• The focus today is the US Personal Consumption expenditure (PCE) deflator. The PCE growth rate remains low – the latest print for April showed an increase of only 0.1% y/y. We expect USTs, local bonds and the rand to find support should the PCE deflator surprise to the downside.

  • The roller coaster ride with Greece continues, with what appeared to be a promising start to the week fizzling out yesterday as it became clear that Greece and its main creditors — the IMF, ECB and EU — are still in disagreement. The European leaders summit is held in Brussels over the next two days, and there was hope that a deal could be reached before the end of the summit. This seems unlikely.

  • Although equity markets in Asia are struggling today, EM currencies such as the rand appear stable. The rand remains around the 12.15 mark against the dollar.

  • The rand’s appreciation against the greenback occurred in line with dollar weakness against most of the major currencies.

  • It’s a quiet day on the local front today, with only Stats Sa releasing PPI data for May at 11h30.

  • USDZAR support is at 12.1350, 12.0500 and 11.8500. Resistance is at 12.20, 12.28, 12.50.


International developments

The main focus today is the US Personal Consumption expenditure (PCE) deflator. The PCE deflator is a broad measure of price pressures in the US economy and a preferred measure of inflation for the Fed. The PCE growth rate remains low: the latest print for April showed an increase of only 0.1% y/y. Expectations are for the PCE deflator to have ticked up to 0.2% y/y in May.

Other inflation expectation measures are higher in the US, and that is one reason why we still expect the Fed to hike in September. Worth noting, US breakeven inflation, as implied by the 10-year bond maturities, has crept up steadily beginning June, from around 1.80% to the current 1.95%. The 5y5y inflation swap put inflation expectations in 5 years’ time at 2.35%, while the Universtity of Michiogan 5-year to 10-year surveyed expectations are currently at 2.7%. We expect USTs, local bonds and the rand to find support should the PCE deflator surprise on the downside.

The roller coaster ride with Greece continues, with what appeared to be a promising start to the week fizzling out yesterday as it became clear that Greece and its main creditors the IMF, ECB and EU are still in disagreemnet. Greece seems unwilling to push through especially tax increases.

One would think that the market will become less senstitve to the Greece news which has dominated financial markets for some time now, and today may be a test of this. Although equity markets in Asia are struggling today, EM currencies such as the rand appear stable. The rand remains around the 12.15 mark against the dollar.

European leaders meet in Brussels today/tomorrow and there was hope that the deal could be reached. This seems unlikely. At the end of the month, the deadline for the extension of the EU-backed bailout extention expires. Then, towards the midlle of July, the first marketable debt payment is due. That may be crunch time for Greece.


Local developments

It’s a quiet day on the local front today with only Stats Sa releasing the PPI data for May at 11h30. Bloomberg consensus expectations is for PPI to have increased to 3.3% y/y in May from an increase of 3.0% y/y in April.


Markets

The rand strengthened, albeit marginally, on Wednesday, closing at 12.15, compared to Tuesday’s close of 12.17. 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 (0.3%) and the yen (-0.1%), but gained ground against the pound (-0.2%). The rand’s performance amongst the major crosses was mixed; the rand gained ground against the pound (-0.3%) and the yen (0.1%), but lost ground against the euro (0.2%). 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 best performance amongst the EM currencies. The rand traded between a low of USDZAR12.1164 and a high of USDZAR12.2038.

Commodity prices were mixed on Wednesday. Copper and gold were down on Wednesday, by 0.7% and 0.3% respectively. Platinum was up by 0.9% on the day. The price of Brent closed 1.5% lower, at $63.49/bbl. The developed world MSCI was down by 0.6% on Wednesday, while the MSCI EM was up by 0.3% on the day. The ALSI was up by 0.4% on the day. Non-residents were net buyers of equities (ZAR301 million) on Wednesday. The EMBI spread widened by 4 bps on Wednesday, while SA’s 5yr CDS widened by 1 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 9.5%.


Latest SA publications

SA Macroeconomics: CAD narrows to a better than expected 4.8% of GDP: Trade deficit widens but dividend receipts rise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 June 2015)

SA Macroeconomics: The CAD is anyone’s guess, ours is 4.8% of GDP: Portfolio flows to EMs falter by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 June 2015)

SA FIC Weekly: The three risks ever clearer - evolution of the main risks to the SARB’s inflation forecast by Walter de Wet and Shireen Darmalingam (17 June 2015)

Credit & Securitisation Weekly: Medupi update by Steffen Kriel and Varushka Singh (19 June 2015)

SA Macroeconomics: Retail sales surprises to the upside at 3.4% y/y in April: YTD retail outperforms 2014 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

Credit & Securitisation Flash note: African Bank Ltd by Steffen Kriel (17 June 2015)

SA Macroeconomics: CPI rises to 4.6%, core to 5.7%: We adjust our CPI trajectory for 2016, which now breaches the target in Q1 and Q3 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

SA FIC Weekly: SA FIC: The CAD: a growing concern - rand is now more sensitive to the CA than in over a decade by Walter de Wet and Shireen Darmalingam (17 June 2015)

SA Macroeconomics: The FOMC should provide this week’s dose of volatility: We expect SA's CPI rose in May, while retail sales slowed in April by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

Credit & Securitisation Weekly: One down, one to go by Steffen Kriel and Varushka Singh (12 June 2015)

SA Macroeconomics: Broad based contraction in April manufacturing, -2.0%y/y: Only vehicles growth was positive by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 June 2015)

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