Standard Bank Research Team
Standard Bank
Bond yields in the US slipped back yesterday, relieving some pressure on local bonds.
As pointed out yesterday, we maintain that the short-term risk for the rand is now much more balanced following the weaker-than-expected data out of China (industrial production and retail sales) and the US (retail sales) earlier this week.
However, while a firmer rand should provide some support to local rates, we would not look for substantial gains before the 10-year UST yield move below tis 200day MA once (currently at 2.18%) again. At time of writing, the 10-year UST was trading at 2.21%.
We keep a close eye on US data today, in particular industrial production for April and the preliminary University of Michigan 5-10 year inflation expectations survey for May.
?The USD/ZAR is in the middle of the 11.90-11.80 band which has provided strong support for a while now. If the rand moves below this level, we would look for support on approach of the 11.70 level. A break below this range could see the rand approach 11.50.
Stats SA released the mining production data for March yesterday. Mining production growth, according to Bloomberg consensus, was expected to have slowed to 5.9% y/y in March from 7.5% y/y in February. In the event, mining output growth overshot expectations, increasing by a stellar 18.8% y/y.
Today marks the deadline for unions and government to reach an agreement on public sector wages. This is a key development for not only fiscal consolidation, but also monetary policy. The SARB has highlighted wage settlements above inflation and productivity growth as a risk to their inflation forecast.
International developments
Bond yields in the US slipped back yesterday, relieving some pressure on local bonds. German bonds, however, continue to sell off as the yield broke above the 200day MA — a resistance level closely looked at by momentum traders. As pointed out yesterday, we maintain that the short-term risk for the rand is now much more balanced following the weaker-than-expected data out of China (industrial production and retail sales) and the US (retail sales) earlier this week. However, while a firmer rand should provide some support to local rates, we would not look for substantial gains before the 10-year UST yield move below tis 200day MA once (currently at 2.18%) again. At time of writing, the 10-year UST was trading at 2.21%.
At current Fed fund futures assign a probability of 80% that the Fed funds rate stays somewhere between 0% and 0.25% by September. This is up from 74% a day after the FOMC meeting at the end of April and 68% at the start of the year. There is a slow moving shift in market pricing that the Fed may move later rather than sooner. We still pen a rate hike for September.
We keep a close eye on US data today, in particular industrial production for April and the preliminary University of Michigan 5-10 year inflation expectations survey for May (the Fed tend to look at longer-term inflation expectations). Long-term US inflation expectations according to this survey have been steady around the 2.8% even through the fall in the oil price in December and January. However, over the past three months, these expectations have moved marginally lower form 2.8% in January to 2.6% in April. US industrial production is expected to come in at 0% m/m (according to Bloomberg consensus). This series is also volatile and should be read in conjunction with other recent data print like the weak retail sales data earlier this week.
The S&P closed at an all-time high’s yesterday, with Asia markets (excluding China) following suit. From a macro perspective, if markets expect interest rates to remain lower for longer (than previously thought), equities should benefit via a lower discount rate in in standard discount models.
Local developments
Stats SA released the mining production data for March yesterday. Mining production growth, according to Bloomberg consensus, was expected to have slowed to 5.9% y/y in March from 7.5% y/y in February. In the event, mining output growth overshot expectations, increasing by a stellar 18.8% y/y. February’s growth rate was revised upwards to 7.8% y/y. The increase was predominantly driven by the 132.2% y/y increase in PGMs, which contributed 13.1 pps to the y/y increase, on the back of a low base in March. Coal and manganese ore contributed 2.5 pps and 1.0 pps respectively to the y/y increase. On a q/q seasonally adjusted basis, mining output grew by 1.9% and is expected to contribute positively to the Q1:15 GDP growth numbers.
Today marks the deadline for unions and government to reach an agreement on public sector wages. This is a key development for not only fiscal consolidation, but also monetary policy. The SARB has highlighted wage settlements above inflation and productivity growth as a risk to its inflation forecast.
