ZAR weakens further; local BCI undershoots expectations

The rand weakened further on Thursday after good US data on Wednesday. The Dollar Index topped 100 for the first time since March on good US house price data.
Chinese industrial profits are down -4.6% y/y in October from 0.1% y/y in September. This is consistent with the PMI indices, slowing supply, and lower commodity prices.
However, metal prices are rallying as Chinese producers meet to discuss cutting back on production because of low prices. This could add some strength to the rand if these talks end in a resolution that favours a production slowdown.
Data released out of Japan was mixed this morning but has generally been read as negative. Household spending is down -2.4% y/y in October from -0.4% y/y in September. Headline inflation came in at 0.3% y/y for October. The unemployment rate moderated to 3.1% in October.
Fitch has maintained its sovereign rating for China at A+ but has stressed the risks Chinese economy faces. Fitch expects the Chinese economy to grow 6.8% in 2015, 6.3% in 2016, and 6% in 2017. S&P also maintained China’s rating.
Stats SA released the October PPI data yesterday. PPI overshot expectations, at 4.2% y/y in October, while on a m/m basis, PPI increased by 0.9% in October from 0.3% in September. The ascent of PPI was driven by coal and petroleum products.
The BER released the Business Confidence Index for Q4:15 yesterday. Business confidence fell to 36 pts in Q4:15 to its lowest level since Q2:10.

International developments

The rand has weakened further on the back of good US data on Wednesday. The Dollar Index topped 100 for the first time since March after good house price data was released for the US.

Chinese industrial profits came out this morning and were down -4.6% y/y in October from 0.1% y/y in September. This is consistent with the PMI indices, slowing supply, and lower commodity prices. The cyclical underpin for commodity prices remains weak.

However, metal prices are rallying as Chinese producers meet to discuss cutting back on production in the face of low prices. This could add some strength to the rand if these talks end in a resolution that favours a production slowdown.

Data released out of Japan was mixed this morning but has generally been read as negative. Household spending is down by -2.4% y/y in October from -0.4% y/y in September. Headline inflation came in at 0.3% y/y for October, while core inflation, which strips out energy and food prices, came in at 0.7% y/y down from 0.9% y/y in September. The unemployment rate moderated to 3.1% in October, its lowest rate in 20 years, from 3.4% in September. The moderation comes on the back of a smaller labour force.

Asian markets read this data print poorly. At the time of writing, the Shanghai Composite was down 1.7%, the Shenzhen Composite was down 1.5%, the Japanese Nikkei was down 0.4%, and the Hong Kong Hang Seng was down 1.3%.

Fitch has maintained its sovereign rating for China at A+ but has stressed the risks that the Chinese economy faces. They expect the Chinese economy to grow 6.8% in 2015, 6.3% in 2016, and 6% in 2017. S&P also maintained China’s rating.

US markets are still on holiday today; we therefore expect a quiet end to the week before we head into a jam-packed first week of December. Out of the UK, however, we can look to the preliminary Q3:15 GDP data.

Local developments

Stats SA released the October PPI data yesterday. Consensus estimates were for producer prices to have increased to 3.8% y/y in October from 3.6% y/y (higher-than-expected) in September. In the event PPI overshot expectations coming in at 4.2% y/y in October, while on a m/m basis, PPI increased by 0.9% in October from 0.3% in September. The ascent of PPI was driven by coal and petroleum products, which moderated to -2.3% y/y in October from -5.1% y/y in September. Within this category, both petrol and diesel slowed, contributing a combined 0.5 ppts to the headline PPI print in October. Food PPI rose only slightly to 6.0% y/y from 5.8% y/y. Our economics team notes that this should moderate expectations for food CPI. They have 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% (see report CPI up 1ppt to 4.7% y/y, dated 18 Nov’15).

The BER released the Business Confidence Index for Q4:15 yesterday. While the index was expected to remain below the 50-benchmark line, Bloomberg consensus was for a pick-up in business confidence in Q4 to 42 pts in Q4:15 from 38 pts in Q3:15. In the event, business confidence fell to 36 pts in Q4:15, its lowest level since Q2:10. The motor vehicles sub-index fell the most in Q4:15, to 19 pts and the lowest it’s been since 2009, from 27 pts in Q3:15. Encouragingly, retail business confidence increased in Q4 to 40 pts from 34 pts in Q3:15.

Markets

The rand weakened further on Thursday, closing at 14.29, compared to Wednesday’s close of 14.13. The rand’s depreciation against the greenback occurred in line with dollar strength against some of the major currencies; the dollar posted gains against the pound (-0.2%) and the euro (-0.1%), but lost ground against the yen (-0.1%). The rand’s performance was weaker against all of the major crosses; the rand lost ground against the yen (-1.2%), the euro (1.0%) and the pound (0.9%). The rand put in the worst performance amongst both the commodity currencies we monitor for purposes of this report, as well as EM currencies. The rand traded between a low of USDZAR14.1190 and a high of USDZAR14.2940.

Metal prices were up on Thursday. Copper and platinum were up on Thursday, by 1.9% and 1.0%, respectively, while gold was up by 0.1% on the day. Brent closed 1.5% lower, at $45.46/bbl. Both the developed world MSCI and the MSCI EM were up on Thursday, by 0.4% and 0.2% respectively. The ALSI was up by 0.6% on Thursday. The EMBI spread widened by 2 bps on Thursday and SA’s 5yr CDS widened by 1 bps on the day.

Latest SA publications

SA Macroeconomics: October PPI accelerates to 4.2%: Main drivers: petrol, diesel and soft commodities; meat slows by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 November 2015)

SA Macroeconomics: SBGS expects Fitch to downgrade and S&P to affirm SA's sovereign rating: Twin deficits a looming risk for SA's investment grade status by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 November 2015)

SA Credit & Securitisation Flash Note: Eskom Holdings SOC Ltd by Steffen Kriel and Robyn MacLennan (25 November 2015)

SA Macroeconomics: Q3 GDP grows 0.7% q/q escaping a technical recession: Y/Y GDP growth slows 1.0% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 November 2015)

SA Macroeconomics: Q3 GDP 0.5% q/q, and we update our repo rate view: SA's leading indicator, Q3 GDP, Business Confidence and PPI by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 November 2015)

SA FIC market themes: Reading the ratings by Walter de Wet, Shireen Darmalingam and Penny Driver (23 November 2015)

SA Credit & Securitisation Flash Note: Eskom quarterly update by Robyn MacLennan, Steffen Kriel and Varushka Singh (20 November 2015)

SA Macroeconomics: MPC raises by 25bps despite lowering GDP & CPI forecasts: USDZAR loves pre-emptive hike, but stays above 14.00 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 November 2015)

SA FIC Flash Note: On the other hand by Walter de Wet, Shireen Darmalingam and Penny Driver (19 November 2015)

SA Macroeconomics: Sept retail sales slow to 2.7% from 4.0% y/y, Q3 3.9% q/q: Cyclical consumption contracts by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 November 2015)

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)

SA Credit & Securitisation Flash Note: Barloworld Ltd by Robyn MacLennan (18 November 2015)

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