RMB Markets Daily – 24 March: All about the SARB this week

What to watch this week

Monday

  • EC        ECB Current Account
  • US        Existing Home Sales

Tuesday

  • SA        Leading Indicator
  • US        Richmond Fed Manufact. Index

Wednesday

  • UK        CPI
  • SA        CPI
  • EC        Markit Manufacturing PMI
  • UK        Markit Manufacturing PMI
  • US        Markit Manufacturing PMI

Thursday

  • GE       GfK Consumer Confidence
  • SA        PPI
  • US        Core PCE
  • SA        SARB Announce Interest Rate

Friday

  • US        University of Michigan Sentiment

Covid-19 update

Economics and Markets

  • Locally, focus turns to the SARB this week. We expect the MPC to keep the repo rate unchanged at 3.50% given the large output gap and relatively contained inflation.
  • We also have CPI and PPI inflation data for February out this week. We expect headline CPI inflation to have eased to 3.0% y/y in February from 3.2% in January, due to a lower increase in medical aid premiums.
  • In contrast, we expect PPI inflation to have nudged to 3.6% y/y in February from 3.5% in January, attributed to a moderation in fuel deflation.
  • Globally, equity stocks nudged higher yesterday as inflation concerns continued to ease and US Treasury yields moderated.
  • USD/ZAR opens at 14.81; EUR/ZAR at 17.65; GBP/ZAR at 20.48; CNY/ZAR at 2.27; and XBT/USD (Bitcoin) 54,554.82.

Locally, focus turns to the SARB this week. We expect the MPC to keep the repo rate unchanged at 3.50% given the large output gap and relatively contained inflation. The better-than-expected 4Q20 GDP outcome will likely lead to an upward revision of the SARB’s growth outlook. The SARB is also likely to lift its inflation outlook due to higher fuel prices since the January MPC meeting and NERSA’s announcement allowing Eskom to raise electricity tariffs by 15.6% in FY21/22. Despite the marginal improvement in the near-term growth outlook, the output gap remains largely negative. This, coupled with relatively contained, albeit rising, inflation, supports our view for the SARB to keep the repo rate unchanged. Developments (better growth outcomes and higher inflation) since the January MPC meeting have reduced the probability of a further cut. Key to watch at this week’s MPC meeting is the voting split. A consensus vote would suggest that we are firmly moving to a hold realm – in line with our expectations for the repo rate to remain unchanged at 3.50% until the end of 2021.

We also have CPI and PPI inflation data for February out this week. We expect headline CPI inflation to have eased to 3.0% y/y in February from 3.2% in January. The moderation in CPI inflation is mainly attributed to a lower increase in medical aid premiums (surveyed by Stats SA in February and April). Since 2010, medical insurance inflation has averaged 9.8% – 4.8ppt higher than headline inflation. However, for 2021, the Council for Medical Schemes requested that the trustees of medical schemes either freeze their contribution increases or limit their increases to 3.9% – well below historical increases. Medical schemes have taken a differentiated approach, with some opting to freeze premiums in the first half of the year and increase them in 2H21, to still average below headline inflation for the full year 2021. We have assumed a 3.0% increase for the insurance component in February. Analysts’ assumptions around medical insurance are probably the key factor driving the range of consensus estimates for February’s headline CPI inflation. The Bloomberg consensus forecast is for headline CPI inflation to have moderated to 3.1% y/y, with estimates ranging from 2.7% to 3.3%. In contrast, we expect PPI inflation to have nudged to 3.6% y/y in February from 3.5% in January, attributed to a moderation in fuel deflation. The Bloomberg consensus forecast is for PPI inflation to have increased to 3.6% y/y, with estimates ranging from 3.4% to 3.9%.

In other news, South Africa received the fourth batch of the Johnson & Johnson vaccine on Saturday. The 66,000 doses received on Saturday brings the total number of J&J vaccines received thus far to 266,000, way below the number of vaccines required to inoculate 67% of the population (about 40 million people) to achieve herd immunity. It is becoming clear that the government is falling behind its own vaccination schedule and that the slow rollout of vaccines will weigh on the growth outlook as SA contends with repeated waves of covid-19 infections.

Globally, equity stocks nudged higher yesterday as inflation concerns continued to ease. Risk assets were also helped by a moderation in US Treasury yields, with the benchmark 10-year yield dipping below 1.7%. Risk assets face two-way risk this week, as investors will have to weigh news of more US stimulus – as President Joe Biden touts US$3 trillion spending on infrastructure – against concerns of extended lockdown measures in Europe. Germany has reversed plans for a gradual re-opening of the economy, following a spike in covid-19 cases.

