12 Dec

Daily Market Report 12 Dec

A Positive Combination of Data Has Boosted Sentiment on SA Markets

Talking Points

  • SA: Healthcare professionals reject the NHI in its current form, calling for reforms.
  • SA: G20 prioritizes strengthening global development banks.
  • SA: High Court denies ICTSI’s bid to block Durban port tender review.
  • CH: China loosens monetary policy for the first time in 14 years to counter slowing growth.

Economic Updates

South Africa

  • Consumer Price Inflation:
    • November CPI: Rose slightly to 2.9% y/y (October: +2.8% y/y), below the Bloomberg consensus of +3.1% y/y.
    • Monthly CPI: Unchanged at 0.0% m/m (October: -0.1% m/m).
    • Key Drivers:
      • Fuel deflation slowed to -13.6% y/y (October: -19.1% y/y) due to rising Brent crude prices amidst Middle East tensions.
      • Food inflation eased further to +1.6% y/y (October: +2.8% y/y), offsetting fuel-related pressures.
    • Outlook:
      • While inflation will likely tick higher in December, the low base allows the SARB flexibility for further rate cuts.
      • Expectations remain for three 25bp cuts in 2024, provided the SARB maintains its conservative stance.
  • Retail Sales:
    • October growth surged to +6.3% y/y (September: +2.0% y/y), marking the strongest expansion since July 2022.
    • Drivers:
      • Lower inflation,
      • Broadly stronger ZAR,
      • Two-pot retirement withdrawals,
      • SARB’s easing cycle.
    • Challenges: Tight monetary conditions and structural unemployment remain limiting factors.

 Global Developments

  • China:
    • Loosening monetary policy to address its economic slowdown and restore confidence in key industries.
    • Expected to stabilize commodity demand, indirectly benefiting SA’s mining exports.
  • US Inflation:
    • November CPI aligned with expectations, rising +2.7% y/y (October: +2.6% y/y).
    • Core Inflation: Held steady at +3.3% y/y, reflecting sticky price pressures.
    • Impact: Market expectations solidify around a 25bp Fed rate cut next week, supporting high-yielding currencies like the ZAR.

 Market Insight – FX

 ZAR Performance

  • Spot Rate: 17.6700; Range: 17.48/17.8665.
  • Drivers:
    • A positive CPI-retail sales combination signals economic resilience.
    • Supportive terms of trade, boosted by higher precious metals prices, enhance ZAR appeal.
    • Global risk sentiment improves with China’s stimulus measures and expected Fed easing.
  • Outlook:
    • A break below 17.6700 (61.8% Fibonacci retracement) opens the door to 17.4800.
    • Upside moves likely capped near 17.8665, barring unforeseen shifts in US inflation dynamics or domestic fiscal shocks.

 Global FX Trends

  • USD Index:
    • Held firm near 107.00, supported by higher Treasury yields.
    • Focus shifts to PPI data today for forward guidance on inflationary trends.
  • EUR/USD:
    • Tested below 1.0500; ECB expected to cut rates by 25bp today.
    • Statement insights on economic conditions will influence near-term sentiment.
  • GBP/USD:
    • Bears pushed the pair towards 1.2700, but support held.
    • Trades firmer at 1.2750, awaiting BoE’s guidance on inflation and fiscal risks.
  • USD/JPY:
    • Consolidates near 152.45; markets await BoJ’s rate decision next week.
    • Resistance at 152.79 remains intact for now.

Market Insight – Fixed Income

South African Bonds

  • Current Trends:
    • Bonds largely unchanged despite supportive ZAR and CPI data.
    • Market appears well-positioned for lower inflation and SARB rate cuts.
  • FRAs:
    • 3X6 Spread: -37bp, signaling another 25bp cut in January.
    • 6X9 Spread: -71bp, reflecting expectations for two cuts in H1 2025.
    • 12X15 Spread: -84bp, indicating at least three rate cuts by 2025, contingent on sustained ZAR strength and subdued inflation.
  • Key Focus:
    • Pipeline Inflation: Today’s PPI data will confirm whether consumer price pressures remain under control.
    • SARB’s conservative bias ensures inflation risks are well-managed, supporting bond market stability.

 Global Bond Markets

  • US Treasuries:
    • Yields rose marginally ahead of today’s PPI data and ongoing Treasury auctions.
    • CPI data supports the case for a Fed rate cut, which could ease yield pressures further.
  • Eurozone Bonds:
    • German 10-year yield stabilized at 2.11%, with ECB policy in focus.
    • French and Italian bond spreads narrowed as political tensions eased slightly.

Strategic Insights

Short-Term Focus

  1. Domestic Data:
    • Softer CPI and robust retail sales underpin ZAR resilience.
    • PPI data to validate pipeline price trends.
  2. Global Factors:
    • US PPI and Fed’s policy next week remain critical for ZAR’s broader direction.
    • ECB’s dovish guidance could pressure the euro, indirectly supporting the USD.

Long-Term Outlook

  1. GNU Reforms:
    • Execution of structural reforms will be pivotal in sustaining SA’s economic recovery and ZAR appreciation.
  2. Global Inflation Trends:
    • China’s policy easing and disinflationary forces could offer tailwinds for EM assets in 2024.

 

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