Daily Market Report – 4 June 2025

South Africa: Treading Water Economically, Dodging a Recession

GDP Performance: Barely Above Water

• Q1 2025 GDP came in at +0.8% y/y and +0.1% q/q, slightly beating expectations but revealing the fragile nature of growth.
• Agriculture remains the hero sector with a +15.8% surge, but this masks deeper issues: excluding agriculture, GDP would have contracted by -0.3%.
• Major drags: Mining and manufacturing, subtracting a combined 0.4pp from overall growth.
• Electricity, gas, and water output also fell significantly (-2.6%), underscoring infrastructure and energy challenges.
• The risk of a technical recession remains real, particularly as load shedding resumes, and fixed investment stagnates.

Structural Risks: Mining Recession & Municipal Rot

• The mining sector is officially in a technical recession, plagued by regulatory hurdles, infrastructure bottlenecks, and uncertain policy frameworks.
• The National Health Insurance (NHI) remains a point of contention: President Ramaphosa has been granted leave to appeal the court’s ruling, although his intent to follow through remains uncertain.
• The court’s decision to allow the fuel levy will marginally worsen inflation and limit disposable income, a negative for household consumption and broader economic sentiment.
• Business confidence remains subdued due to poor municipal performance and corruption. With only 99 out of 257 municipalities receiving clean audits, the governance crisis continues to sap investment appetite.

Market Insight – FX: Consolidation Mode for the ZAR

• Spot at 17.8550, with a technical support at 17.7500 and near-term resistance at 18.2675 (23.6% Fibonacci retrace).
• While GDP beat estimates slightly, investors are awaiting stronger directional cues, most likely from upcoming US labour market data (ADP, jobless claims, NFP).
• USD strength is on pause as the DXY has rebounded slightly, supported by US job openings (JOLTS), but longer-term risks from Trump’s tariff policy and fiscal stance remain.
• Two supportive pillars for the ZAR:
  1. Low VIX (below 18.0), signalling risk-on sentiment.
  2. Elevated gold prices, enhancing SA’s terms of trade, albeit limited by weak domestic demand.

Fixed Income: Relative Strength in SA Bonds

Bonds/Yield Curve

• R209-UST 10yr spread <600bp, the narrowest this year, slightly dulling SA’s carry edge but still attractive due to global EM demand.
• The SARB’s potential move to a 3% inflation target remains a game-changer, enabling lower long-term yields.
• Elon Musk’s critique of Trump’s “One Big, Beautiful Bill” underscores the fears of a fiscally unsustainable US, bolstering emerging market debt appeal.
• SA’s bond auction this week, amid greylist exit hopes, should attract solid demand, contingent on global risk appetite.

FRAs

• The 2X5 spread vs JIBAR is unchanged at -26bp; 3X6 at -27bp, and 6X9 at 43bp, pricing in possibly one more cut for 2025.
• But caution is rising: SARB’s target inflation near 3% might demand more evidence of tame inflation before proceeding with further easing.

Global Risks & Dynamics

US Dollar Outlook

• The DXY rebounded 0.5% after JOLTS data, though it’s still fragile.
• Trump’s fiscal agenda, including large tax cuts and defence hikes, is raising the spectre of long-term debt unsustainability.
• Dollar dynamics are now being driven by:
  • Labour market resilience
  • Interest rate differentials (Fed vs ECB)
  • Liquidity-driven carry trades

China & Rare-Earth Exports

• China has restricted rare-earth mineral exports, threatening global vehicle supply chains.
• Likely retaliation to US tariffs, and will be high on the agenda for Trump-Xi talks.
• This is another layer of supply-chain uncertainty that could prolong global inflationary pressures and complicate global growth trajectories.

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