ZAR stronger for four days

• Wall Street enjoyed another day of good trading yesterday as the S&P gained 0.8%, closing up for six out of seven days. The Dow Jones was up 0.7%. The Chinese holidays have ended, and markets have shot up, playing catch-up with the global rally this week.

• At the time of writing, the Japanese Nikkei was down 0.9% after machinery orders, which is considered to be a proxy for private capital spending, decreased by -3.5% y/y for August.

• Brazil’s CPI slipped to 9.49% y/y in September from 9.53% y/y in August. This should take some of the pressure off the central bank to keep hiking rates after the BRL lost value last month after the downgrade by S&P.

• The rand has found some strength this week on the back of rising commodity prices and a global rally this week. The rand traded in a 13.30 to 13.55 range yesterday and has been up for four days running.

• The Fed will release the minutes of the 16-17 September FOMC meeting this week. Last week’s job’s data disappointed, and adds to the uncertainty around when “lift-off” will begin.

• The Bank of England meets this week to decide on monetary policy. Expectations are for rates to remain unchanged at 0.5%.

• Today sees the release of Stats SA’s mining and manufacturing production data for August. According to Bloomberg consensus expectations, mining production growth, due out at 11h30, is expected to have increased to 6.3% y/y in August from 5.6% y/y in July.

• Growth in manufacturing production, due at 13h00, is expected to have moderated in August, to 1.4% y/y from 5.6% y/y in July.

International developments

Wall Street enjoyed another day of good trading yesterday as the S&P gained 0.8%, closing up for six of the last seven days. The Dow Jones was also up, closing 0.7% higher. The Chinese holidays came to an end and the markets have shot up, playing catch-up with the global rally this week. After being closed since last Thursday, at the time of writing, the Shanghai Composite was up 3.8% and the Shenzhen Composite was up 4.5%, while the Hong Kong Hang Seng was down 0.7%.

At the time of writing, the Japanese Nikkei was down 0.9% after a release of Japanese data this morning. Japanese machinery orders, which is considered to be a proxy for private capital spending, decreased by -3.5% y/y in August from an increase of 2.8% in July. This decrease was out of line with consensus expectations and was the fastest drop in orders seen in 10 months.

Brazil’s CPI slipped to 9.49% y/y in September from 9.53% y/y in August. This should take some of the pressure off the central bank to keep hiking rates after the BRL lost value last month following the downgrade by S&P. The BRL has rallied this week, but is still down approximately 31% year to date. Other EM currencies such as the TRY MYR and COP are also down in the year to date, around 20%. The ZAR has fallen by 14.4% this year so far.

Nonetheless, the rand has found some strength this week on the back of rising commodity prices and a global rally this week. Yesterday the rand traded in the 13.30 to 13.55 range. It has closed in positive territory for four days running.

The Fed will release the minutes of the 16-17 September FOMC meeting this week. Recall, the Fed kept interest rates unchanged at the September meeting, with the statement not deviating much from the previous meeting. However, they indicated that concerns over the global economy and volatility in the markets may restrain economic activity. Last week’s job’s data disappointed and adds to uncertainty around when “lift-off” will begin. We expect rates to increase in December.

The Bank of England meets this week to decide on monetary policy. Expectations are for rates to remain unchanged at 0.5%.

Local developments

SARB Governor, Lesetja Kganyago, noted yesterday that the central bank is ready to alter monetary policy should they see signs that the weak rand is filtering through to the economy and fuelling inflation. The Bank has pointed out on numerous occasions that they are concerned about second-round effects, which could leave them with little other choice but to adjust monetary policy appropriately to deal with the consequences of the pass-through.

We believe, however, that the rates will remain on hold this year. The impact of a weaker rand on inflation is offset by a lower oil price and a lower exchange rate pass-through into inflation. Under our base case assumptions for the rand and oil (at $50/bbl in 2016), our economics team estimates inflation to peak in Q1:16 at 6.3% and the average 5.7% in 2016.

Today sees the release of Stats SA’s mining and manufacturing production data for August. According to Bloomberg consensus expectations, mining production growth, due out at 11h30, is expected to have increased to 6.3% y/y in August from 5.6% y/y in July. On a m/m basis, however, mining output growth is expected to have moderated to 0.8% from 1.1% in July. Growth in manufacturing production, due at 13h00, is expected to have moderated in August, to 1.4% y/y from 5.6% y/y in July.

Markets

The rand closed stronger for the fourth consecutive day on Wednesday, at 13.47, at 13.52, compared to Tuesday’s close of 13.52. The rand’s appreciation against the greenback occurred in line with dollar weakness against some of the major currencies; the dollar posted losses against the pound (0.6%) and the yen (-0.2%), but strengthened against the euro (-0.3%). The rand’s performance was mixed against the major crosses; the rand gained ground against the euro (-0.7%) and the yen (0.2%), but lost ground against the pound (0.1%). The rand put in the second-worst performance amongst the commodity currencies we monitor, only ahead of the CAD and put in a mixed performance amongst EM currencies. The rand traded between a low of USDZAR13.3407 and a high of USDZAR13.5486.

Commodity prices were mixed on Wednesday. Platinum was up by 1.1% on Wednesday, while copper was up marginally on the day. Gold was down by 0.2% on Wednesday. Brent closed the day 1.1% lower, at $51.33/bbl. Both the developed world MSCI and the MSCI EM were up on the day, by 0.8% and 2.7% respectively. The ALSI was up by 0.9% on the day. Non-residents were net sellers (-ZAR2.720 billion) of equities on the day. The EMBI spread narrowed on Wednesday by 4 bps, and SA’s 5yr CDS narrowed by 11 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 5.2%.

Latest SA publications

SA Macroeconomics: USD40Bn of EM outflows in Q3: We update our ZAR & repo rate forecasts & expect SA manufacturing to slow in Aug by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (6 October 2015)

SA FIC Weekly: Weaker rand, but rates view stands by Walter de Wet, Shireen Darmalingam and Penny Driver (5 October 2015)

SA Credit & Securitisation Monthly: Quarterly update – Q3 2015 by Robyn MacLennan, Steffen Kriel and Varushka Singh (2 October 2015)

SA Macroeconomics: SARB keeps repo rate at 6.0%: Growth outlook deteriorates meaningfully, inflation largely unchanged by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 September 2015)

SA FIC Flash Note: SARB - hawkish statement with lower growth by Walter de Wet (23 September 2015)

SA Macroeconomics: SA CPI slows to 4.6% y/y: Core inflation falls to 5.3% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 September 2015)

SA FIC Weekly: SARB – a hawkish pause by Walter de Wet, Shireen Darmalingam and Penny Driver (21 September 2015)

SA Credit & Securitisation Weekly: Transnet’s acting CEO comments by Steffen Kriel (18 September 2015)

SA Macroeconomics: July retail sales grow 3.3% y/y, down from 3.8% y/y in June: General dealers and textiles together contribute 1.9 ppts by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (16 September 2015)

SA Macroeconomics: SA Q2 CAD narrows, retail sales slow in Jul & we await FOMC: PCE & Investment may disappoint by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (14 September 2015)

SA FIC Weekly: Key FOMC meetings matter by Walter de Wet, Shireen Darmalingam and Penny Driver (14 September 2015)