Local data the focus this week

• We are off to a quiet start, with both the US and UK on public holiday today. Local data this week, including Q1:15 GDP and the trade balance, will likely be key drivers of the rand.

• Over the weekend, media reports indicated that the Greece interior minister said that Greece would default on its payment to the IMF in early June unless creditors make some concessions.

• While markets continue to take the possibility of a Greek default in its stride, our bias would lie towards rand weakness rather than strength against the dollar. The rand remains vulnerable to any increase in global risk aversion due to the current account deficit South Africa is running.

• Stats SA releases the Q1:15 GDP data on Tuesday at 11:30. Bloomberg consensus is pencilling in a moderation in GDP to 1.5% q/q (saar) in Q1:151 from 4.1% q/q (saar) in Q4:14. Standard Bank expects GDP to come in at 1.0% q/q (saar) in Q1:15.

• The April trade data will be released on Friday at 09h00. Bloomberg consensus expects the trade balance to have swung into deficit territory to -ZAR5.0 billion in April from ZAR0.5 billion in March.

• The expected trade deficit in April thus does not bode well for CA deficit compression in Q2:15.

• Last week saw the SARB keep the repo rate unchanged but come out with a very hawkish statement. We also saw government conclude a wage deal with public sector employees.

• The MPC statement and the wage deal do not change our view on the rand. Inflation is likely to increase faster than nominal rates into Q1:16, which should result in a real interest rate which will fall as inflation rises. This remains on balance rand-negative. Our view on the rand is in line with this principle.

International developments

We are off to a quiet start for the week, with both the US and UK out on public holiday today. Local data this week, including Q1:15 GDP and the trade balance, is likely to be key drivers of the rand.

Friday saw the release of US inflation numbers for April. While headline inflation showed a decline of -0.2% y/y (in line with expectations), core inflation (excluding energy and food) rose to 1.8% y/y, above expectations of 1.7% y/y. US bond markets took this news as indication that the Fed is most likely still on course for a hike this year and came under renewed selling pressure (we still pencil in September). 10-year breakeven inflation, as implied by UST’s remains steady at 1.9% - very close to the Fed’s long-term target for inflation of 2%.

The dollar also found renewed strength on the back of this data print. The rand is trading just above 11.90 this morning. Although we believe that the more hawkish statement by the MPC last week may add some support to the rand at the margin, we maintain that dollar strength into September is likely to keep the rand on the back foot.

Over the weekend, media reports indicated that the Greece interior minister indicated the country would default on its payment to the IMF in early June unless creditors make some concessions.

As we head towards the first week of June, tension seems set to rise. While markets continue to take the possibility of a Greek default in its stride, our bias would lie towards rand weakness rather than strength against the dollar. The rand remains vulnerable to any increase in global risk aversion due to the current account deficit South Africa is running.

Local developments

Stats SA releases the Q1:15 GDP data on Tuesday at 11:30. Bloomberg consensus is pencilling in a moderation in GDP to 1.5% q/q (saar) in Q1:151 from 4.1% q/q (saar) in Q4:14. Standard Bank expects GDP to come in at 1.0% q/q (saar) in Q1:15. In the final quarter of 2014, the production side of the economy outperformed the consumption side. Both the mining and manufacturing sectors accelerated after the strike in the first half of the 2014, by 15.5% q/q and 9.5% q/q respectively, adding a combined 2.3 ppts to growth, versus a combined 0.2 ppts in Q3:14, -0.7 ppts in Q2:14 and -2.5 ppts in Q1:14.

Manufacturing output in Q1:15 contracted by 2.5% q/q (seasonally adjusted) down from healthy growth in Q4:14. Manufacturing is thus likely to subtract from q/q GDP growth in Q1:15 (saar) versus the positive contribution made in Q4:14. Mining output grew by 7.4% and is expected to contribute positively to the Q1:15 GDP growth numbers.

The trade and hospitality industry contracted 0.3% q/q in Q4:14, down from robust growth of 3.4% q/q in Q3:14. We expect trade will perform better in 2015 on the back of lower petrol prices. Upside surprises in Q4:14 emanated from the construction sector, which accelerated unexpectedly from 2.2% q/q in Q3:14 to 3.5% q/q in Q4:14 and averaged 2.9% q/q for the year, while the finance, real-estate and business services sector grew by 3.5% q/q (saar), up from 2.4% q/q (saar) in Q3:14 after averaging 1.3% q/q in the first half of 2014.

We expect growth to pick up in 2015 and average 2.0% y/y.

The April trade data will be released on Friday at 09:00. Bloomberg consensus expects the trade balance to have swung into deficit territory to -ZAR5.0 billion in April from ZAR0.5 billion in March. For Q1:15, the trade balance sits at a total deficit of -ZAR32.44 billion. Although we would expect the current account deficit to compress in Q1:15 from the -5.1% of GDP seen in Q4:14, the compression may not be that great. The trade balance of Q1:15 is still wider than the -ZAR28.16 billion seen during the same quarter last year (despite all prices being much lower this year compared to Q1:14). The expected trade deficit in April thus does not bode well for CA deficit compression in Q2:15.

Markets

The rand weakened on Friday, closing at 11.89, compared to Thursday’s close of 11.82. The rand’s depreciation against the greenback occurred in line with dollar strength against most of the major currencies; the dollar posted gains against the pound (-1.1%), the euro (-0.9%) and the yen (0.4%). The rand gained ground against some of the major crosses: the pound (-0.6%) and the euro(-0.4%), but lost ground against the yen (-0.1%). The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, only behind the NZD, and put in the third-worst performance amongst the EM currencies, only ahead of the HUF and BRL. The rand traded between a low of USDZAR11.7696 and a high of USDZAR11.9029.

Commodity prices were down on Friday. Copper and platinum were down by 1.5% and 0.6% respectively, while gold was largely unchanged. The price of Brent closed 1.8% lower, at $65.37/bbl. The developed world MSCI was down by 0.4% on Friday while the MSCI EM was up by 0.5% on the day. The ALSI was down by 0.1% on the day. Both the EMBI spread and SA’s 5yr CDS narrowed by 2 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.2%.

Latest SA publications

SA FIC Weekly: Public sector wages: the real deal not all that bond-positive by Walter de Wet and Shireen Darmalingam (25 May 2015)

Credit & Securitisation Weekly: Clarification on e-tolls by Steffen Kriel and Varushka Singh (22 May 2015)

SA FIC: MPC Comment: The MPC “stands ready to act when appropriate” by Walter de Wet (22 May 2015)

SA Macroeconomics: Mar retail sales 2.0% y/y, down from a revised 3.7% in Feb: Hardware grew 9.9% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 May 2015)

SA Macroeconomics: CPI 4.5%, below expectations: Core starts to moderate by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 May 2015)

SA Macroeconomics: SARB to remain on hold: Relatively resilient SA consumer; wage negotiation risks and EM assets weather the storm by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 May 2015)

SA FIC Weekly: Three risks facing the SARB by Walter de Wet and Shireen Darmalingam (18 May 2015)

Credit & Securitisation Weekly: Tariff decision timelines announced by Steffen Kriel and Varushka Singh (15 May 2015)

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 Weekly: Escalating municipal electricity debt by Steffen Kriel (17 April 2015)