11 Dec

Daily Market Report 11 Dec

Inflation Domestically and in the US to Guide Currency Direction Today

Talking Points

  • SA: Maputo port closure costs SA R10mn daily, according to the Road Freight Association.
  • SA: Business confidence climbs to a nine-year high, supported by tourism and precious metals.
  • SA: Climate change remains a priority on the G20 agenda.
  • Global: Israel escalates its military actions in Syria, raising geopolitical tensions.

Economic Updates

South Africa

  • Mining Production:
    • Increased 1.4% y/y in October (Sept: +4.9% y/y).
    • Long-term underperformance persists despite nine months without load-shedding.
    • Suggests GNU policies need further reform to unlock sector potential.
  • Manufacturing Output:
    • Rebounded +0.8% y/y in October (Sept: -0.8% y/y).
    • Exceeded consensus expectations (+0.3% y/y) but remains weak.
    • Deindustrialization continues due to a lack of investment and structural inefficiencies.
  • Retail Sales (Data due today):
    • September marked the 7th consecutive month of growth, supported by:
      • Lower inflation,
      • A stronger ZAR,
      • SARB rate cuts,
      • Two-pot retirement withdrawals.
    • Consensus forecast: Retail growth improves to 2.0% y/y, reflecting green shoots rather than wholesale recovery.
  • Consumer Price Inflation:
    • Headline inflation fell to 2.8% y/y in October (Sept: +3.8% y/y), driven by:
      • Fuel deflation (-19.1% y/y).
      • Food price slowdown (+2.8% y/y).
    • November forecast: CPI expected to rise to 3.1% y/y, influenced by base effects and fuel price increases.
    • Lower inflation gives SARB scope to maintain a conservative approach with rate cuts aligned with FRA market expectations.

 United States

 October Inflation Recap:

    • Headline CPI rose to 2.6% y/y (Sept: 2.5%), driven by food and transportation costs.
    • Core inflation remained elevated at 3.3% y/y, highlighting persistent price pressures.
    • November forecast: Headline inflation expected to rise to 2.7% y/y, with risks tied to oil prices and geopolitical tensions.

 Market Insight – FX

 ZAR Performance

  • Spot Rate: 17.8000; Range: 17.73/18.0000.
  • Drivers:
    • The ZAR gained on soft US inflation expectations and SARB’s conservative policy stance.
    • ETM’s ZAR sentiment indicator remains positive, supported by strong terms of trade.
    • Potential for SARB rate cuts offers a balance between growth support and maintaining the ZAR’s carry trade appeal.
  • Outlook:
    • A positive CPI print domestically could further strengthen the ZAR.
    • Expectations for a ZAR move toward 17.30/dlr remain intact, contingent on credible GNU reforms.

Global FX Trends

  • USD Index:
    • Anchored at 106.00, awaiting US CPI data.
    • Markets are pricing an 86% chance of a 25bp Fed rate cut next week.
  • EUR/USD:
    • Stabilized above 1.0500; risks lie in a dovish 25bp ECB rate cut tomorrow.
  • GBP/USD:
    • Trading between 1.2762/1.2726, with modest strengthening likely if US CPI surprises to the downside.
  • USD/JPY:
    • Holding below 152.00, capped by exporter offers. Tight ranges expected ahead of US CPI data.

 Market Insight – Fixed Income

 South African Bonds

  • Auction Activity:
    • Bid volumes dropped to a two-month low (R8.02bn, down from R11.93bn last week).
    • Caution prevailed ahead of inflation data and amidst declining yields.
  • Yields:
    • Lower yields, driven by ZAR strength and improved inflation expectations, may limit demand.
    • Resilience in bonds reflects confidence in the SARB’s conservative stance and SA’s narrow current account deficit.
  • Key Focus:
    • Domestic CPI data will shape expectations for the SARB’s January meeting.
    • US inflation and Fed policy guidance will influence global yield trends and indirectly impact SA bonds.

 FRAs

  • Curve Positioning:
    • 3X6 Spread: -35bp, signaling a January rate cut.
    • 6X9 Spread: -67bp, indicating two cuts in H1 2025.
    • 12X15 Spread: -80bp, suggesting three more 25bp cuts next year.

 Global Bond Markets

 US Treasuries

  • Yields rose ahead of this week’s $119bn bond sales, including:
    • $58bn in 3-year notes (yesterday).
    • $39bn in 10-year notes (today).
    • $22bn in 30-year bonds (tomorrow).
  • CPI Data Today:
    • A softer reading could reinforce expectations of a December rate cut, easing yields further.

Eurozone Bonds

  • German 10-Year Yield: Stabilized at 2.11%, with markets awaiting tomorrow’s ECB meeting.
  • ECB Policy Outlook:
    • A 25bp cut is widely anticipated, with guidance critical for setting future rate expectations.

 Key Risks

  • Geopolitical Tensions: Escalating conflicts in the Middle East and policy uncertainties in Europe pose significant risks to global bonds.

 Strategic Insights

Short-Term Focus

  1. CPI Data (SA & US):
    • Key determinant for SARB and Fed policy decisions.
  2. US Treasury Auctions:
    • Impacts global bond yields and USD sentiment.

 Long-Term Outlook

  1. GNU Reforms:
    • Structural reforms critical to sustaining ZAR strength and broader economic recovery.
  2. Global Inflation Trends:
    • Rising geopolitical risks and disinflationary pressures from China will shape global monetary policies in 2024.

 

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