Government has made a wage offer to public servants of 7%, whilst they are demanding a 10% increase, revised down from 15%. Should public servants not accept government’s offer, we could see work stoppages by nurses, teachers, police offers and other public servants. Government’s wage offer sees an increase of 4.8% (average CPI projected by National Treasury) plus an adjustment of 2.2% in the first year. The offer also includes a medical aid increase of 28.5% and a housing allowance of R1,200. Years 2 and 3’s offer would see salary adjustments of the projected average CPI plus a 1% adjustment.
Markets
The rand strengthened on Thursday, closing at 11.79, compared to Wednesday’s close of 11.88. The rand’s appreciation against the greenback occurred in line with dollar weakness against most of the major currencies; the dollar posted losses against the euro (0.5%) and the pound (0.2%), but strengthened fractionally against the yen. The rand strengthened against all of the major crosses: the yen (0.9%), the pound (-0.7%) and the euro (-0.3%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in the fourth-worst performance amongst the EM currencies, only ahead of the IDR, THB and RUB. The rand traded between a low of USDZAR11.7736 and a high of USDZAR11.9275.
Commodity prices were mixed on Thursday. Platinum and gold were up by 0.8% and 0.4% respectively, while copper was down by a 0.1% on the day. The price of Brent closed 0.3% lower, at $66.59/bbl. Both the developed world MSCI and the MSCI EM were up on Thursday, by 0.8% and 0.2% respectively. The ALSI was down by 0.4% on the day. Non-residents were net buyers of equities (ZAR1.1 billion) on Thursday. The EMBI spread widened by 6 bps and SA’s 5yr CDS widened by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 7.4%.
Latest SA publications
SA Macroeconomics: Broad based rebound in March manufacturing to 3.8% y/y: Q1 growth contracted 0.6% q/q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (12 May 2015)
SA Macroeconomics: SA deindustrialisation continues: SA deficit revised to 3.5% amidst global bond market volatility by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 May 2015)
SA FIC Weekly: The exchange rate pass-through; what you need to know by Walter de Wet and Shireen Darmalingam (11 May 2015)
Credit & Securitisation Monthly: Focus on: SA Municipal Sector by Robyn MacLennan Steffen Kriel (8 May 2015)
SA Macroeconomics: SA’s trade deficit to narrow: Global data continues to drive local and EM assets by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 April 2015)
Credit & Securitisation Weekly: Eskom’s acting CEO comments by Steffen Kriel (24 April 2015)
SA Macroeconomics: CPI surprises to the downside: Food inflation slowed to 5.9% y/y, and core to 5.7% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 April 2015)
SA Macroeconomics: March CPI to rise to 4.1% y/y: EM assets receive mixed signals from US & Chinese data by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 April 2015)
Credit & Securitisation Weekly: Escalating municipal electricity debt by Steffen Kriel (17 April 2015)
SA FX Weekly: ZAR: less undervalued and still vulnerable against the dollar by Marc Ground and Shireen Darmalingam (16 April 2015)
SA Macroeconomics: Feb retail sales 4.2% y/y, up from 1.9% y/y in Jan: General dealers grow 4.8% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (15 April 2015)
SA Macroeconomics: Risk on as global monetary policy remains accommodative: SA consumption expected to outpace production in February by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 April 2015)
Certification
The analyst(s) who prepared this research report (denoted by an asterisk*) hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst’s(s’) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report.
Conflict of Interest
It is the policy of The Standard Bank Group Limited and its worldwide affiliates and subsidiaries (together the “Standard Bank Group”) that research analysts may not be involved in activities in a way that suggests that he or she is representing the interests of any member of the Standard Bank Group or its clients if this is reasonably likely to appear to be inconsistent with providing independent investment research. In addition research analysts’ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts cannot be subject to the supervision or control of anyone in the Standard Bank Group’s investment banking or sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those sales and trading departments may conflict with your interests.
Legal Entities
To U. S. Residents
Standard New York Securities, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is also a member of the FINRA and SIPC. Standard Americas, Inc is registered as a commodity trading advisor and a commodity pool operator with the CFTC and is also a member of the NFA. Both are affiliates of Standard Bank Plc and Standard Bank of South Africa. Standard New York Securities, Inc is responsible for the dissemination of this research report in the United States. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Standard New York Securities, Inc.
