Commodity prices under pressure

• Commodity markets are under pressure. Brent crude oil dropped below $50/bbl yesterday afternoon. Brent crude oil denominated in rand also declined substantially in recent weeks as the oil price decline outpaced the depreciation of the rand.

• The rand was unchanged on Monday, closing at 12.68, the same as Friday. The rand traded between a low of USDZAR12.6635 and a high of USDZAR12.7477.

• The UST 10-year bond yield declined sharply yesterday, to 2.14%, finding support at the 200-day MA. USTs are finding support in weaker commodity prices in general and a lower WTI oil price in particular.

• The market seems to be shifting expectations to a December Fed rate hike, rather than September. Our G10 analyst Steve Barrow points out that a number of developments occurred in the last week or so in the US, seemingly indicating that lift-off is now more likely in December.

• In central bank developments, the Reserve Bank of Australia (RBA) kept the benchmark rate unchanged this morning – in line with Bloomberg consensus. The last time the RBA raised the benchmark rate was in October 2010; the Bank has since November 2011 cut rates by 275 bps.

• Domestically, the BER released the July PMI data yesterday. The numbers overshot Bloomberg consensus expectations, coming in at 51.4 pts in July, the same as in June. The BER noted, however, that only 4 of the 9 sub-components of the Index had improved in July.

• More disappointing was the release of the Naamsa vehicle sales data for July. New vehicle sales continued a downward trend, contracting for the fourth consecutive month — by -6.1% y/y from -4.8% y/y in July.

International developments

Commodity markets are under pressure. Brent crude oil dropped below $50/bbl yesterday afternoon. Brent crude oil denominated in rand also declined substantially in recent weeks as the oil price decline outpaced the depreciation of the rand. Brent crude oil in rand is now trading at levels last seen in early February this year. The decline in the oil price is positive for the domestic inflation outlook and is likely to mitigate base effects which may have started to increase inflation towards the end of last year. These base effects in inflation stemmed from the oil price slide which started in July last year. The current slide in oil, and the accompanied weak growth outlook, would be consistent with our current repo rate outlook which sees the SARB remaining on hold for the rest of 2015.

Oil and oil refined products remain South Africa’s single largest merchandise import by value, and the price decline on its own should be rand-positive. Unfortunately South Africa’s largest commodity exports are also under pressure, with platinum falling to $945 this morning, and gold trading around $1,084. Platinum is now approaching levels last seen in January 2009 at the height of the financial crisis. Thermal coal prices for export from Richards Bay (FOB) remain under pressure too, now trading at $55.80 – a level last seen before the financial crisis. Iron ore prices have rebounded from recent lows of $45/mt, currently trading at $55/mt — still close to multi-year lows.

Turning to the bond markets, the UST 10-year bond yield declined sharply yesterday, to 2.14%, finding support at the 200-day MA. USTs are finding support in weaker commodity prices in general and a lower WTI oil price in particular. That said, although the 5-year breakeven inflation, as implied by the US bond market, has declined from around 1.65% during April to June this year to the current level of 1.35%, breakeven inflation is still well above levels seen in January when breakeven inflation bottomed at 1.07%. South Africa’s 5-year breakeven inflation is steady at 6.59%; it has failed to decline much in recent weeks. In January this year, South Africa’s breakeven inflation dropped to 5%.

The market seems to be shifting expectations to a December Fed rate hike rather than September. Our G10 analyst Steve Barrow points out that a number of developments occurred in the last week or so in the US, indicating a December lift-off from the Fed. Of course, there are a few data releases and policy speeches left to go until the September 16th/17th meeting but, unless any of these produce significant (hawkish) surprises, it’s best to assume we’ll be looking for a December lift-off.

Among the factors that have made us nervy of the September call in the last week or so have been the Fed’s post-meeting statement, GDP revisions, the fall in commodity prices and the Employment Cost Index data we saw last Friday.

On the Fed’s most recent statement, we said at the time that we would have liked to see the Fed do a little bit more to maintain the idea of September lift-off. The changes to the statement were more than minimal. For instance, the Fed suggested that the risks to the economy were still “near balanced”. We would have liked to see it drop the “near” qualification to stay focused on a September hike. In addition to this, the Fed said it still needed to see “some” improvement in the labour market before hiking and the Q2 ECI data showed the labour market going backwards.

In central bank developments, the Reserve Bank of Australia (RBA) kept the benchmark rate unchanged this morning – in line with Bloomberg consensus. The last time the RBA raised the benchmark rate was in October 2010; the Bank has since November 2011 cut rates by 275 bps. Like the rand, the AUD has been under persistent pressure as commodity prices have declined.

