SARB MPC meeting: on the precipice

• Following yesterday’s FOMC minutes, equities and EM currencies in general are on the front foot. While there was still no consensus on a December hike amongst FOMC members, the Fed still seems set for a December hike.

• One of the reasons why we believe that EM currencies and equities are marginally stronger this morning, despite what appears to be a greater possibility of a Fed hike in December, is that firstly, more certainty is likely to benefit risky assets at the margin and secondly, as mentioned yesterday the emphasis of the minutes was also on the outlook for possible rate hikes beyond the December meeting.

• The Bank of Japan has left its quantitative easing plan unchanged for the time being, as was largely expected. Although the country is now officially back in recession, the BoJ said that the economy is recovering slowly although it has been negatively affected by the slowdown in emerging markets.

• Stats SA released the October CPI data yesterday. Bloomberg consensus expectations were for CPI to have increased in October to 4.7% y/y from 4.6% y/y in September. The data printed in line with expectations.

• After having made a loss of R648 million in the first half of 2015/16, South African Airways (SAA) is appealing to government for additional guarantees to aid the company. SAA appealed to Treasury for a debt guarantee of R4-5 billion for the company to continue as a going concern; this is in addition to the R6.5 billion guarantee granted last year.

• The SARB’s MPC will announce the monetary policy decision at 15h00. Bloomberg consensus is for the repo rate to remain unchanged at 6.0%. While a weaker rand may tip the SARB into hiking at today’s meeting, we believe that the MPC may prefer to wait until after the FOMC meeting in December in order to gauge how currency markets may react.

International developments

Following yesterday’s FOMC minutes, equities and EM currencies in general are on the front foot. While there was still no consensus on a December hike amongst FOMC members, overall, the Fed still seems set for a December hike. It seemed that there was still some concern over how a rate hike in December may impact the US growth outlook, but there were equally some concerns over heightened market uncertainty if they don’t hike.

The USDZAR has drifted lower towards the 14.00 level largely on the back of dollar weakness. The 14.00 will remain a natural level of support for the USDZAR. Ahead of the SARB MPC this afternoon, where we expect no change in the repo rate, we expect the rand to remain range bound. USDZAR support is at 14.0700, 14.0000 and 13.9200. Resistance is around 14.1500, 14.3800 and 14.5000.

One of the reasons why we believe EM currencies and equities are marginally stronger this morning, despite what appears to be a greater possibility of a Fed hike in December, is that firstly, more certainty is likely to benefit risky assets at the margin and secondly, as mentioned yesterday, the emphasis of the minutes was also on the outlook for possible rate hikes beyond the December meeting. A key indicator of what Fed officials expect in terms of the rate hike is the so-called dot-plot forecasts. The latest median forecast by the FOMC according to the dot plots from their September meeting put the Fed funds rate at 1.375% at the end of 2016. This would imply at least five 25 bps hikes between now and the end of December next year (our G10 strategist expects a total of 75 bps hikes between now and the end of 2016). The next release of the dot plots will be for the upcoming December meeting and it appears as if the market may be looking for a slow lift-off when lift-off actually occurs.

The Bank of Japan has left its quantitative easing plan unchanged for the time being, as was largely expected. Although the country is now officially back in recession, the BoJ said that the economy is recovering slowly although it has been negatively affected by the slowdown in emerging markets. Japanese imports fell more than expected in October, coming in at -13.4% y/y below expectations of -8.6% y/y, while imports matched expectations to come in at -2.1% y/y for October. This has left Japan with its first trade surplus since March this year.

Not only EM currencies which took the US Fed minutes as positive; US markets did the same. The S&P closed 1.6% up yesterday and the Dow Jones made gains of 1.4%. The Asian markets also read the Fed minutes as positive, which combined with a positive lead from Wall Street, has led to a good morning of trade. At the time of writing, the Shanghai Composite was down 0.1%, the Shenzhen Composite was up 0.7%, the Japanese Nikkei was up 1.1%, and the Hong Kong Hang Seng was up 1.2%.

