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The SA Daily 17 January 2018

Don't infer rand or bond weakness on Fed hikes

  • The Fed’s hiking cycle has seen UST 10-yr yields increase, resulting in curve-flattening; and, US real interest rates too have been rising. However, the EMBI spread has been narrowing due to strong growth expectations and higher commodity prices.
  • Regarding the likely upcoming Fed hikes, one should be wary of assuming rand weakness and, by implication, bond weakness. At the time of the last two Fed hikes, the dollar depreciated, implying that, perhaps, in the short term, the market had priced too much into the dollar and US bonds — which resulted in an unwinding of positions.
  • Longer term, the 2004 Fed hiking cycle would suggest that if further Fed hikes coincided with higher growth expectations (especially in EM, and commodities in particular), i.e. a narrowing of the EMBI spread, then South African local markets won’t necessarily be affected adversely by Fed action.
  • Of course, South Africa faces more challenges now, especially in the fiscal space, than in 2004, but an improved EM growth and commodity outlook, compared to six months ago, is likely to buffer South Africa against US rate hikes.

For chart of the day on "US bond yields andEMBI spreads", please see graph further down in email body.

Daily commentary

Rand view: The rand has risen to its highest level against the dollar since July 2015 as it crossed crucial technical points and spurred offshore buying interest. However, the USDZAR is weaker this morning as the dollar rebounds from three-year lows, after having slid on tighter monetary expectations from other central banks. We watch the euro zone CPI forecast for December today, as rising inflation would lead markets to believe that the euro zone might signal a pull-back in the current asset buying — which would not bode well for the dollar.

The rand is currently below 12.30 against the dollar, as markets are still awaiting news around President Zuma. Also crucial for the rand this week will be the SARB MPC meeting tomorrow. We believe that while the SARB is unlikely to cut rates, real rates at current levels would support the rand at the margin.

SA yesterday

Seven MPC members of the SARB effective 19 Feb: the SARB has appointed Ms Fundi Tshazibana as the official seventh member of the MPC deciding on rates, meaning that the Governor no longer has a tie-breaker vote. Fundi was previously Head of the Economic Policy and Forecasting Division, and Deputy Director General at National Treasury. Responsibilities included: compiling the economic outlook which informed the Budget. Her other experience includes public policy analysis at the IMF and NERSA.

Mining production for November has surprised to the upside at 6.5% y/y, from 5.2% y/y, and above expectations of 5.1% y/y. The recent uptick in commodity prices should bode well for mining production.

SA today: retail sales for November: Bloomberg consensus is for a slight uptick in retail sales to 3.8% y/y, from October’s 3.2% y/y. Retail sales growth may also remain supported in December given that it’s a seasonally high-selling month for most retail outlets.

UK headline and core inflation falls for the first time in six months: headline came in at 3.0% y/y, below November’s 3.1%, and core inflation came in at 2.5% y/y, below November’s 2.7% y/y. This could be the start of the downward trend the BOE foresees. Since the numbers were close to consensus, it is hard to tell if inflation has peaked yet.

On our radar

  • Fed speech: market looking for clues on the number of interest rate hikes.
  • Eurozone inflation forecast for December today: these numbers will be watched for clues to monetary policy by each respective country.
  • China’s Q4:17 GDP on Thursday: we monitor China’s growth for clues to any signs of a slowdown. This would pose a risk to SA’s exports and, potentially, the rand.
  • SARB MPC meeting on Thursday: in the very near term, the SARB might be reluctant to cut interest rates given the prevailing fiscal and credit rating risks to the rand 

Latest research publications:

Africa Flash Note: Nigeria: inflation surprises to the downside as the MPC is unlikely to meet this month by Ayomide Mejabi (16 January 2018)

African Sovereign Eurobond Weekly: African Eurobonds: No changes in overall composition of the portfolio by Dmitry Shishkin (15 January 2018)

SA Macroeconomics: Macro Weekly by Elna Moolman (15 January 2018)

Credit Weekly: Repo rate cuts expected by Robyn MacLennan, Steffen Kriel and Varushka Singh (12 January 2018)

SA Macroeconomics: 2018 SA economic outlook by Elna Moolman (11 January 2018)

SA Macroeconomics: Rand outlook by Elna Moolman (10 January 2018)

Credit Special Report: Eskom update by Steffen Kriel (10 January 2018)

SA Macroeconomics: Economic Insight by Elna Moolman (9 January 2018)

SA Economics: Dec vehicle sales -2.4% y/y by Thanda Sithole (9 January 2018)


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