ZAR steady ahead of a quiet day

• The rand has gained over 3% this week as global monetary policy has been very accommodating. The rand traded in a 13.30 to 13.55 range yesterday and has been up for five consecutive days. 

• The Fed released the minutes of the meeting held on 16-17 September yesterday. The minutes indicated that many of the members thought the economy was close to warranting a hike before the end of the year, but that they were waiting to be sure that the global economic slowdown would not disrupt the US economic recovery.

• The minutes have been taken to mean that the Fed is unlikely to hike this year, and Wall Street therefore had a good close. The S&P closed up 0.9% and the Dow Jones closed up 0.8%. The Asian markets took their cue from Wall Street. 

• The Bank of England kept rates on hold at 0.5% yesterday, as expected, and indicated that conditions might be right for a rate hike near the end of this year. 

• Growth in mining production undershot expectations, moderating to 3.8% y/y in August from a downwardly revised 4.0% y/y in July. 

• Manufacturing growth also came in below consensus expectations, contracting by -0.2% y/y in August from a downwardly revised 5.3% y/y in July.

• We expect employment in the manufacturing and mining sectors to be particularly impacted by lower commodity prices and slower domestic and global economic growth.

International developments

The rand has strengthened by more than 3% this week as global monetary policy has been very accommodating. The rand traded in a 13.30 to 13.55 range yesterday and has been up for five days running.

The Fed released the minutes of the meeting held on 16-17 September yesterday. The minutes indicated that many of the members thought the economy was close to warranting a hike before the end of the year, but that they were waiting to be sure that the global economic slowdown would not disrupt the US economic recovery. The disappointing employment data that came out this month is leading many to suspect that the Fed may put off the rates hike until sometime next year, but San Francisco Federal Reserve Bank president John Williams reiterated yesterday that a hike this year still seemed appropriate.

However, the minutes have been taken to mean that the Fed is unlikely to hike this year, and Wall Street therefore had a good close. The S&P closed up 0.9% yesterday and the Dow Jones closed up 0.8%. The Asian markets took their cue from Wall Street and have also enjoyed a good day of trading so far. At the time of writing, the Shanghai Composite was up 0.8%, the Shenzhen Composite was up 0.8%, the Japanese Nikkei was up 1.5%, and the Hong Kong Hang Seng was up 1.5%.

The Bank of England kept rates on hold at 0.5% yesterday, as expected, and indicated that conditions might be right for a rate hike near the end of this year. The minutes of their October meeting were released and read as rather dovish, and BoE governor Mark Carney insisted that the central bank has not changed its view. He also insisted that the BoE’s decision to hike rates will not be affected by when the Fed begins lift-off, but rather on when the UK conditions are right for a rates hike.

Local developments

Stats SA released both the mining and manufacturing production data for August yesterday. According to Bloomberg consensus expectations, mining production growth was expected to have increased to 6.3% y/y in August from 5.6% y/y in July. In the event, growth in mining production undershot expectations and moderated to 3.8% y/y in August from a downwardly revised 4.0% y/y in July. The y/y increase was driven by PGMs (63.0% y/y and contributing 7.6 ppts) and diamonds (24.0% y/y and contributing 0.5 ppts). On a m/m basis, however, mining output growth was expected to have moderated to 0.8% from 1.1% in July. Output growth, however, declined by -1.1% in August from a downwardly revised -0.8% in July. In the three months ending in August, mining production contracted by -3.3% (seasonally adjusted), from -4.6% (seasonally adjusted) in the three months to July, and suggests that the mining sector is unlikely to add positively to GDP growth in Q3:15.

Growth in manufacturing production was expected to have moderated in August, to 1.4% y/y from 5.6% y/y in July. In the event, manufacturing growth also undershot expectations, contracting by -0.2% y/y in August from a downwardly revised 5.3% y/y in July. The contraction in August was driven by lower y/y growth in the basic iron and steel, non-ferrous metal products, metal products and machinery (-8.0% y/y and contributing -1.6 ppts). There were, however, large positive contributions from petroleum, chemical products, rubber and plastic products and food and beverages. In the three months ending in August, manufacturing production contracted by -0.3% (seasonally adjusted), from -1.4% (seasonally adjusted) in the three months to July. Looking ahead, signals from the PMI’s leading indicator continue to suggest ongoing deterioration in the manufacturing sector.

Our economics team expects employment in the manufacturing and mining sectors to be particularly impacted by lower commodity prices and slower domestic and global economic growth.

Markets

The rand closed stronger for the fifth consecutive day on Thursday, at 13.31, compared to Wednesday’s close of 13.47. The rand’s appreciation against the greenback occurred in line with dollar weakness against all of the major currencies; the dollar posted losses against the euro (0.4%), the pound (0.2%) and the yen (-0.1%). The rand’s performance was stronger against the major crosses; the rand gained ground against the then (1.1%), the pound (-1.0%) and the euro (-0.8%). The rand put in the best performance amongst the commodity currencies we monitor, and put in a mixed performance amongst EM currencies. The rand traded between a low of USDZAR13.3075 and a high of USDZAR13.5311.

Commodity prices were mixed on Thursday. Platinum was up by 0.3% on Thursday, while copper and gold were down on the day, by 1.0% and 0.6% respectively. Brent closed the day 3.4% higher, at $53.05/bbl. The developed world MSCI was up by 0.6% on Thursday, while the MSCI EM was down by 0.3% on the day. The ALSI was up by 0.3% on the day. Non-residents were net sellers (-ZAR505 million) of equities on the day. The EMBI spread narrowed on Thursday by 6 bps, and SA’s 5yr CDS narrowed by 2 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 5.4%.

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)