EM currencies were slightly weaker yesterday, caught in the Turkish lira contagion. The lira tumbled 10.0% on Monday after President Recep Tayyip Erdogan sacked central bank chief Naci Agbal who had increased the policy rate by 200bp last Thursday to tame inflation. The MSCI index for EM currencies weakened by 0.9%, while the rand depreciated by 0.3% against the US dollar and opens Tuesday’s trading session weaker at 14.81.
Mpho Molopyane

RMB’s John Cairns says central banks, inflation and treasury yields are the focus this week, which has scope for continued volatility and the pull of dovish central banks and push of higher treasury yields. Kindly access the full video here: #RMBWeeklyUpdates

Local Market

As expected, bond flows on Friday were muted as investors looked forward to a long weekend in SA. With USTs finally finding some type of stability, SAGBs managed to rally into the close of the week, led predominantly by the back end of the curve which closed the day 10bp tighter. Foreigners have now been reported as net buyers for two days in a row and, with the US 10Y currently below 1.70 after the long weekend, SAGBs should find further support into today’s tender. National Treasury comes to the market looking to issue R6.6bn across R2030s, R213s and R2032s. Given the demand for duration on Friday, today’s auction should fare well. The global backdrop has a slight risk-off tone this morning, but given the stabilisation of USTs, we expect today’s auction to be well supported.

On Friday, National Treasury under-allocated yet another inflation auction. It managed to issue R1.76bn out of the possible R2bn on offer at MTM levels. Given the constant under-allocation of inflation-linked bonds in the weekly tender, bid-offer spreads have widened in the secondary market, as the market struggles to find where the real price of ILBs should be. The market keenly awaits an announcement from National Treasury on a reduction of issuance across the nominal and ILB markets, which should be bond positive.
Michelle Wohlberg

News headlines

Powell says recovery far from complete, Fed support to continue
The economy seems to be gathering steam, though it is still far from fully recovering from the damage wrought by the pandemic, Federal Reserve Chairman Jerome Powell said. Powell will be appearing before the committee along with Yellen as part of congressional oversight of the government’s response to the pandemic.
https://www.bloomberg.com/news/articles/2021-03-22/powell-says-recovery-far-from-complete-fed-support-to-continue

China’s economic growth could exceed target, premier Li says
China’s economic growth this year could exceed a target of “above 6%,” with the government seeking stable expansion and job creation, Premier Li Keqiang said in a meeting with foreign business executives.
https://www.bloomberg.com/news/articles/2021-03-23/china-s-economic-growth-could-exceed-target-premier-li-says

ECB steps up pace of bond-buying in bid to tame rise in borrowing costs
The European Central Bank has stepped up the weekly pace of its emergency bond-buying programme to its highest level for over three months in an attempt to counter the recent sell-off in eurozone debt markets.
https://www.ft.com/content/363b7efb-4b12-4574-bc48-f9201165cd6c

Germany’s Merkel banks on Easter circuit-breaker to combat ‘new pandemic’
In talks that ran deep into the night, Merkel pushed the leaders of Germany’s 16 states to take a tougher stance to fight the pandemic, reversing plans for a gradual re-opening of the economy agreed earlier this month after a sharp rise in the infection rate.
https://www.reuters.com/article/us-health-coronavirus-germany/germanys-merkel-banks-on-easter-circuit-breaker-to-combat-new-pandemic-idUSKBN2BF05L

China retaliates after US, EU and UK impose sanctions
The US, EU, UK and Canada have imposed sanctions on China over its treatment of Uyghur Muslims in a co-ordinated move that sparked an immediate retaliation from Beijing.
https://www.ft.com/content/27871663-cebc-433c-b9bf-4ef28a55d73e

Asian stocks shed gains as China worries grow
Asian stocks reversed earlier gains on Tuesday, weighed by Chinese markets as investors took profit on a recent rally in some mainland firms, although ebbing inflation fears helped shore up broader sentiment in the region.
https://www.reuters.com/article/us-global-markets/asian-stocks-shed-gains-as-china-worries-grow-idUSKBN2BE36F

SA Reserve Bank likely to turn more hawkish but hikes are a long way off
There is a strong consensus that the Reserve Bank will decide unanimously to keep the repo rate on hold this week.
https://www.businesslive.co.za/bd/economy/2021-03-22-economic-week-ahead-reserve-bank-likely-to-turn-more-hawkish-but-hikes-are-a-long-way-off/

 

Source: RMB Markets