Q1:15 GDP on the agenda today

• With both the US and UK on public holiday yesterday, markets were subdued.

• Today, however, sees a wall of data out of the US, with durable goods orders, consumer confidence data and the Richmond and Dallas Fed manufacturing activity indices on the agenda, to name a few.

• Since markets opened this morning, bonds were slightly stronger, with the UST 10-year yield falling to 2.1950% — still hugging the 200day MA at 2.1713%.

• The fact that USTs remain so range-bound is perhaps a clear indication that the bond market at least remains very uncertain about when the Fed will hike, and how to interpret a hike.

• As we head towards 5 June, when the first tranche of Greece’s June payments to the IMF is due, 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.

• Locally, we look at Q1:15 SA GDP data today. We expect GDP to come in at 1.0% q/q (saar) in Q1:15.

• While we would read a print higher than expectations as generally positive for the rand, we expect little reaction to this data, largely because the trade balance due for release later this week will likely garner more attention.

• We would also look at this data from through the lens of the SARB – especially relative to where the SARB sees potential growth.

• USDZAR support is at 11.9201 and 11.8500. Resistance is at 11.9750 and 12.0300.

International developments

With both the US and UK out on public holidays yesterday market activity was subdued. Today, however, sees a wall of data out of the US, with durable goods orders, consumer confidence data and the Richmond and Dallas Fed manufacturing activity indices on the menu, to name a few. After Friday’s US CPI data, where core inflation beat expectations on the up side, US bonds were under pressure. Since markets opened this morning, bonds were slightly stronger, with the UST 10-year yield falling to 2.1950% — still hugging the 200day MA at 2.1713%.

The fact that USTs remain so range-bound is perhaps a clear indication that the bond market at least remains very uncertain about when the Fed will hike, and how to interpret a hike. The Fed fund futures are now assigning around a 70% probability that the Fed funds rate will be between 0.25 and 0.50 by the September meeting. This is up 50% from a month ago when the market was evenly split between a hike in September and a hike in July. The dollar continues to gain some ground since Friday following the US CPI print.

With the Greece negations still underway and with clear resistance form certain camps within the Greece government on how to proceed with negotiations, the market is likely to focus increasingly on the Eurozone in the next two weeks. As we head towards 5 June when the first tranche of the June payment to the IMF is due, 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

Locally, we look at Q1:15 SA GDP data today. Bloomberg consensus is for a print of 1.5% q/q (saar) in Q1:151 from 4.1% q/q (saar) in Q4:14. We expect GDP to come in at 1.0% q/q (saar) in Q1:15.

While we would read a print higher than expectations as generally positive for the rand, we do believe that there would be little reaction to this data, largely because the trade balance due for release later this week is possibly more important.

We would also look at this data from through the lens of the SARB. In their MPC statement last week, the SARB has revised their forecasts down to 2.1% in 2015 (from 2.2% in March) and 2.2% in 2016 (from 2.3% in March). It is worth noting that the SARB sees the short-term potential output growth between 2% and 2.5%. Their growth forecasts are at the lower end of this potential output growth band. Because there is no clear breach of this potential growth band inflationary concern via this channel is likely to linger, but remain muted. This may especially be the case in light of the fact that the “risks to growth are assessed to be on the downside” by the Committee.

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.

Stats SA will release the Quarterly Labour Force Survey (QLFS) for Q1h15 at 13h00. Bloomberg consensus expectations pencil in an increase in the unemployment rate to 24.8% in Q1:15 from 24.3% in Q4:14.

Markets

The rand weakened on Monday, closing at 11.94 compared to Friday’s close of 11.89. 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 euro (-0.3%), the pound (-0.1%) and marginally against the yen. The rand lost ground against all of the major crosses: the yen (-0.3%), the pound (0.2%) and the euro (-0.1%). The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-worst performance amongst the EM currencies, only ahead of the TRY and HUF. The rand traded between a low of USDZAR11.8618 and a high of USDZAR11.9762.

Commodity prices were mixed on Monday. Copper and gold were down by 1.5% and 0.3% respectively, while platinum was up by 0.4%. The price of Brent closed 0.2% higher, at $65.52/bbl. The developed world MSCI was up fractionally on Monday while the MSCI EM was down by 0.2% on the day. The ALSI was down by 0.2% on the day. The EMBI spread narrowed by 2 bps, while SA’s 5yr CDS remained largely unchanged. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.2%.

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