18 Dec

Daily Market Report 18 Dec

 

FOMC Decision Takes Center Stage

 

Talking Points

  • SA: Revised leading indicator points to economic green shoots despite structural challenges.
  • SA: President Ramaphosa calls for the B20 to reconsider working with corruption-tainted McKinsey.
  • SA: Rand Water crisis intensifies, triggering calls for a national intervention.
  • US: Federal Reserve set to announce an anticipated 25bp rate cut today, with a cautious outlook.

Economic Overview

South Africa

  • Leading Indicator:

    • Revised SARB leading indicator improved to 114.0 points in October (highest since Dec 2022).
    • Drivers include:
      • GNU optimism and falling inflation.
      • Stable ZAR and easing interest rate expectations.
      • Absence of load-shedding, fostering a recovery in business sentiment.
    • Outlook remains contingent on fiscal reforms and addressing looming liabilities (e.g., water crises, SOE inefficiencies).

  • Structural Risks:

    • Despite macroeconomic improvements, infrastructure challenges like the Rand Water crisis expose unfunded liabilities that could strain fiscal resources.
    • Fiscal sustainability remains precarious unless GNU-led reforms tackle inefficiencies and boost gross fixed capital formation (GFCF).

Global – FOMC Decision

  • Fed Rate Cut Expectations:

    • The Federal Reserve is widely expected to cut rates by 25bp, lowering the Fed Funds range to 4.25%-4.50%.
    • Recent data highlights the Fed’s dilemma:
      • Weak Industrial Output supports easing.
      • Robust Retail Sales suggests economic resilience, tempering urgency for further cuts.
    • Markets anticipate a hawkish tone, emphasizing inflation risks and cautious rate trajectories.

  • Fed’s Balancing Act:

    • Inflation has moderated but remains above the 2% target, requiring vigilance.
    • The incoming Trump administration’s pro-growth fiscal policies may create upside inflation risks.
    • Easing today could ease political pressure, with Powell aiming to maintain Fed credibility.

  • Global Implications:

    • Easing by the Fed could bolster other central banks’ policy space.
    • SARB may consider further cuts in March 2025, assuming a benign inflation trajectory and fiscal clarity from the February budget.

Market Insight – FX

ZAR Analysis

  • Spot Rate: 18.0900; Range: 17.8900/2650.

  • Recent Performance:

    • The ZAR weakened sharply yesterday, retreating above 18.00/dlr, aligning with a broader USD rally.
    • Despite the dip, the ZAR remains in its well-established range and relatively resilient, supported by:
      • Improved local sentiment on GNU reforms.
      • Positive feedback from rating agencies and progress on FATF compliance.

  • Outlook for Today:

    • Hawkish Fed cut: USD strength likely to pressure ZAR further towards 18.2650 resistance.
    • Dovish Fed cut: Potential ZAR recovery, with a test of 17.8900 support.

Global FX Trends

  • USD:

    • The USD Index consolidated around 107.00, with resistance at 107.18.
    • Hawkish Fed messaging could push the index higher, while dovish surprises may see a retracement to 106.50-70.

  • EUR/USD:

    • Despite spiking to 1.0535, EUR struggled to sustain gains amid ECB easing expectations.
    • Selling pressure persists, with technical resistance near 1.0550.

  • GBP/USD:

    • Sterling remains range-bound ahead of Thursday’s BoE decision, trading near 1.2655-1.2700.
    • Strong UK pay growth complicates inflation outlook, keeping rate cut probabilities subdued.

  • USD/JPY:

    • Stabilized below 154.00, with first support at 153.14.
    • Focus shifts to the BoJ’s decision, with speculation on a potential December rate hike.

Market Insight – Fixed Income

SA Bonds

  • Yield Trends:

    • Bond yields remained stable yesterday, with markets awaiting Fed guidance.
    • SA 10-Year Spread: Compressed to 452bp over US 10-Year Treasuries, reflecting a strong ZAR backdrop.
    • Risks persist, however, as Rand Water liabilities could challenge fiscal sustainability.

  • Key Considerations:

    • SARB’s conservatism ensures bond market support, particularly with deflationary PPI trends signaling subdued inflation risks.
    • A hawkish Fed tone may pressure yields higher, while dovish guidance could spur demand for SA bonds.

FRAs

  • Curve Movements:
    • 3X6 vs 3m JIBAR: Unwound to -37bp, signaling another Q1 2025 cut.
    • 6X9 Spread: Narrowed to -61bp, reflecting expectations for two cuts in H1 2025.
    • 9X12 vs 3m JIBAR: Compressed to -69bp, with cautious optimism for further easing.
    • 12X15 Spread: Eased to -72bp, signaling three rate cuts in 2025 but with reduced conviction.

Strategic Insights

Short-Term Focus

  1. Fed Decision and Forward Guidance:

    • A hawkish cut could keep USD strength intact, pressuring ZAR and EM currencies.
    • A dovish cut may allow ZAR recovery, particularly if risk sentiment improves.

  2. ZAR Drivers:

    • Monitor ZAR’s reaction to Fed guidance alongside commodity prices and potential news on GNU reforms.

  3. SA Bonds:

    • Watch the Fed’s tone for implications on global fixed-income demand.
    • SA’s fiscal risks (e.g., Rand Water crisis) will influence long-term bond appetite.

Long-Term Outlook

  1. Fiscal Discipline:

    • February’s budget must address structural inefficiencies, particularly in SOEs and municipal debt.
    • Persistent fiscal risks may cap ZAR and bond market gains.

  2. Monetary Policy:

    • SARB’s cautious stance supports ZAR stability but may delay additional rate cuts until March 2025.

  3. Global Dynamics:

    • Diverging central bank policies (Fed vs. ECB, BoJ, BoE) will drive FX volatility into early 2025.
    • China’s pro-growth policies may bolster commodity-linked currencies like ZAR in the medium term.

 

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