Market Wrap

Markets @ Bidvest Bank - 18 August 2014

By Bidvest Bank
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• The New York Federal Reserve said its Empire state general business conditions index fell to 14.69 this month from 25.60 in July. The number has weighed on US growth expectations and is helping the general rally in bonds.
• Some inflows trickling back into US high yield bond market will allay some fears that the bottom is falling out, although some $700m inflow in the week to Wed is small in comparison with the previous week’s $7bn outflow. Insiders expect little strong issuance and demand action for the remainder of August, citing the holiday period as a dampener.
• Quiet on the data front today with only the NAHB housing market index for Aug of any real note. Investors eyeing out a busy week though with US CPI on Tue, FOMC minutes on Wed, and Fed’s Jackson Hole event starting Thu.
• The big story overnight is Rightmove’s home asking price index which fell a chunky 2.9% m/m nationwide and 5.9% in London. These are the biggest monthly drops in the index’ 10 year+ history. UK policy makers will take note and this will further dent expectations of gradual BoE rate normalisation. The UK cycle is heavily property influenced so data like this comes as a major red flag for business conditions heading into 2015.
• UK CPI for July on Tue is in focus, and then strong attention will be on the BoE minutes on Wed. In last week’s inflation report, the BoE put strong emphasis on what remains subdued wage growth and it will be interesting to note how this affects the board’s voting pattern going forward.
• Revised wage growth data released by the Ministry of Finance shows overall monthly earnings rose 1.0% y/y in June vs. 0.6% y/y in May, accelerating for a fourth consecutive month and coming in much more robust than preliminary estimates of 0.4% y/y.  Real wages, however, contracted 3.2% y/y, suggesting that the wage growth momentum required to fuel inflation remains lacking.
• Chinese house prices fell in 67 of the 70 major cities in July, the most since January 2011. Tight mortgage lending has exerted a drag on the housing market and has hindered overall GDP growth. Prospects for an imminent improvement in the housing market are lacking, rising expectations for govt. to implement stimulatory measures notwithstanding, as credit remains tight.
• Political tensions in Italy’s parliament are running high as PM Renzi looks to de-shackle Italy’s decision making process through the upper house powers being drastically reduced. Italy’s Senate passed a first reading of the bill on Friday which Renzi is targeting as a prerequisite for the govt to be allowed to make the necessary structural reforms.
• Last week saw the Bank of France estimate that the French economy would grow by around 0.2% in Q3. This comes as France is expected to revise down its official forecasts for growth in 2014 to just 0.7%.
• A sign that internal demand is starting to recover in some peripheral economies was seen in Portugal as the trade data swung into a more significant deficit. Cessation of oil refinery exports has weighed on data.
Developments worth noting:
• The week ahead sees a busy international calendar, with US and UK CPI first up tomorrow before the BoE minutes, Fed minutes, preliminary manufacturing PMIs from various major regions and then the Jackson Hole meeting take place through the remainder of the week. In the run up to these we are likely to see a rather quiet session today but this does nevertheless allow for a look into these upcoming events. BoE rhetoric will be important to note after its latest inflation report put added emphasis on wage growth. Should we see a moderation on the Jul CPI reading out of the UK as expected by consensus, this may very well play into the theme of rate expectations being briefly scaled back.
• It is not just the UK which is seeing a pullback in rate expectations, but the US and Eurozone too, and this has been significant in allowing for a rebound in risk taking as the view on imminent monetary policy tightening abates. Questions are being asked around the strength of the US recovery after the latest round of retail sales data and payrolls data confirming a lack of wage growth, and it will be relevant to note how the Fed interprets such data in context of its still caution policy stance come the minutes on Wed. The Jackson Hole meeting is meanwhile set to kick off from Thu. The key focus of the symposium is labour market dynamics, with both Fed chair Yellen and ECB Pres Draghi due to be speaking there.
• Domestically, fundamentals continue to deteriorate. At the centre of these weakening fundamentals we have very sluggish and disappointing growth and in turn a negative drag on the fiscus, while another angle is that of the weak growth limiting the degree to which the SARB raises rates to bring down inflation. Many are likely to believe there will be breathing room for the SARB as CPI begins to moderate through the second half of the year, a glimpse into which will be provided by the latest Jul reading on Wed. However, the fact is that real rates are still deeply negative and this will remain a point of concern for the savings base.
Data/Events for the next week:
• Locally the only major data release is that of the Jul CPI number where consensus of 6.4% would mark a slowdown from the prior 6.6% y/y (economist forecasts range from 6.1% to 6.5%, BBG). Note that core inflation was last at 5.6% y/y, and given a SARB that has forecast core inflation to average 5.6% in 2014 its view on second-round inflationary pressures will not be hugely threatened. Heading into Q3, CPI is expected to gradually moderate yet remain buoyed at around the upper bound of the target band.
• UK and US CPI readings tomorrow will be in focus prior to their respective central bank meeting minutes the next day, especially considering how much emphasis remains on trying to time potential policy normalisation in these economies. These events will be followed by preliminary manufacturing PMIs and the Jackson Hole meeting on Thu.

Trade Weighted ZAR:

• The trade-weighted rand posted a rebound last week, its month-to-date gains rising to 0.9% from 0.4% a week prevoiusly, even when accounting for the profit-taking that took place on Fri. Through the week, it tested its best levels since Jul 25. The rally forms part of a broad rebound that is being experienced by risk assets, firstly as the geopolitical risks out of the Ukraine become more fully priced in and secondly as we have seen a firm retreat across offshore rate expectations, or in other words a less immediate view on the timing of potential rate hikes from the likes of the BoE and Fed.
• The latter is significant as without the support of more dovish central bank talk from abroad, the rand would find itself more exposed to weakening domestic fundamentals. In reality, the gains made by the trade-weighted rand have not been all that impressive considering it is coming off still very weak levels, trading in the red year-to-date. Locally, disappointing growth presents a risk to government’s fiscal position and the outlook on interest rates, while equally the view of slowing growth offshore is one that SA cannot afford given its already high cumulative trade and current account deficits. Foreign portfolio flows are typically required to help finance such deficits but have deteriorated rapidly in recent months.
• Looking ahead, we are not ruling out the potential for further rand resilience in the short term but continue to warn of the rand’s tendency to weaken faster than it strengthens, with much reliant on global risk conditions. Rand volatility is a sure bet and although further losses are in store once Fed/BoE rate hikes become a more imminent reality, for now the rand is being offered a degree of shielding.

Bidvest Bank Limited, 19 Ameshoff Street, Braamfontein, Johannesburg, 2001 (“Bidvest Bank”). The information furnished in this report (“this report”), which information may include opinions, estimates, indicative rates, terms, price quotations, and projections, reflects the current view of the author(s) and prevailing market conditions, which view and conditions are subject to change without notice. The information herein has been obtained from various sources, the accuracy and completeness of which Bidvest Bank does not guarantee. This report does not constitute advice or any recommendation, and independent tax, accounting, legal and financial advice should be sought, should any party seek to place any reliance on the information contained herein. This report has been prepared for general information purposes only and may not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments or to participate in any particular trading strategy in any jurisdiction. Any additional information relative to any financial instruments and financial products reviewed in this report is available upon request. All rights are reserved. Any unauthorised use or disclosure of this report is prohibited