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Markets @ Bidvest Bank - 14 March 2016

By Bidvest Bank
14-03-2016
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Fundamentals:

US:

  • The US card was capped off with the low tier import and export prices release, with both the annual readings contracting for their eight and nine months respectively. On the import price side, deflation remains an oil-dominated story with the ex-petroleum figure virtually flat while oil plunged another 4%. A subsequent stabilization and rebound in oil prices plus more favourable base effects should however ensure that the headline figure continues becoming less contractionary over coming months, affirming Fed expectations for current relatively low levels of inflation to be transitory.

  • There are no major releases on the US card at the start of the week, but the lead-up to the March FOMC will be presaged by top tier data in the form of the February retail sales, CPI and industrial production figures. Topside surprise risks loom large as the market had gotten excessively pessimistic on the growth outlook in recent months. The Citi US economic data surprise index has already rebounded to highs for the year in an indication of this. The market meanwhile continues to under-price Fed hike risk, with overnight index swaps implying the Fed funds rate at 1.00% for this year whereas the median Fed guidance is closer to 1.50%.  

     

     

     

     

     

     

UK:

  • It will be a slow start to the week for the local card, but top tier data in the form of the latest employment figures looms with the Chancellor’s budget speech and the BoE MPC to contend with in the latter half of the week. Chancellor Osborne has already warned of putting in place austerity measures. Overall, the chancellor is likely to miss his target of crimping debt to GDP levels given a small borrowing overshoot and smaller cash size of the economy.

  • Cable extended post-ECB gains but faces tougher resistance at the 1.44 handle. The area from here back up to 1.46 February highs could attract fresh short interest as Brexit risk and a lower for longer BoE outlook keep secular selling bias on sterling entrenched.

 

 

 

 

 

 

Asia:

  • The latest talk ahead of the BoJ MPC tomorrow is that the Bank is considering exempting short-term money market funds from the impact of negative rates. This highlights the frictions being caused by this policy, which is likely to leave the BoJ no choice but to keep policy on hold with consensus eyeing April or June as more likely meetings for an expansion of easing policies.

  • Chinese economic data over the weekend was on the soft side, but with the proviso of Lunar New Year effects still being a factor. More attention will be on PBOC Gov. Zhou’s statement that no major stimulus is needed to support growth, which could dent recent commodity and EM rallies.

     

     

EU:

  • ECB speakers are already walking back Pres. Draghi’s indication that rates won’t go more negative from here, and one can expect to see more damage control over coming sessions. The transmission of the latest ECB measures are primarily in the credit space for now, but the market will be eyeing how bonds react.

  • The initial reaction on bonds has been to price in the prospect of higher inflation levels, with German’s 10yr breakeven rate climbing to the highest level since January in the wake of oil price gains and stimulus bets.

  • Euro-zone industrial production holds focus this morning. A solid performance from the likes of Germany, Italy and France suggest that a bounce at the start of the year is likely.

     

    Developments worth noting:

     

  • It will be an important week for SA and many other EM’s that have experienced a reasonably decent recovery from the financial market volatility experienced at the start of the year. The week ahead is peppered with key central bank decisions including the FOMC, the BoE and lest we forget the SARB’s decision and statement. Given that real interest rates and consumptive dynamics play such an important role in the way that currencies operate over time, these decisions are indeed very relevant to determining longer term direction. And it is clear that the ZAR has been trading cautiously through the past week, ahead of the SARB’s decision which appears to be a very close call.

  • What is clear is that another hike by the Fed which could be announced on Wednesday would raise the pressure on the SARB to follow suit in order to keep the differential intact. Furthermore, the rise in interest rates is part of the process of rebalancing the economy. Following the recent retail sales and trade data one could argue that there is still plenty of rebalancing to do. Inflation has disappointed and risen more than anticipated and here too, the SARB will feel obliged to act so as to ensure that it retains its credibility and further moves to ensure that their efforts to restore positive real interest rates remain intact.

  • The counter argument that the economy is weak and rates should not be lifted does not necessarily hold in that the sectors that are weak are those that have been influenced by drought, soft commodity prices and tepid external demand, none of which can be cured through keeping rates low. On the flip side, retail sales data has surprised to the topside and whilst the data that is scheduled for release could start to show some softening coming through, the reality is that retail sales have benefitted massively from the low interest rate environment for many years and are likely to be resilient for a while longer.

Data/Events for the week:

  • Locally, apart from Thursday’s SARB MPC event risk, the latest retail sales data for January comes due on Wednesday. The trend in annual sales growth has been higher since troughs of -0.8% y/y in June 2014, which may be the result of a large govt. wage bill and previously moderating implied retail inflation.

  • The BoJ, Fed and BoE have their respective policy meetings scheduled over the next few days. BoJ and BoE policy expectations for this year remain skewed to the dovish side, whilst a recent string of positive US economic data allaying US growth fears should provide the Fed with reason to maintain its view of further rate hikes being on the table.

  • Note that this week’s Fed meeting will be the first this year to be accompanied with a summary of economic projections and a press conference by the Chair. Fed funds futures around the June 15 FOMC are now pricing in a 50% probability for a 25bp rate hike up from 45% priced in on March 10 and a probability below 10% seen a month ago.


Trade Weighted ZAR:

  • Despite last week seeing sporadic trading at times, the rand closed flat on a trade-weighted basis in the week-ended March 11. That said, the currency’s performance was a mixed bag vs. its trade-weighted peers as the rand strengthened by around 0.6% vs. the CNY, JPY and USD. This was nevertheless countered by weakness against the GBP and EUR as the latter advanced 1.4% vs. the greenback on the week. Markets had initially placed overwhelming focus on ECB Pres. Draghi’s indication at the MPC presser that no further cuts to interest rates would be forthcoming, although a reappraisal since has seen the currency partially retreat from nearly one-month highs achieved on Thursday.

  • Pulling back the lens reveals that the trade-weighted rand has strengthened by over 1% for the month so far, and is around 4.4% firmer since the previous SARB MPC meeting on January 28. The SARB rate decision this week will no doubt be a close one with median expectations, as per the 24 analysts polled by Bloomberg, split evenly between a hold on the repo rate, at 6.75% or a 25bpts hike.

  • While the rand has recovered recently, the effects of currency depreciation are still expected to filter through to headline inflation with a six to twelve month lag. Additionally, SA’s inflation profile remains elevated, with the SARB itself forecasting CPI to be outside of the upper bound of its target band as far out as 2017. Proponents of a neutral policy outcome would cite particularly grim growth prospects and the bulk of major central banks turning more accommodative, as supportive factors. On balance, the rand could find some support off the back of another interest rate hike this week as the increasingly attractive yield differential has the potential to prop up carry trade appeal.



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