Daily Market Report 16 Oct
Domestic Developments:
- SARB’s Monetary Policy Review: The SARB’s recent review didn’t generate much market movement despite interesting forecasts suggesting that inflation could fall below the midpoint of 4.5% by December and approach the 3.0% mark. This would create space for the repo rate to drop to around 7.0% by 2025, aligning with expectations of easing interest rates.
- Retail Sales Data: Focus shifts to retail sales, an important early indicator of economic activity. Retail growth has slowed, and while still positive, the sector faces headwinds. However, the post-GNU optimism, stable ZAR, and potential SARB rate cuts are expected to support further growth.
- Infrastructure and Energy Challenges: Eskom’s push to change its electricity pricing model and Infrastructure SA’s R600mn construction bid aim to address ongoing infrastructure issues. These efforts are crucial for long-term economic recovery, but challenges in the energy sector remain a drag on overall growth.
China’s Stimulus Uncertainty:
- Investors remain cautious as China’s fiscal stimulus efforts have yet to provide clear direction. China is South Africa’s largest trading partner, and any signs of economic weakness in China could negatively impact South Africa’s export channels and trade balance, thus weighing on the ZAR.
- AUD and NZD currencies, which are highly sensitive to Chinese economic data, have also come under pressure, reflecting the broader uncertainty surrounding China’s growth outlook.
Global Monetary Policy:
- ECB Rate Cut Expectations: The European Central Bank (ECB) is widely expected to cut its deposit rate by 25 basis points to 3.25%. This marks the ECB’s ongoing response to weakening economic activity in the Eurozone. Inflation in the Eurozone is now below 2% for the first time since 2021, further justifying the need for monetary easing.
- US Retail Sales and Fed Rate Outlook: US retail sales data will be another key focus. Market consensus expects a modest increase of 0.2%, but any surprise could influence expectations around the Fed’s rate path. While the market is already pricing in a total of 150bp in rate cuts by 2025, weaker retail sales data could accelerate these expectations, potentially providing some relief to the ZAR if the USD weakens.
ZAR FX Market Insights:
- The ZAR remains in a consolidation phase, with 17.6750 acting as resistance for the USD-ZAR pair. Despite external factors like China’s uncertain stimulus, the ZAR has found support from exporters and investors viewing South Africa as undervalued. This discount has provided some insulation from more aggressive sell-offs.
- Key Trading Levels: Support for the ZAR is seen around 17.3500, which should limit downside moves. A break of the 17.6750 resistance would be needed for the USD-ZAR to move significantly higher, but the ZAR’s current resilience suggests this will be a challenging level to surpass without a major catalyst.
Fixed Income Market:
- South African Bond Yields: Bond yields remain elevated but have stabilized slightly as investors digest the SARB’s forecast for lower inflation and the expected easing of interest rates. The spread between SA bonds and US Treasuries has widened slightly, with SA bonds continuing to offer attractive yields for investors.
- Long-Term Bond Prospects: Despite recent gains in equity markets driven by rate cut expectations, valuations are becoming stretched, making bonds a more attractive option for risk-averse investors. Any further economic data pointing to weakness in key markets like the US could shift investor attention back to bonds.
Global Economic Outlook:
Oil Prices and US Dollar: Oil prices have pulled back following assurances from Israel that it will not target Iranian oil facilities. This has eased some upward pressure on inflation, providing more room for central banks like the Fed and ECB to cut rates. A softer USD, driven by lower oil prices and easing inflation expectations, could support a stronger ZAR in the medium term.