January trade balance in focus today

• Just as the rand looked to settle below 11.40 yesterday, US inflation data for January was released, and the rand quickly retraced above 11.50. Core CPI was unchanged from the December print, at 1.6% y/y.

• The unchanged US core CPI data boosted the dollar. Just earlier this week, Fed chair Yellen indicated that inflation was likely to move back towards 2% over the medium term as the lower oil price effect dissipated. The core inflation print was a stark reminder of this.

• Domestically, we focus on the January trade balance. The rand is likely to be sensitive to the data.

• The trade balance is expected to have swung back into deficit territory in January after a surprisingly large surplus in December.

• There is strong seasonality in the trade data over December and January.
  December tends to register a positive trade balance, while January tends to register a negative trade balance. Therefore, a trade deficit for January should not necessarily be seen a negative, but rather one should look at the size of the deficit.

• Bloomberg consensus estimates have pencilled in a trade deficit of -ZAR7.8 billion in January from a surplus of ZAR6.8 billion in December.

• Our mid-point for the rand in Q1:15 is still at 11.50. Key support for the rand is at 11.3697 — its 100 day MA. Resistance is at 11.5739.

International developments

Data out of the US yesterday was mixed. The headline CPI number was very soft at -0.7% m/m, leaving the annual rate below zero at -0.1%. But it was all still thanks to the fall in energy prices, as the core rate was up 0.2% m/m, just above the 0.1% m/m consensus. Here, the annual rate stayed steady at 1.6%.

The unchanged core CPI data in the US provided a boost to the dollar. Just earlier this week Fed, chairperson Yellen indicated that inflation was likely to move back towards 2% over the medium term as the lower oil price effect dissipated. The core inflation print was a stark reminder of this. We continue to pin the first rate hike in the US in September.

Durable goods data was strong at 2.8% m/m, but this was mainly due to aircraft orders again as the non-transport figure of 0.3% m/m was below the 0.5% m/m consensus. Finally, initial jobless claims were quite high at 313k, but these have been quite volatile recently.

The next set of CPI data is set to start coming out of some Eurozone countries soon, starting with Germany today. The consensus is for the monthly inflation rate to be 0.6% in harmonised terms, which would leave the annual rate the same as January, at -0.5%. It appears that the persistence of negative inflation rates, at least in annual terms, is likely to be a theme for some time, perhaps right up to Q3:15, when the base effects from the plunge in oil prices from last July start to help lift annual data.

Next week’s Eurozone CPI data is expected to show a -0.4% annual rate according to the current consensus, which comes after -0.6% in January. However, the core rate is seen down to 0.5% from 0.6% and, in many senses, this might be of more significance as we see the extent to which the plunge in oil prices has second-round effects as those firms enjoying a reduction in production costs, thanks to oil, pass this on to their customers. If this happens to a significant extent, it will give the ECB even more sleepless nights. It probably won’t elicit any further monetary easing but it should help maintain a weakening bias for the euro.

The US releases revised Q4:14 GDP data today. It’s expected to come down to a 2% annualised rate from the, previously released, 2.6% rate. Even if the revision does not come down this much – as a revision – the market impact may be modest. There might be more reaction to the Chicago PMI and Michigan consumer confidence later in the day.

Domestic developments

SARS preliminary trade balance numbers are due today. The trade balance is expected to have swung back into deficit territory in January after a surprisingly large surplus in December. Bloomberg consensus estimates have pencilled in a trade deficit of -ZAR7.8 billion in January from a surplus of ZAR6.8 billion in December.

We note a strong seasonality in the trade data over December and January. December tends to register a positive trade balance, while January tends to register a negative trade balance. As a result, a trade deficit for January should not necessarily be seen a negative, but one should rather look at the size of the deficit.

