Standard Bank Research Team
Standard Bank
The rand strengthened below 12.00 against the dollar yesterday as US data disappointed.
The US ISM manufacturing index slipped to 51.5 (a 22-month low) in March. Yesterday also saw the release of ADP employment data. According to this, a disappointing 189k jobs were added in March; analysts had expected a 225k increase.
With the rand below 12.00, the next resistance level for the USDZAR is at 11.9200 and 11.8100 as the next major support level. Resistance is at 12.1185 and 12.2370.
We look to tomorrow’s US employment data (non-farm payrolls (NFP)) which remains key for the US Fed’s monetary policy path.
Although the ADP employment data is not a particularly useful guide to the official employment data, released tomorrow, there is clearly doubt creeping in as to whether expectations of a 245K increase in jobs for March will be met. The official data will be released on Good Friday, which is a public holiday in South Africa as well as many US States. Markets may be thin and the rand choppy.
We still await an announcement around Iran and the so-called P5+1 nations regarding this country’s nuclear ambitions. Should there indeed be a deal on the table, crude oil prices may well come under pressure. Crude oil rallied yesterday, with Brent front month trading as high as USD57.50, from lows around USD54.80 after the US oil production posted a decline last week.
South Africa’s Kagiso PMI for March was released yesterday. The index improved only slightly in March, coming in at 47.9 pts. While the employment index increased to 46.9 pts in March from 43.0 pts in February, it is still on the wrong side of 50 and is indicative of the subdued hiring conditions in the manufacturing sector.
International developments
The US ISM manufacturing index slipped to 51.5 (a 22-month low) in March, weighed down by the pressure of a strong dollar on export manufacturers and generally weak global demand. This was a bit worse than the anticipated drop to 51.5 (Bloomberg consensus) from 52.9 in February. As we noted yesterday, the FOMC has acknowledged the drag that a stronger dollar has already, and might continue to have (as it appreciates further), on US exports. However, even taken together with a number of other perceived risks to the international economic outlook, the Committee is still of the view that overall risks to the US economy are balanced. Capital Economics points out that other indicators suggest that the non-manufacturing sectors of the US economy are performing well, so overall economic activity should not be overly hampered by weakness in manufacturing. The non-manufacturing component of the ISM data will be published next week Monday. There was some good news out of the Eurozone, with the final reading on manufacturing PMI improving on the preliminary results released a few weeks ago – 52.2 compared to 51.9. Markit’s global manufacturing PMI reading for March edged down slightly to 51.8, from 51.9 in February.
Yesterday also saw the release of ADP employment data. According to this, a disappointing 189k jobs were added in March – analysts had expected a 225k increase. Although it is well known that the ADP numbers are not a particularly useful guide to the monthly results from the official payrolls data, this may still temper expectations for tomorrow’s non-farm payrolls release. Currently, the market is expecting a strong 245k increase in non-farm payrolls for March, with the unemployment rate seen holding steady at 5.5%. Today, Challenger job cuts data and jobless claims figures will likely be scrutinised for hints regarding the state of the US labour market – although any market reaction might be limited as participants await tomorrow’s official labour market report.
Local developments
The Kagiso PMI for March was released yesterday. The index improved only slightly in March, coming in at 47.9 pts (against Bloomberg expectations of a stronger increase to 48.6 pts) from 47.6 pts in February. The average for Q1:15 came in just below the 50-benchmark line at 49.9 pts compared to 51.2 pts in the final quarter of 2014.
The slight increase in the index was driven largely by an improvement in the employment index while the business activity and the new sales orders (the two largest components of the index), slipped further below the benchmark line. While the employment index increased to 46.9 pts in March from 43.0 pts in February, it is still on the wrong side of 50 and is indicative of the subdued hiring conditions in the manufacturing sector. The new sales orders index slipped to 49.0 pts in March from 49.3 pts in February. The business activity index fell further in March to 44.6 pts from 45.5 pts in February. The fact that the expected business conditions in six months’ time also slipped does not bode well for the sector going forward. We expect the manufacturing sector to remain strained in the coming months with little headway being made on the back of electricity supply constraints this year.
NAAMSA’s release of the vehicle sales data yesterday showed a virtually unchanged market in March this year compared to March last year. A total of 55 449 vehicles were sold in March 2015 compared to 55 440 vehicles sold in March 2014. The YTD market was also virtually unchanged compared to the comparable period in 2014. The light commercial vehicle market, medium commercial vehicles as well as the extra heavy commercial vehicle market and bus market reflected improvements during the month. Encouragingly, vehicle exports increased by 38.5% y/y in March with 34 147 cars exported to our main trading partners (24 659 were exported in March last year).
Markets
The rand strengthened on Wednesday, with the local currency falling below 12.00 and closing at 11.99, compared to Tuesday’s close of 12.13. The rand’s appreciation against the greenback occurred in line with dollar weakness against some of the major currencies; the dollar posted the largest losses against the euro (0.3%) and the yen (-0.3%) and mildly against the pound. The rand gained ground against all of the major crosses; the pound (-1.1%), the euro (-0.9%) and the yen (0.8%). The rand put in the best performance amongst both the commodity currencies and EM currencies we monitor for purposes of this report. The rand traded between a low of USDZAR11.9587 and a high of USDZAR12.1491 intraday.
Commodity prices were all up on Wednesday. Platinum and gold were up by 1.9% and 1.7% respectively while copper was up by 0.1% on the day. The price of Brent increased on Wednesday, by 3.6%, to close lower at $57.10/bbl. The developed world MSCI was down by 0.2% on Wednesday, while the MSCI EM was up by 0.9% on the day. The ALSI was up by 0.2% on the day. The EMBI spread narrowed by 3 bps and SA’s 5yr CDS narrowed by 5 bps on Wednesday. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 1.2%.
Latest SA publications
SA Macroeconomics: Economics Note: Weaker growth, higher inflation, unchanged repo rate: Hawkish tone, but SARB's outlook still does not justify a hike by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 March 2015)
SA Fixed Income MPC Comment: Defending not to hike by Asher Lipson and Walter de Wet (26 March 2015)
SA FI ALBI note: Auctions pressure the ALBI by Asher Lipson (25 March 2015)
SA FX Weekly: USDZAR trading now in a weaker range by Marc Ground and Shireen Darmalingam (24 March 2015)
SA Macroeconomics: Economics Note: The SARB to remain on hold: Manufacturing & mining contract in January; the Fed is no longer “patient”; and S&P downgrades Eskom to speculative grade by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)
Credit & Securitisation Weekly: S&P downgrades Eskom by Steffen Kriel and Varushka Singh (20 March 2015)
SA FI Weekly: Little local driver to bonds by Asher Lipson (20 March 2015)
SA Macroeconomics: Economics Note: Jan retail sales slowed to 1.7% y/y from 2.0% y/y in December: General dealers -2.5% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)
SA Macroeconomics: Economics Note: CPI falls to 3.9% y/y: Services and food remain sticky by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)
SA Macroeconomics: Economics Note: CAD narrows to 5.1% of GDP: Trade data a positive surprise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)
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