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The SA Daily 18 January 2018

SA 5yr breakeven vs US 5yr breakeven

  • South Africa’s 5-year breakeven inflation rate has been declining steadily since May 2016, remaining below the upper band of the SARB’s target range of 3-6% since March 2017, and staying around 5% until September last year.
  • At the same time, US breakeven rates have been rising steadily largely due to higher nominal yields, indicating that SA breakeven yields have been reflecting domestic rather than global factors driving inflation expectations.
  • After the SARB’s September meeting and the October MTBPS, heightened political and credit risk made the bond market nervous and, as such, no longer convinced that inflation would remain in the SARB’s target band.
  • However, after the ANC’s December elective conference, there are again declining inflation expectations in SA, as implied by the bond market, relative to those of the US, reflecting a stronger rand and lower domestic bond yields.

For chart of the day on breakeven inflation rates, please see further down.

Daily commentary

Rand view: The rand is steady this morning ahead of the SARB’s MPC meeting later today. USDZAR is currently around 12.30 against the dollar. Our base case is for the SARB to remain on hold. However, FRAs are pricing in a 40% probability of a 25bps rate cut today. Should the SARB not cut, the rand should enjoy marginal support.

SA yesterday: SA November retail sales came in at record highs, at 8.2% y/y, from October’s 3.5% y/y, due to a higher participation in Black Friday deals. We expect reasonable growth in retail sales to persist over the near term, assisted by real income growth from lower inflation; with some improvement in confidence; the prospects for interest rate cuts, and a gradual acceleration in credit extension. Retail sales growth may also remain supported in December given that it’s a seasonally high-selling month for most retail outlets.

SA today: SARB MPC meeting: we expect that the SARB will be reluctant to adjust interest rates ahead of the Budget (21 Feb) and the Moody’s credit rating decision (23 March), as there are substantial risks that could be rand-negative. Whether the SARB cuts interest rates thereafter would depend on whether the bank’s medium-term inflation forecasts are lowered sufficiently to lift forward-looking real rates above 1.5% at least. We expect two 25bps rate cuts in 2018.

The Eurozone’s December CPI is forecast in line with November’s 1.4% y/y. Yesterday, the ECB’s Nowotny’s comments about the euro being too strong does cast some doubt as to whether there will be a pick-up in inflation.

The Bank of Canada hiked rates by 25 bps, as expected. The statement was somewhat ambiguous as the Bank stated that there was a need for tightening in policy but that some accommodation was needed so that the economy could operate at full employment. According to our G10 analyst, it does suggest that rates will stay on hold for a while before rising again, and that's proving a bit disappointing for the Canadian dollar.

US yield curve flattened as the 2-yr UST yield reached a 9-yr high. The front end of the curve is moving on sentiment that the Fed will hike rates and the dollar is currently also rallying on this. Also, the Fed Beige book was more upbeat on inflation picking up and some Fed speech hawkish.

  • Upbeat Beige Book: THE Fed said that the US economy and inflation expanded moderately from late November through the end of 2017, this also translated into wage pressures, as evidenced by most districts observing wage increases.
  • Dallas Fed President Robert Kaplan said that he was worried about the economy overheating, and is convinced the Fed needs to move "deliberately" this year and hike rates three times.
  • While Chicago Fed President Charles Evans said that he would favour fewer hikes as he would like to see inflation pick up to the 2% target.

On our radar

  • China’s Q4:17 GDP today: we monitor China’s growth for clues to any signs of a slowdown. This would pose a risk to SA’s exports and, potentially, the rand.
  • SARB MPC meeting today: in the very near term, the SARB might be reluctant to cut interest rates given the prevailing fiscal and credit rating risks to the rand.

Latest research publications:

Credit Quant Note: Secondary market: Quarterly by Varushka Singh (18 January 2018)

SA Economics: Nov retail sales 8.2% y/y by Thanda Sithole (17 January 2018)

Africa Flash Note: Nigeria: inflation surprises to the downside as the MPC is unlikely to meet this month by Ayomide Mejabi (16 January 2018)

African Sovereign Eurobond Weekly: African Eurobonds: No changes in overall composition of the portfolio by Dmitry Shishkin (15 January 2018)

SA Macroeconomics: Macro Weekly by Elna Moolman (15 January 2018)

Credit Weekly: Repo rate cuts expected by Robyn MacLennan, Steffen Kriel and Varushka Singh (12 January 2018)

SA Macroeconomics: 2018 SA economic outlook by Elna Moolman (11 January 2018)

SA Macroeconomics: Rand outlook by Elna Moolman (10 January 2018)

Credit Special Report: Eskom update by Steffen Kriel (10 January 2018)

SA Macroeconomics: Economic Insight by Elna Moolman (9 January 2018)

SA Economics: Dec vehicle sales -2.4% y/y by Thanda Sithole (9 January 2018)


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