US NFP data in the spotlight today

• The Fed and the ECB is very much in the spotlight. Markets nervously await the US non-farm payrolls (NFP) data this afternoon. The rand and other EM currencies such as the TRY, the INR and the IDR are on the back foot again.

• As far as the US non-farm payrolls are concerned, the headline numbers will be important. Bloomberg consensus is for a number of 217K in August, up from 215K in July.

• The US Fed rate hike decision is very much the reason why the market remains focused on US employment data. Fed fund futures assign a 30% probability of a rate hike by the Fed later this month, while the December meeting is assigned a 57% probability.

• In the past, a NFP print well below the expectations would have been rand- positive, and this may still be the case. However, the lines have become more blurred in recent weeks given the growing concerns over especially the EM growth outlook.

• Mario Draghi, president of the European Central Bank, made comments on Thursday that indicate that the bank is open to another round of QE after the current round reaches completion if it is necessary for regional economic stability.

• It was reported in the media yesterday that Finance Minister Nhlanhla Nene indicated that the government was working on ways to curb pressures on government’s rising wage bill in the current year and over the medium term.

• The Standard Bank PMI for August was released yesterday. The index increased in August to 49.3 pts from 48.9 pts in July. Nevertheless, the manufacturing sector is in recession.

International developments

The Fed and the ECB is very much in the spotlight. Markets nervously await the US non-farm payrolls (NFP) data this afternoon. The rand and other EM currencies such as the TRY, the INR and the IDR are on the back foot again. The rand touched 13.73 against the dollar this morning and is, at the time of writing, trading just below the 13.70 level.

In anticipation of the NFP data release, there has also been a sell-off of Asian stocks, with the Japanese Nikkei down 2.1% at time of writing, and the Hang Seng China Enterprises Index – a measure of Hong Kong based Chinese business – down 2.3%.

As far as the US non-farm payrolls are concerned, the headline numbers will be important. Bloomberg consensus is for a number of 217K in August, up from 215K in July. However, the increase in hourly earnings and the unemployment rate remains key given that wage pressures are a key determinant of US inflationary pressures.

The US Fed rate hike decision is very much the reason why the market remains focused on US employment data. Fed fund futures assign a 30% probability of a rate hike by the Fed later this month, while the December meeting is assigned a 57% probability.

f However, the lines have become more blurred in recent weeks given the growing concerns over especially the EM growth outlook. A weak print in the US today may increase this fear. When combined with general market expectations that the Fed will stay on course for a hike this year despite the lack of global growth, this may prove to be even more rand-negative.

Turning to the other side of the Atlantic, Mario Draghi, president of the European Central Bank, made comments on Thursday that indicate that the bank is open to another round of QE after the current round reaches completion if it is necessary for regional economic stability. It is important to note that the ECB decreased their inflation expectations for 2016 to 1.1%, from 1.5%, and their 2017 forecast to 1.7% from 1.8%. The ECB is clearly still concerned about the lack of inflationary pressures and the economic recovery amid the EM slowdown. Weak growth and low inflation, combined with the potential for further QE, is bond-positive. German bonds found support after the conference and dropped to 0.72%, from close to 0.80% at the start of the day’s trading activity. While the lack of global inflation should aid bonds in general, local bonds remain hostage to the weaker currency.

Local developments

It was reported in the media yesterday that Finance Minister Nhlanhla Nene indicated that the government was working on ways to curb pressures on government’s rising wage bill in the current year and over the medium term. We estimate that the wage bill, agreed on earlier this year, will add up to ZAR65 billion to the overall wage bill over the next 3 years, with much of the pressure in the current fiscal year. The Finance Minister indicated that adjustments would be made in the Medium Term Budget Policy Statement (MTBPS), scheduled for release on 21 October. Measures to contain costs may include limiting headcount growth or selectively reducing headcount and reviewing the allocation of resources towards performance bonuses and notch progression. Nene noted that the aim “was to preserve fiscal space and limit the impact of wage pressures on service delivery and capital budgets”.

The Standard Bank PMI for August was released yesterday. The index increased in August to 49.3 pts from 48.9 pts in July, in contrast with the Barclays manufacturing PMI. Our economics team noted that the private manufacturing sector continued to face headwinds in August. Both demand and activity indices remained weak. New orders emerged as the main drag to August’s headline index. And, while output registered a marginal improvement from July, it remained in contraction.

Employment was the exception, rising for a third consecutive month and holding above the 50 points threshold. While encouraging, we think that the pace of increase in employment is likely to be negatively affected by rising staff costs.

Higher generalised input prices are expected to constrain manufacturers’ margins. The manufacturing production environment is facing rising electricity costs and slowing growth both domestically and internationally, as reflected in the intensification of the contraction in the new export orders index.

Our economics team further notes that the manufacturing sector is in recession and signals from the PMI’s leading indicator suggest ongoing deterioration, with the ratio remaining below 1 for a third consecutive month.

Markets

The rand weakened on Thursday, closing at 13.57, compared to Wednesday’s close of 13.44. 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 (-0.9%) and the pound (-0.3%), but weakened against the yen (-0.2%). The rand strengthened against most of the major crosses; the rand lost ground against the yen (-1.1%) and the pound (0.6%), but gained only fractionally against the euro on the day. The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the second-worst performance amongst the EM currencies, only ahead of the TRY. The rand traded between a low of USDZAR13.3959 and a high of USDZAR13.6432.

Commodity prices were mixed on Thursday. Platinum and gold were down on Thursday, both by 0.8%, while copper was up by 2.5% on the day. Brent closed the day 0.4% higher, at $50.68/bbl. Both the developed world MSCI and the MSCI EM were down on Thursday, by 0.5% and 0.6% respectively. The ALSI was up by 2.4% on the day. Non-residents were net buyers (ZAR1.078 billion) of equities on the day. The EMBI spread narrowed on Thursday by 3 bps, and SA’s 5yr CDS narrowed by 6 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 1.8%.

Latest SA publications

SA Macroeconomics: Aug vehicle sales -8.2% y/y: Passenger vehicle sales -8.3% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (2 September 2015)

SA Macroeconomics: August PMI retreats to 48.9: China's growth slowdown dampens manufacturing confidence by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 September 2015)

SA Macroeconomics: Jul records R0.4Bn trade deficit, YTD deficit shrinks to R25Bn: Base metal exports outperform, non-mineral import volumes contract by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 September 2015)

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SA FIC Weekly: Stagflation squeeze to tighten by Walter de Wet, Shireen Darmalingam and Penny Driver (31 August 2015)

SA Credit & Securitisation Weekly: Eskom’s coal contract in dispute by Steffen Kriel (28 August 2015)

SA FIC Trade Idea: SAGBs long-end looks like value by Walter de Wet (26 August 2015)

SA Macroeconomics: Mining grows 4.0% in June: Q2:15 contracts 2.0% q/q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 August 2015)

SA Macroeconomics: SA GDP disappoints, -1.3% q/q: Broad based weakness, agric & trade far worse than expected by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 August 2015)

SA FIC Weekly: Yields – when the rand blows, and the SARB is forced to hike by Walter de Wet, Shireen Darmalingam and Penny Driver (24 August 2015)