On the international front, we look to the US factory orders for June, expected to have rebound during the month.

Local developments

The BER released the July PMI data yesterday. The numbers overshot Bloomberg consensus expectations, coming in at 51.4 pts in July, the same as in June. The BER noted, however, that only 4 of the 9 sub-components of the Index had improved in July. Notably, business activity, one of the major sub-components of the index, increased in July, to 53.2 pts from 51.7 pts in June. Inventories improved to the highest level since January 2015, to 60.2 pts in July from, 56.8 pts in June. Suppliers’ performance and expected business conditions both supported the overall index in June.

Disappointingly, the new sales orders fell below the 50 benchmark line for the fourth time this year to 49.8 pts in July from 51.7 pts in June. The slippage is in line with constrained domestic demand conditions. The employment sub-component is also struggling to break through the 50 benchmark line. The employment sub-component slipped further in July to 46.9 pts from 48.7 pts in June.

More disappointing was the release of the Naamsa vehicle sales data for July. New vehicle sales continued a downward trend, contracting for the fourth consecutive month, by -6.1% y/y from -4.8% y/y in July. A total of 54,112 vehicles were sold in July, compared to 57,636 vehicles sold in July 2015 (and 50,321 vehicles in June 2015). Sales of new passenger cars contracted by 8.8% y/y in July from -6.6% y/y in June; most categories of commercial vehicles contracted. Light commercial vehicles was the only category to post y/y gains. Exports of vehicles, however, increased by 24.4% y/y in July with 28,291 vehicles exported to SA’s main trading partners (22,736 in July 2014 and 31,420 in June 2015).

Markets

The rand was unchanged on Monday, closing at 12.68, the same as Friday. The rand’s movement against the greenback occurred in line with dollar strength against all of the major currencies; the dollar posted gains against the euro (-0.3%), the pound (-0.2%) and the yen (0.1%). The rand gained ground against all of the major crosses; the euro (-0.2%), the pound (-0.2%) and the yen (0.1%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and the second-best performance amongst the EM currencies, behind only the IDR. The rand traded between a low of USDZAR12.6635 and a high of USDZAR12.7477.

Commodity prices were down on Monday. Platinum and gold were down on Monday, by 2.2% and 0.8% respectively, while copper was down 0.2%. Brent closed the day 5.2% lower, at $49.52/bbl. Both the developed world MSCI and the MSCI EM were down on Monday, by 0.3% and 1.2% respectively. The ALSI was down 0.5% on the day. Non-residents were net buyers (ZAR28 million) of equities on Monday. The EMBI spread widened on Monday by 9 bps, and SA’s 5yr CDS widened by 3 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 3.6%.

Latest SA publications

SA Macroeconomics: SA recorded $290Mn net outflows from equity and debt: US labour and global PMI data to dominate asset prices by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (3 August 2015)

SA FIC Weekly: Fool me once – despite oil price decline, bonds and rand on back foot as Brazil goes negative by Walter de Wet, Shireen Darmalingam and Penny Driver (3 August 2015)

SA Macroeconomics: SA records its first quarterly trade surplus in 3 years: Base effects, & weak demand counter declining terms of trade by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (31 July 2015)

SA Macroeconomics: June PPI rises to 3.7% from 3.6%: Petrol deflation slows, electricity tariffs kick in & food is up by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 July 2015)

SA Macroeconomics: Q2 unemployment falls to 25%: 563,000 jobs were created Y/Y, & 198,000 Q/Q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 July 2015)

SA Macroeconomics: June PSCE 8.14% y/y: HH unsecured credit accelerates, corporate credit slows to 12.9% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 July 2015)

SA Macroeconomics: EM portfolio flows: Portfolio flows in H1:15 are down 32% on H1:14 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (28 July 2015)

SA Macroeconomics: SA trade surplus expected: $0.3Bn net outflows from EMs: SA saw net debt & equity inflows by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 July 2015)

SA FIC Weekly: Despite the oil price decline, the cyclical underpin for the rand is still far from reliable by Walter de Wet and Shireen Darmalingam (27 July 2015)

SA FIC: The SARB: still hawkish, but more dovish by Walter de Wet (23 July 2015)

SA Macroeconomics: SARB hikes repo 25bps to 6.0%: Statement supportive of our view for rates on hold until 2H:2016 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 July 2015)

SA FIC Trade Idea: Time to revisit the receiver trade by Walter de Wet (23 July 2015)