Local developments

Stats SA released the October CPI data yesterday. Bloomberg consensus was for CPI to have increased in October to 4.7% y/y from 4.6% y/y in September. The data printed in line with expectations. Food inflation increased to 4.9% y/y in October from 4.4% y/y in September and was driven mainly by higher prices of wheat and cereals, fish, oils and fats. In contrast, the prices of meat moderated in October. Our economics team has since revised their food inflation forecast higher for 2016 in line with the move in SAFEX wheat and yellow maize prices and ends next year at 9.3% versus their July forecast of 7.0%.

The price of petrol (93 Unleaded Gauteng) fell from R12.32c/l in September to R12.30c/l in October and R12.08c/l in November. However, the price of 95 Unleaded Gauteng rose, such that on average petrol actually added 1 bp to September’s 4.6% y/y inflation rate. Our economics team notes that due to base effects petrol should add another 6 bps to CPI in November. Core CPI was expected to have remained unchanged at 5.3% y/y in October, but moderated to 5.2% y/y in October, in line with second round effects of a lower ZAR oil price. Looking ahead, we expect CPI to average 4.5% y/y in 2015 and increasing further to 6.0% y/y in 2016.

Stats SA also released the September retail sales data yesterday. Expectations were for retail sales growth to have increased to 4.1% y/y in September from 3.9% y/y in August. In the event, retail sales growth moderated to 2.7% y/y in September from revised growth of 4.0% y/y in August. On a m/m basis, consensus estimates were pencilling in a moderation in growth to 0.5% in September, from 1.5% in August. Retail sales growth slipped into negative territory in September, falling by -1.9% from revised growth of 1.8% in August.

After having made a loss of R648 million in the first half of 2015/16, South African Airways (SAA) is appealing to government for additional guarantees to aid the company. SAA appealed to Treasury for a debt guarantee of R4-5 billion for the company to continue as a going concern; this is in addition to the R6.5 billion guarantee granted last year, with total state guarantees amounting to R14.5 billion. This amount could, however be reduced if the plans to renegotiate the leasing agreement with Airbus. The delay in the finalisation of this agreement comes as it would materially alter the support SAA would require to operate as a going concern. SAA’s air traffic liability guarantee of R495 million was extended to the end of September 2016.

The SARB’s MPC announces its decision on monetary policy today at 15h00. Bloomberg consensus is for the repo rate to remain unchanged at 6.0%, although ten of the 26 analysts polled by Bloomberg expect rates to increase by 25 bps. While a weaker rand may tip the SARB into hiking at today’s meeting, we believe that the MPC may prefer to wait until after the FOMC meeting in December in order to gauge how currency markets may react.

A 25 bps hike by the SARB this week — in contrast to our expectations — would not change our view on the rand. Much of the rand weakness at this point is due to dollar strength and weak commodity prices (especially South African commodity export prices). In fact, a repo rate hike may be bond-positive and anchor longer-dated yields, but may also be equity-negative (which may lead to more foreign outflows and put additional pressure on the currency. We still see the USDZAR trading towards 14.60.

Markets

The rand strengthened further on Wednesday, closing at 14.17, compared to Tuesday’s close of 14.27. 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 euro (0.2%) and the pound (0.2%), but gained against the yen (0.2%). The rand’s performance was stronger against all of the major crosses; the rand gained ground against the yen (0.9%), the euro (-0.6%) and the pound (-0.6%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in the second-best performance amongst EM currencies, only behind the BRL. The rand traded between a low of USDZAR14.1583 and a high of USDZAR14.3184.

Commodity prices were mixed on Wednesday. Copper and platinum were down on Wednesday, by 1.6% and 0.5% respectively, while gold was up marginally on the day. Brent closed 1.3% higher, at $44.14/bbl. The developed world MSCI was up by 0.9% on Wednesday, while the MSCI EM was down by 0.2% on the day. The ALSI was down by 0.7% on Wednesday. The EMBI spread narrowed by 5 bps on Wednesday and SA’s 5yr CDS narrowed by 9 bps on the day. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 10.6%.

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SA Macroeconomics: CPI up 1ppt to 4.7% y/y: Core fell to 5.2% y/y, while food has begun to rise, to 4.9% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 November 2015)

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