In the loop

What you should know this morning:

• The rand is weaker this morning, at R16.45/$, after closing unchanged yesterday (R16.37/$*).
• EM currencies were mixed yesterday; the RUB (+1.3%), COP (+1.2%) and KRW (+0.5%) were the biggest gainers; the BRL (-0.5%), MXN (-0.3%) and ARS (-0.2%) were the biggest losers.
• Asian equity markets, the Nikkei, Hang Seng and Shanghai Composite, are down this morning.

• Central bank watch: the SARB's Monetary Policy Committee (MPC) will announce its interest rate decision this afternoon.
• The SARB will likely hike interest rates by 25 bps, though it might be a divided decision, with some members likely preferring to hold rates steady.
• Relatively favourable initial conditions, including low inflation expectations and high real rates, create some leeway for the SARB to look beyond the direct impact on inflation of higher oil prices due to the Iran war.
• However, exceedingly high forecast risk means that the SARB cannot take it for granted that oil prices, and in turn their inflationary impact, will recede materially in the coming weeks or months.
• Therefore, a 25 bps rate hike now might be viewed as relatively inexpensive insurance against broadening inflation pressure in response to the oil price shock.
• MPC members may argue that they may ultimately have to hike interest rates more aggressively if they wait too long, allowing such inflation pressures to take hold.
• The Bank of Korea held rates steady this morning, but signalled that a 25 bps hike may be likely at its next meeting in July.
• The ECB will publish the minutes from its most recent rate-setting meeting today.

• Iran war: US forces shot down four one-way Iranian attack drones fired at a commercial ship and also struck an Iranian drone-launching unit near the Strait of Hormuz.
• Further, the US imposed new sanctions to prevent Tehran from profiting from vessels transiting the Strait.
• This as Iran expands its claimed jurisdiction of the waterway with a new Iranian agency (the Persian Gulf Strait Authority) and new rules for vessels seeking transit.
• These moves once again lay bare the fragility of the ceasefire and recent diplomatic momentum to reach an agreement to end the war.

• A slew of US data is due for release this afternoon, including the second estimate of Q1:26 GDP.
• US personal income and spending data for April will likely show slower growth; income and spending registered growth of 0.6% m/m and 0.9% m/m respectively in March.
• The core personal consumption expenditure (PCE) price index for April, the Fed's preferred measure of US inflation, likely increased to 3.3% y/y, with the m/m rate remaining unchanged, at 0.3%.
• Durable goods orders and new home sales for April will also be released.
• Initial jobless claims for the week of 23 May, due today, are expected to have ticked up.

• Chicago Fed President Austan Goolsbee has said that he's “not totally convinced” that the current bout of inflation from the Middle East energy shock will prove transitory.
• He repeated that increased investment counting on productivity gains in future is likely to be inflationary.
• “It can lead to increased spending and potentially overheat the economy before the productivity boom has actually arrived. In that case, rates would likely need to rise”, said Goolsbee.
• “The bigger the hype about future productivity, the more rates may need to rise to prevent overheating”, he warned.

• Locally, the focus will be on the SARB's interest rate decision when the MPC meeting concludes today.
• PPI inflation for April is due for release this morning.
• The PPI rose 1.1% m/m in March, to 2.3% y/y.
• PPI inflation is expected to have accelerated noticeably in April as fuel prices spiked.
• The PPI likely jumped around 2.8% m/m, bringing the y/y rate to 3.5% in April.

• Brent crude is up this morning, and up by 60.5% year-to-date.
• The gold price is down this morning, and up by 1.6% year-to-date.

• Brent crude oil is currently at $97.65/bbl; ($94.29/bbl*).
• Gold is at $4388/oz ($4451/oz*).
• SA CDS 135bps*, Brazil 120bps* and Turkey 245bps*.
• Yields: US 10yr at 4.48%*, German bund at 2.99%*, SA 10-year generic at 8.65%*, SA's R2035 at 8.47%*.

* Denotes yesterday's close.

Key events and data:

• 11h30: SA PPI (April)
• 14h30: US personal income and spending, core PCE deflator, durable goods orders (April), initial jobless claims (23 May)
• 15h00: SA SARB interest rate decision – 25 bps hike expected
• 16h00: US new home sales (April)

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