The SARB likely to remain on hold

• The SARB’s MPC meeting concludes today. We expect the SARB to keep the repo rate unchanged.

• In the November statement, the SARB pointed to “the overall risk to the headline inflation forecast to be more or less balanced”. Since then, oil has dropped from USD80/bbl to below USD50/bbl. In rand, we are now paying ZAR563/bbl, down from around ZAR860/bbl at the last MPC meeting. We expect oil to remain low for longer.

• The rand weakened from 11.00 to the current 11.58 level, while on a trade-weighted basis the rand is largely unchanged.
  

• In November, the SARB expected GDP growth the average 2.5% in 2015, and 2.9% in 2016. Although the SARB has acknowledged fiscal consolidation, the GDP growth forecast may rise due to the growth stimulus from lower oil prices.
  

• The SARB’s previous inflation forecast was 5.3% for 2015 and 5.8% in 2016. The SARB may drop its inflation forecast for 2015 but, due to base effects, 2016 may not change much, or actually increase. We expect inflation to average 3.6% in 2015.
  

• Core inflation and inflation expectations were a concern in November, and likely still are.
  

• The SARB indicated in November that the “committee remains vigilant and will continue to monitor developments closely”. In December, the MPC decided unanimously to keep the repo rate unchanged. The MPC statement explicitly indicated that the SARB was still in a hiking cycle by saying that “the timing of future interest rate increases will be dependent on a range of factors”.
  

• Local FI markets are stronger this morning despite the rates decision this afternoon. There was surprisingly little pressure overnight from FOMC on either USDZAR or US Treasuries, so the ZAR open will guide initial market moves.

International developments

Yesterday’s statement following the conclusion of the January FOMC meeting indicated a committee which still felt that things remained largely on course for “liftoff”, perhaps around mid-year, as some Fed officials have intimated. This is despite the market perhaps thinking that oil price weakness and its impact on inflation would cause a delay in Fed policy normalisation. This has dampened risk appetite.

The committee acknowledged the impact of energy prices, saying that “[i]nflation has declined further” and was “anticipated to decline [even] further in the near term”. However, the committee continues to view the effects of lower oil prices as “transitory” and still expects that inflation will “rise gradually toward 2 percent over the medium term”.

The committee noted that market-based measures of inflation compensation had “declined substantially” (last time these where referred to as having “declined somewhat further”). Although, from a policy calibration perspective, the Fed’s preferred signal on inflation expectations is from the “stable” survey-based measures.

The committee’s confidence that inflation will “rise gradually toward 2 percent over the medium term” stems largely from their observation that inflation expectations remain well-anchored and a view that the labour market will continue to improve. Jobs gains were referred to as “strong” this time, compared to “solid” in the December statement. In addition, economic activity was described as expanding at a “solid pace”, rather than just a “moderate pace”. The fall in oil prices was noted as “hav[ing] boosted household purchasing power”.

The committee maintained “that it can be patient in beginning to normalize”, adding “international developments” to the factors that it will take into consideration before doing so. The other factors it points out are “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial … developments”. No FOMC voting members dissented this time.

We saw Eurozone inflation turn negative recently and today it is expected to be German consumer inflation that drops below the zero line as well. Monthly inflation is seen falling -0.8% on the national measure, which would leave annual prices down -0.1%, after the 0.2% rise in December. On a harmonised basis (this is what feeds into the calculation of Eurozone inflation) the data is seen as even worse; falling -1% in monthly terms and -0.2% in annual terms. Steve Barrow (our G10 FIC Strategist) notes that this will be the first negative inflation print since Germany dipped very briefly below the zero line in 2009. But just whether the market can be bothered to respond, now that the QE bazooka has been fired by the ECB, remains to be seen. Steve thinks that the data will be about in line with the consensus, although it’s a tough call as the slump in the oil price is playing havoc with CPI forecasts in all countries.

Before the German CPI data we will see Eurozone monetary data. Steve thinks that this too will probably be ignored. Although he points out that this might be a shame, as there could be some signs here that things are improving at a slightly faster rate. M3 growth is expected to rise again, to 3.1% y/y from 2.7% on a 3-month average and, while private sector credit will probably still be negative in annual terms it should not be as negative as the -1.4% y/y rate seen in November. The last ECB survey of bank lending was pretty good and Steve expects this to start coming through a bit more in the monetary data. In theory, this could make for a positive release for the euro and a negative one for fixed income but, already mentioned, it is unlikely that the market will respond.