Our economist Kim Silberman anticipates that the trade deficit in January 2015 will come in around ZAR5.6 billion wider than January 2014 due to significantly lower export commodity prices, which will have offset the positive effect on imports from a lower oil price. Exports are likely to have contracted in January despite appreciation in the nominal effective exchange rate (2.0% y/y, 1.2%m/m), as a consequence of a 48% y/y fall in the iron ore price, 0.6% y/y fall in the gold price, 12.2% y/y fall in the platinum price and 16.8% y/y fall in the coal price. Imports may have grown marginally y/y. This takes into account both the lower oil price and the likelihood that the volume of crude and refined crude products may have risen due to Eskom’s elevated demand for diesel to run their OCGTs.

If our estimate for the trade balance in January is correct, we would expect the rand to come under pressure.

Markets

The rand weakened against the dollar on Thursday, closing at 11.54, compared to Wednesday’s close of 11.45. The rand’s depreciation against the greenback occurred in line with dollar strength against all of the majors; the dollar posted the largest gain against the euro (-1.4%). In terms of the other major crosses, the rand managed to strengthen against the euro (-0.6%) and sterling (-01%), but lost ground against the yen (-0.3%). The rand put in a middling performance amongst the commodity currencies we monitor for purposes of this report, and was the third-worst performer amongst the EM currencies we look at – ahead of only the HUF and BRL. The rand traded between a low of USDZAR11.3626 and a high of USDZAR11.5416 intraday.

Metals prices pushed higher on Thursday. Copper took the lead, climbing 2.0% on the day. Gold and platinum were both up by around 0.4%. Brent tumbled 2.6% yesterday as investors reacted to a surge in US oil stockpiles. The developed market MSCI fell 0.2%, while MSCI EM was up 0.1% on Thursday. The ALSI was up 0.2%. The EMBI narrowed by 6 bps and SA’s 5yr CDS spread narrowed by 2 bps on the day. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.5%.

Latest SA publications

SA Macroeconomics: Economics Note: Fiscal slippage & tax increases: GDP revisions lower debt to GDP by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 February 2015)

SA Fixed Income Budget note 2015 Budget: Trying to stick to MTBPS forecasts by Asher Lipson, Walter de Wet and Shireen Darmalingam (26 February 2015)

SA Macroeconomics: Economics Note: 2014 GDP 1.5% y/y, 1.3% q/q: Q4:14 outperforms post strikes by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 February 2015)

SA Fixed Income Trade Idea: Time to receive 8x11 FRA by Asher Lipson (24 February 2015)

Credit & Securitisation Flash Note: Curro Holdings Ltd by Steffen Kriel (23 February 2015)

SA FX Weekly: Budget 2015: time to deliver by Marc Ground and Shireen Darmalingam (23 February 2015)

SA Macroeconomics: Economics Note: 2015 Budget: commitment to consolidation: GDP, Budget, PSCE, PPI & Trade data to be released this week by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 February 2015)

Credit & Securitisation Weekly: Upcoming National Budget by Steffen Kriel and Varushka Singh (20 February 2015)

SA Macroeconomics: Economics Note: Retail sales grew 3.4% y/y, in December and 2.4% in 2014: Festive season saw food, pharma, clothing & furniture outperform by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 February 2015)

SA Macroeconomics: Economics Note: CPI falls to 4.4% y/y, core rises: Food surprises to the downside by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 February 2015)

SA Fixed Income ALBI note: ALBI modified duration moves longer in March by Asher Lipson (17 February 2015)

SA FX Weekly: Risk aversion alive and kicking by Marc Ground and Shireen Darmalingam (16 February 2015)

SA Macroeconomics: Weekly Data Preview: Jan CPI expected to fall to 4.6%: Dec retail sales may surprise to the upside by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (16 February 2015)

Credit & Securitisation Weekly: Eskom at top of government’s agenda by Steffen Kriel and Varushka Singh (13 February 2015)

SA Macroeconomics: Economics Note: December manufacturing up 1.1%y/y, driven by food: Manufacturing grows 0.5 in 2014 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (10 February 2015)

SA Macroeconomics: Economics Note: The lower oil price: Part 2: Impact on the current account deficit by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (9 February 2015)