13 Dec

Daily Market Report 13 Dec

ZAR’s Performance Supported by Fundamentals

 

Talking Points

  • SA: Transnet awards a 25-year contract to FFS Tank Terminals for Cape Town’s port terminal.
  • SA: Harvard study suggests deregulation of SA’s informal private sector to stimulate growth.
  • SA: Producer prices remain in deflationary territory, while temporary election-related job losses weigh on employment.
  • EZ: ECB lowers interest rates to 3.0%, signaling more easing ahead.

Economic Highlights

South Africa

  • Producer Price Index (PPI):

    • November 2024 PPI registered -0.1% y/y, consistent with October’s deflationary trend.
    • Month-on-month, prices were flat (0.0% m/m), signaling subdued producer inflation.
    • Drivers:
      • Persistent deflation in manufacturing goods.
      • Rising fuel prices and accelerating intermediate goods inflation hint at potential long-term pressures.
    • Outlook:
      • Deflation supports the case for three more 25bp rate cuts in 2025, contingent on stable fuel and food prices.
      • Provides a window to lower the inflation target, aligning with SARB’s conservative stance.

  • Labour Market:

    • Employment fell by 133,000 jobs q/q, driven by a 129,418 decline in government positions, as temporary election jobs ended.
    • Total annual employment declined by 294,000, reflecting structural challenges.
    • Key Concerns: Persistent unemployment and weak job creation despite a growing population.

  • Private Sector Involvement:

    • Transnet’s contract with FFS Tank Terminals marks progress in leveraging private sector expertise.
    • Expansion of private sector roles in SOEs like Eskom has yielded positive results (e.g., ending load-shedding).
    • Next Steps: Fiscal reform and efficient government spending are crucial for sustainable growth.

Eurozone

  • ECB Rate Cut:
    • ECB cut rates by 25bps to 3.0%, citing slowing growth and softened inflation.
    • Implications:
      • Further easing expected in 2025 to support economic recovery.
      • Pressure on EUR as the Fed maintains a comparatively conservative stance.

Global Developments

  • US Treasury Yields:
    • Yields rose after mixed data on jobless claims and producer price inflation.
    • Market anticipates a 25bp Fed rate cut next week, with a pause in January likely.

Market Insight – FX

ZAR Performance

  • Spot Rate: 17.7900; Range: 17.6050/9050.

  • Drivers:

    • Deflationary PPI: Reinforces SARB’s room to cut rates, supporting ZAR sentiment.
    • Positive Reforms: Incremental private sector involvement in SOEs boosts confidence.
    • Global Tailwinds: Fed easing expectations and China’s stimulus measures improve sentiment toward EM currencies.

  • Outlook:

    • ZAR could test the upper limit of 17.9050 if global sentiment turns risk-averse or domestic data disappoints.
    • Sustained reform momentum could drive ZAR closer to 17.6050 or beyond in H1 2025.

Global FX Trends

  • USD Index:

    • Hovered around 107.00, supported by expectations of cautious Fed rate cuts.
    • Fed’s decision next week will set the tone for USD performance into early 2025.

  • EUR/USD:

    • Dipped to 1.0460 post-ECB rate cut, with sentiment turning bearish.
    • Focus shifts to whether ECB signals deeper easing in early 2025.

  • GBP/USD:

    • Trades below 1.2700, with profit-taking and cautious sentiment dominating.
    • UK economic data and BoE’s December 19 meeting will guide near-term direction.

  • USD/JPY:

    • Consolidated around 152.45 as speculation mounts over a potential BoJ rate hike next week.

Market Insight – Fixed Income

South African Bonds

  • Current Trends:

    • PPI deflation and ZAR resilience have bolstered demand for SA bonds.
    • ILB Auction Today: Featuring I2031, I2038, and I2050, the results will reflect investor sentiment following softer inflation data.

  • FRAs:

    • 3X6 Spread: -40bp, signaling another 25bp rate cut in January.
    • 6X9 Spread: -73bp, reflecting expectations for three cuts in H1 2025.
    • 12X15 Spread: Consolidated around -90bp, hinting at three or four rate cuts in 2025 if ZAR strength persists.

  • Key Focus:

    • ZAR remains a barometer for broader market sentiment into the year-end.
    • Global developments, including Fed and ECB policies, will play a critical role in shaping bond market dynamics.

Global Bond Markets

  • US Treasuries:

    • Yields rose slightly but remained stable ahead of next week’s Fed meeting.
    • Strong auction demand for shorter maturities contrasts with weaker interest in 30-year bonds.

  • Eurozone Bonds:

    • German Bund yields eased post-ECB rate cut, reflecting expectations of further easing.
    • Italian and French yields narrowed, signaling optimism despite political and economic uncertainties.

Strategic Insights

Short-Term Focus

  1. Domestic Data:

    • PPI underscores disinflationary pressures; CPI and retail strength support ZAR resilience.
    • Incremental reforms (e.g., Transnet privatization) signal a positive trajectory but require scaling.

  2. Global Factors:

    • Fed’s rate decision next week will be pivotal.
    • ECB easing and China’s economic policies could indirectly benefit SA’s terms of trade.

Long-Term Outlook

  1. Reforms & Fiscal Discipline:

    • SA must accelerate SOE privatization and reduce inefficiencies to sustain economic gains.
    • Fiscal consolidation remains critical to avoid rating downgrades and attract investment.

  2. Global Inflation Trends:

    • China’s stimulus could stabilize commodity prices, indirectly aiding SA exports.
    • Eurozone challenges may enhance ZAR’s appeal as a high-yielding alternative.

 

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