Daily Market Report – 10 June 2025

South Africa: S&P Offers a Glimmer of Hope, but Risks Loom

1. S&P Ratings View

• S&P’s Ravi Bhatia notes that SA’s debt trajectory could improve if the government delivers on:
  • Fiscal consolidation
  • Primary budget surplus
  • Structural reforms
• However, GDP growth forecast was trimmed from 1.6% to 1.3% for 2025, which still seems optimistic given weak local indicators and external fragilities.

2. Manufacturing Sector Woes

• March production: -0.8% y/y, less bad than Feb’s -3.2%, but still negative.
• Q1 2025 manufacturing output shrank -2.4% y/y, a direct drag on GDP.
• April consensus: -4.5% y/y, reflecting poor competitiveness, infrastructure constraints, and trade friction.
• These persistent declines compound revenue challenges and signal minimal upside for fiscal buffers.

3. Fiscal Framework Debate

• Parliamentary debate continues this week, but implementation remains the key risk.
• Gross fixed capital formation sits at ~14% of GDP, well below National Development Plan targets and investment-grade expectations.
• Policy path over the past two decades — bloated bureaucracy + insufficient capital investment — explains weak job creation and deteriorating investor confidence.

FX Market Insight: Trade Talks Hold the Key

1. USD-ZAR Technicals and Trends

• Spot: 17.7250, with intraday range: 17.60 – 18.10
• The pair is consolidating just above the 76.4% fibo level (17.70), a technical support area.
• No convincing reversal patterns yet, although weekly chart hints at slowing downside momentum.

2. Trade Negotiations Drive Sentiment

• US-China talks show constructive tone, with potential for:
  • Tariff de-escalation
  • Improved global risk sentiment
  • Support for Wall Street and emerging markets
• If talks succeed:
  • ZAR could strengthen further
  • Enhanced demand for SA exports
  • Improved current account dynamics

3. USD Outlook

• DXY modestly higher in Asia (+0.15%) but lacking strong catalysts.
• Treasury yields remain subdued, limiting upside for the dollar.
• A trade breakthrough would reduce US inflation risk and increase Fed easing expectations, weakening the USD further.

Fixed Income: Bond Market Looks for Support Amid Soft Data

1. Yield Curve Developments

• SA bond yields nudged higher in thin trade (Pentecost holiday), unwinding part of the prior rally.
• Today’s manufacturing data could pressure yields again if it disappoints.
• Watch: Weekly bond auction will gauge investor confidence amid S&P’s constructive tone.

2. Inflation and Break-even Compression

• Breakeven rates:
  • 5-year: 4%
  • 10-year: below 5%
• SARB alternative inflation targeting (3%) models:
  • 2027 inflation: Projected at 3.0% vs 4.4% under current 4.5% target.
• If adopted, lower inflation targets would anchor bond yields and reduce debt service costs structurally.

FRA Market Overview

• FRA curve is compressing, reflecting modest rate cut expectations.
• SARB likely to wait for clarity on inflation data, especially if manufacturing and GDP figures remain weak.

Global Macro: Yield Creep, Trade Diplomacy, ECB Signals

1. Trade & Dollar Dynamics

• US-China trade talks: Second day of discussions, focus on export controls.
• DXY stabilising, but upside capped by low yields and trade uncertainty.
• A breakthrough would boost EM FX, including ZAR, MXN, and TRY.

2. ECB Commentary: Nearing the End of Cuts

• ECB signalled that further rate cuts may pause, after a 25bp cut last week.
• German 10Y bund yield: 2.585%, rising modestly.
• Eurozone yield curves steepening slightly, reflecting fiscal pressures and increased debt issuance (e.g., French volatility post-election).

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