21 Nov

Daily Market Report 21 Nov

 SARB Rate Cut Likely

  • Inflation Trends:
    • Headline inflation slowed to +2.8% y/y in October, falling below the SARB’s lower 3.0% target.
    • Key drivers included fuel deflation (-19.1% y/y) and easing food prices, which reinforce the case for monetary easing.
  • Monetary Policy Outlook:
    • A 25bps rate cut is widely expected today, following a reduction in September.
    • While a 50bps cut could be justified by low inflation, SARB’s conservative stance amid global uncertainties suggests a smaller move.
  • Future Cuts:
    • Markets anticipate additional easing in Q1 2025, contingent on inflation trends, fiscal reforms, and geopolitical stability.
  1. Business Confidence and Retail Sales
  • Improving Sentiment:
    • Business confidence rose to 45 in Q4, driven by gains in wholesale, retail, and construction, reflecting incremental progress toward the neutral 50 mark.
  • Retail Sales Underwhelm:
    • September retail sales grew by +0.9% y/y, below expectations of +2.7%.
    • A -0.8% m/m contraction highlights lingering economic fragility, emphasizing the need for structural reforms to support household incomes and consumer spending.

 

Market Insight – FX

 

ZAR Outlook

  • Recent Performance:
    • The ZAR consolidated at 18.1150, recovering from recent lows.
    • Expectations of a 25bps rate cut and a dovish SARB tone could drive modest gains, barring external shocks.
  • Geopolitical Risks:
    • Uncertainty over Trump’s potential presidency, NATO dynamics, and Ukraine-Russia tensions may periodically weigh on the ZAR, particularly if safe-haven flows strengthen the USD.
  • Technical Levels:
    • Support: Immediate support at 17.8900, with potential to test 17.8250 (50% Fibonacci retracement) in the coming week.
    • Resistance: Key resistance at 18.1250, followed by 18.1700, if SARB signals a more cautious outlook.

 

Global Context

 

  1. Geopolitical Risks
  • Ukraine-Russia Tensions:
    • Ukraine’s deep strikes into Russia, supported by US and UK arms, heighten global risk aversion, benefiting safe-haven currencies like the USD.
    • Russia’s nuclear warnings add further unease, sustaining investor caution.
  • Trump’s Potential Policies:
    • Expected policies under Trump, such as higher tariffs, deregulation, and reduced NATO funding, create uncertainty.
    • While these measures may boost US growth, their inflationary impact could delay Fed easing, keeping the USD elevated.
  1. USD Dynamics
  • Current Positioning:
    • The USD Index remains above 106.00, with signs of consolidation.
    • Moderating Fed rate cut expectations, with three 25bps cuts priced through 2025, reflect inflation risks tied to Trump’s proposed policies.
  • Cross-Currency Trends:
    • EUR/USD: Range-bound at 1.0450-1.0650, constrained by FX option expiries and speculation of ECB rate cuts.
    • GBP/USD: Hovering near 1.2600, as inflation data failed to provide clear direction, limiting sterling’s rally.
    • USD/JPY: Supported near 155.00, with exporter interest offsetting broader yen weakness.

 

Market Insight – Fixed Income

 

SA Bond Market

  • Resilience Amid ZAR Volatility:
    • Local bond yields remain stable, reflecting optimism over falling inflation and SARB’s expected easing.
    • Bonds continue to attract investor interest, underpinned by disinflationary pressures.
  • Key Factors Ahead:
    • SARB guidance will shape future yield trajectories, with a balanced stance likely supporting bond market stability.
    • Structural reforms, including fiscal consolidation and FATF greylist removal, remain critical for sustained gains.

Global Bond Markets

  • US Treasuries:
    • Yields remain elevated as inflation concerns linked to Trump’s policies temper Fed rate cut expectations.
    • Treasury issuance continues to weigh on longer-term yields, sustaining investor caution.

FRAs

  • Pre-MPC Adjustments:
    • FRA rates reflect expectations for a 25bps cut today and potentially another in Q1 2025.
    • The 6X9 spread to JIBAR widened to -62bps, signaling two cuts in the next six months.
    • Longer-term spreads suggest a reduced likelihood of additional cuts, reflecting SARB’s conservative stance.

 

Strategic Insights

 

Near-Term Focus

  • SARB Decision:
    • Governor Kganyago’s tone will be pivotal for understanding the rate cut trajectory into 2025.
    • A cautious stance may limit ZAR upside but support bond market stability.
  • Inflation Target Debate:
    • Low inflation raises the possibility of SARB pushing for a narrower 3.0% target, reinforcing a disinflationary bias.

Global Uncertainties

  • Geopolitical Risks:
    • Heightened tensions and Trump’s policy uncertainties will constrain risk appetite, impacting emerging market currencies like the ZAR.
  • US Economic Outlook:
    • If Trump’s policies spur inflation, delayed Fed easing could strengthen the USD, weighing on EM currencies.

Long-Term Outlook

  • Domestic Reforms:
    • South Africa’s economic prospects hinge on structural reforms, fiscal discipline, and FATF greylist removal.
    • Improved governance and investment climate can sustain ZAR resilience and lower bond yields.

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