Daily Market Report 19 Dec

Fed Cuts Rates by 25bp, Triggers Volatility with Cautious Guidance

 

Talking Points

• SA:

  • Public Works and Infrastructure seeks proposals to repurpose state properties.
  • Municipal debt to Eskom continues to grow, raising fiscal and operational risks.
  • Home Affairs nears resolution of visa backlog, improving immigration processes.

• US:

  • FOMC cuts interest rates by 25bp, lowering the Fed Funds range to 4.25%-4.50%.
  • Guidance signals only two cuts through 2025, sparking sharp market reactions.

Economic Overview

US – Federal Reserve Decision

• Rate Cut Delivered:

  • As expected, the Fed lowered rates but shocked markets by indicating a slower pace of easing.
  • The dot plot showed only two rate cuts in 2025, a stark contrast to earlier expectations of four or more.

• Market Reaction:

  • Treasuries: The entire yield curve shifted higher, with 10-year yields near 4.5%.
  • Equities: US stock markets corrected sharply, reversing recent gains.
  • USD: The dollar surged as investors flocked to safety, pricing in a “higher-for-longer” rate scenario.

• Economic Interpretation:

  • Resilient Growth: Strong retail sales suggest robust consumer demand.
  • Elevated Inflation: Core inflation remains sticky, delaying the Fed’s path to its 2% target.
  • Trump’s Fiscal Policy: Pro-growth proposals could fuel inflation, complicating monetary easing.

South Africa

• Fiscal Challenges Persist:

  • Municipal debt to Eskom continues to grow, raising operational risks for the utility and threatening load-shedding stability.
  • Infrastructure issues, such as Gauteng’s water crisis, underscore persistent fiscal risks.

• Economic Recovery:

  • Green shoots emerge as SARB’s leading indicator rose to its highest level since 2022, suggesting recovery in consumer and business confidence.
  • Inflation remains subdued, offering SARB room to maneuver in its rate-cutting cycle.

Market Insight – FX

ZAR Analysis

• Spot Rate: 18.2750; Range: 18.10/3950.

• Recent Performance:

  • ZAR weakened sharply following the Fed’s announcement, driven by USD strength rather than local factors.
  • Commodity prices, including gold and platinum, retreated, worsening SA’s terms of trade.

• Outlook:

  • Short-Term Weakness: Elevated US bond yields and a surging dollar suggest the ZAR could remain under pressure.
  • Key Drivers: Domestic fiscal stability and reforms in the February budget will determine medium-term ZAR direction.
  • Catalysts: Any progress on FATF greylist removal or GNU reform implementation could support ZAR resilience.

Global FX Trends

• USD:

  • The USD Index surged past 108.00, reflecting the Fed’s cautious guidance.
  • Elevated Treasury yields will likely maintain USD strength in the near term.

• EUR/USD:

  • The pair fell to a 1-month low, pressured by divergent Fed-ECB monetary policies.
  • Options expiries today may influence short-term price action, with 1.0350 support in focus.

• GBP/USD:

  • Sterling recovered slightly ahead of today’s BoE decision, with expectations of no change in rates.

• USD/JPY:

  • Broke above 155.00, with the BoJ maintaining its dovish stance and leaving rates unchanged.

Market Insight – Fixed Income

SA Bonds

• Yield Trends:

  • Domestic bond yields rose in tandem with global yields, with the R209 likely trading near 10.70% today.
  • The spread between SA and US 10-year yields widened slightly, reflecting heightened risk aversion.

• Key Considerations:

  • Rising yields may undermine bond market gains, with investors turning cautious ahead of the February budget.
  • Fiscal risks, such as municipal debt and unfunded SOE liabilities, remain a significant concern.

FRAs

• Conservative Repricing:
  • 3X6 vs 3m JIBAR: Widened to -38bp, signaling one Q1 2025 cut.
  • 6X9 Spread: Narrowed to -59bp, pricing in two H1 2025 cuts.
  • 12X15 Spread: Compressed to -69bp, reflecting tempered expectations of three cuts next year.

Strategic Insights

Short-Term Focus

1. Fed Guidance Impact:

   • Watch for further USD strength as markets adjust to a slower rate-cut trajectory.
   • Higher US yields may pressure EM currencies, including the ZAR.

2. ZAR Drivers:

   • Domestic fiscal risks, particularly Eskom and municipal liabilities, will weigh on sentiment.
   • Focus will shift to GNU reform implementation and February’s budget for long-term direction.

3. SA Bonds:

   • Rising yields reduce the appeal of SA bonds, but sustained SARB conservatism may offer support.

Long-Term Outlook

1. Fiscal Reform:

   • The February budget must address structural inefficiencies, SOE challenges, and fiscal consolidation.
   • Failure to implement reforms could exacerbate ZAR and bond market volatility.

2. Monetary Policy Divergence:

   • Fed’s slower easing contrasts with SARB’s likely cuts, creating a challenging environment for ZAR stability.

3. Global Uncertainty:

   • Trump’s fiscal policies and geopolitical tensions will add volatility to global markets in 2025.

 

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