To South African Residents
The Standard Bank of South Africa Limited (Reg.No.1962/000738/06) is regulated by the South African Reserve Bank and is an Authorised Financial Services Provider.
To U.K. Residents
Standard Bank Plc is authorised and regulated by the Financial Services Authority (register number 124823) and is an affiliate of Standard Bank of South Africa. The information contained herein does not apply to, and should not be relied upon by, retail customers.
To Turkey Residents
Standard Unlu Menkul Degerler A.S. and Standard Unlu Portfoy Yonetimi A.S. are regulated by the Turkish Capital Markets Board (“CMB”). Under the CMB’s legislation, the information, comments and recommendations contained in this report fall outside of the definition of investment advisory services. Investment advisory services are provided under an investment advisory agreement between a client and a brokerage house, a portfolio management company, a bank that does not accept deposits or other capital markets professionals. The comments and recommendations contained in this report are based on the personal opinions of the authors. These opinions might not be appropriate for your financial situation and risk and return preferences. For that reason, investment decisions that rely solely on the information contained in this presentation might not meet your expectations. You should pay necessary discernment, attention and care in order not to experience losses.
To Singapore Residents
Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.
Important Regional Disclosures
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company(ies) within the past 12 months.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors:
The non-U.S. research analysts (denoted by an asterisk*) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts (denoted by an asterisk*) may not be associated persons of Standard New York Securities Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an asterisk*) is a Non-U.S. Analyst. The analyst is a research analyst employed by The Standard Bank Group Limited.
General
This research report is based on information from sources that Standard Bank Group believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or member of the Standard Bank Group gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this document (except with respect to any disclosures relative to members of the Standard Bank Group and the research analyst’s involvement with any issuer referred to above). All views, opinions and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Members of Standard Bank Group may act as placement agent, advisor or lender, make a market in, or may have been a manager or a co-manager of, the most recent public offering in respect of any investments or issuers referenced in this report. Members of the Standard Bank Group and/or their respective directors and employees may own the investments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. This report is intended solely for clients and prospective clients of members of the Standard Bank Group and is not intended for, and may not be relied on by, retail customers or persons to whom this report may not be provided by law. This report is for information purposes only and may not be reproduced or distributed to any other person without the prior consent of a member of the Standard Bank Group. Unauthorised use or disclosure of this document is strictly prohibited. By accepting this document, you agree to be bound by the foregoing limitations. Copyright 2011 Standard Bank Group. All rights reserved.
Recommended Content
Editors’ Picks
AUD/USD pressures as Fed officials hold firm on rate policy
The Australian Dollar is on the defensive against the US Dollar, as Friday’s Asian session commences. On Thursday, the antipodean clocked losses of 0.21% against its counterpart, driven by Fed officials emphasizing they’re in no rush to ease policy. The AUD/USD trades around 0.6419.
EUR/USD extends its downside below 1.0650 on hawkish Fed remarks
The EUR/USD extends its downside around 1.0640 after retreating from weekly peaks of 1.0690 on Friday during the early Asian session. The hawkish comments from Federal Reserve officials provide some support to the US Dollar.
Gold price edges higher on risk-off mood hawkish Fed signals
Gold prices advanced late in the North American session on Thursday, underpinned by heightened geopolitical risks involving Iran and Israel. Federal Reserve officials delivered hawkish messages, triggering a jump in US Treasury yields, which boosted the Greenback.
Runes likely to have massive support after BRC-20 and Ordinals frenzy
With all eyes peeled on the halving, Bitcoin is the center of attention in the market. The pioneer cryptocurrency has had three narratives this year already, starting with the spot BTC exchange-traded funds, the recent all-time high of $73,777, and now the halving.
Billowing clouds of apprehension
Thursday marked the fifth consecutive session of decline for US stocks as optimism regarding multiple interest rate cuts by the Federal Reserve waned. The downturn in sentiment can be attributed to robust economic data releases, prompting traders to adjust their expectations for multiple rate cuts this year.