left, ending its QE programme and the Bank of Japan has now entered stage right. The BoJ announced that they will increase their holdings of government bonds to 80trn yen/year, up from the previous 60-70trn yen, as well as boosting ETF purchases to 3trn yen. This has given an early morning boost to SAGBs, which are opening stronger. USDZAR was trading slightly weaker first thing, but has now started strengthening.

At today’s ILB auction, NT plans to raise up to ZAR800m across the R212, I2025 and I2038. There was a 43% take up at yesterday’s non-competitive auction, just shy of the 50% allowable limit, as an additional ZAR1.02bn was raised across the three auction bonds: R2030; R2032; and R2048. An additional ZAR401m was raised in the R2030, representing the full 50% allowable limit. However, ZAR325m (41%) was raised in the R2032, while only ZAR295m (39%) was raised in the R2048.

There was virtually no turnover in SAGBs yesterday, with less than ZAR10bn traded in nominal SAGBs. 36.1% of turnover was due to the R186, 10.0% from the R213 and 21.4% of turnover from the non-comp auction bonds. Bonds bear flattened as the front-end moved 1.5 bps higher and the back-end was unchanged. FRAs were also fairly unchanged, with only slight changes in the very front-end points. US Treasury yields fell across the curve yesterday. The 2yr UST fell by 1.18 bps to a yield of 0.47% and the yield on the 5yr UST fell by 1.23 bps to 1.57%. The 10yr UST fell by 1.16 bps to a yield of 2.31% and the yield on the 30yr UST fell by 0.32 of a bp to 3.05%.

Non-residents were net buyers of nominal SAGBs yesterday for a total of +ZAR689m. Foreign buying was concentrated in the 12+ year segment (+ZAR743m), with marginal net buying also recorded in the 7-12 year segment. In the 12+ year segment, notable net buying was recorded in the R2048 (+ZAR312m), R213 (+ZAR247m) and R2030 (+ZAR205m); this was partially offset by net selling in the R214 (-ZAR183m). No other notable transactions (in excess of ZAR100m), was recorded in the remaining front-half of the curve yesterday.

Yesterday’s September fiscal balance printed at -ZAR5.36bn, compared to our estimate of -ZAR15.3bn and consensus of -ZAR11.1bn. This comes after August’s print was worse than expected, at -ZAR7.32bn, compared to the consensus print of -ZAR2.00bn. Expenditure is running slightly behind last year’s figures and revenue is also behind last year’s figures: At the end of September, revenue raised was 45.2% of the Budget, vs 45.8% at the same time in 2013/14. Expenditure is now 48.3% of the Budget, compared to 48.4% in 2013/14. However, the deficit for the fiscal year is -ZAR117.15bn compared to -ZAR108.5bn for the same period last year, just under 8.0% worse.

R&I downgraded South Africa’s sovereign rating yesterday. The Japanese rating agency moved the long-term foreign currency rating one notch lower to BBB+, the long-term domestic currency rating one notch lower to A- and the short-term foreign currency rating one notch lower to a-2. All ratings have a stable outlook. The rating change is unlikely to receive the attention that a rating change from the big-3 would have. The agency noted that “economic developments will continue to hold the key to a medium-term fiscal outlook”, while “a focus is now on [the] effective implementation of the [national development] plan, together with the maintenance of prudent macroeconomic policies”.

EM FI markets strengthened on balance yesterday. 5yr local currency sovereign yields fell by 1.56 bps on average and 10yr yields fell by 3.66 bps on average. SA’s 5yr yield underperformed against its EM peers, with the yield rising by 0.40 of a bp. This was behind weaker moves recorded in Mexico (+5.20 bps), Poland (+2.60 bps) and Thailand (+1.10 bps). In contrast, Russia (-18.51 bps), India (-3.40 bps) and Indonesia (-0.90 of a bp) recorded the three best moves in the 5yr space yesterday. SA’s 10yr note also rose by 0.40 of a bp, underperforming the EM average move. The three best moves in the 10yr space were recorded in Brazil (-17.80 bps), Russia (-17.73 bps) and India (-3.20 bps). In this longer-dated space, the worst three moves were recorded in Mexico (+3.60 bps), Hungary (+2.00bps) and Poland (+0.60 of a bp).

EM currencies appreciated overall yesterday. The exceptions were the Indonesian rupiah, which depreciated by 0.46%, the Indian rupee (0.16%) and the Thai baht (0.13%). In contrast, the moves stronger were led by the Russian ruble, which appreciated by a substantial 3.14% on the day. This was followed by an also substantial move stronger in the Brazilian real which appreciated by 2.41%. Other currencies to appreciate yesterday were the Turkish lira (0.78%), SA rand (0.72%), Mexican peso (0.41%), Hungarian forint (0.38%) and Polish zloty (0.12%).

Today sees Mexico’s central bank conclude its monetary policy meeting. Bloomberg market consensus is calling for an unchanged rate of 3.00%.

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