Local developments

Stats SA will release the December PPI data today at 11:30. Bloomberg consensus expectations are for PPI inflation to have moderated to 6.0% y/y in December from 6.5% y/y in November.

The SARB convened for its first MPC meeting this week and is expected to announce its decision on interest rates today at 15:00. Bloomberg consensus, in line with ours, is for the repo rate to remain unchanged at 5.75%.

We would expect the SARB to adjust their inflation forecast lower for 2015. Our focus would also be on the SARB’s 2016 forecast for headline inflation which may not necessarily be adjusted lower. In fact, 2016’s inflation forecast may actually rise due to a lower base in 2015. We would also closely monitor the SARB’s statement on its view on core inflation and inflation expectations.

Markets

The rand remained unchanged on Wednesday, closing at USDZAR11.58. The rand’s move occurred in despite dollar strength against most of the major crosses; the dollar strengthened most against the euro (0.8%) and the pound (0.4%), but weakened against the yen (-0.3%). The rand strengthened against most of the major crosses, with appreciation seen against the euro (0.9%), the pound (0.4%) and the dollar (0.1%). The rand weakened against the yen (-0.2%). The rand put in the best performance amongst the both the commodity currencies as well as the EM currencies we monitor. The rand traded between a low of USDZAR11.4924 and a high of USDZAR11.5972 intraday.

Turnover was recorded at marginally over R30.5bn in nominal SAGBs yesterday, another R479m in ILBs. 32% was in the R186, 11% in the R207 and 9% in each of the R204 and R2023. Offshore were net sellers of -R312m. But I think the number was actually around a R1.0bn worse than that, as R1.3bn was backdated, cancelled and reissued in the R186. Selling was fairly consistent across the curve: R2030 (-R543m), R208 (-R457m), R203 (-R316m), R207 (-R177m), R2044 (-R151m). The only significant buying was in the R2023 (+R234m) and R2037 (+R175m).

The curve flattened aggressively for a second day as back-end bonds rallied. The R2030 through R2048 moved 12.5 bps lower, with the R2032 13.0 bps lower. The benchmark R186 was 10 bps stronger on the day. FRAs also moved lower on the day; all points out to 12 months are now pricing in some amount of cuts from the SARB. In particular, the 6x9 is pricing in a 96% probability of a 25 bps cut.

US Treasuries were stronger on the day as well. 10yr moved 10 bps lower to trade this morning at 1.72%. 30yr USTs are now trading at 2.29%. Russia led EM moves for a second day. Local currency sovereign EM debt strengthened, moving by an average of 4 and 5 bps stronger in 5 and 10yr tenors respectively. South Africa had the third-best performing 5yr EM debt and fourth-best performing 10yr debt. Turkey and Thailand local currency debt weakened slightly.

Commodities were mixed on the day. Gold and platinum were down on the day, falling by 0.6% and 0.8% respectively. However, copper increased on Wednesday, by 1.2%. Brent was down by 2.3% to close at $48.47/bbl. The developed market MSCI was down by 1.0% on Wednesday, while the MSCI EM was down 0.5% on the day. The ALSI, however, increased by 1.0% on the day. Non-residents were net sellers of equities on Wednesday (ZAR317 million). The EMBI spread widened by 10 bps while the SA’s 5yr CDS spread widened on Wednesday by 1 bp. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, increased by 1.0% yesterday.

Latest SA publications

SA FX Weekly: ZAR: another year on the back-foot by Marc Ground and Shireen Darmalingam (23 January 2015)

SA Fixed Income Weekly: SAGB forecasts for 2015 by Asher Lipson (23 January 2015)

Credit & Securitisation Weekly: Banks early out the starting block by Steffen Kriel and Varushka Singh (23 January 2015)

SA FIC Thematic: Ratings matter; a quantitative approach by Walter de Wet, Asher Lipson and Shireen Darmalingam (21 January 2015)

SA Fixed Income Weekly: Disinflation in H1 2015 by Asher Lipson (16 January 2015)

Credit & Securitisation Weekly: Mounting pressure on Eskom by Steffen Kriel and Varushka Singh (16 January 2015)

SA Fixed Income ALBI note: ALBI MD to increase in February by Asher Lipson (9 January 2015)