Forex strategy: Rand remains vulnerable to the dollar. For the second trading session, rand bears ran out of momentum at R7.02 yesterday. This saw the two-week trading range of R6.76-R7.02 stay in place. The rand continued taking its cue from dollar movements yesterday, given (a) better-than-expected US retail sales data and (b) debt concerns in Europe. Although rand bears can’t quite breach the psychological R7.00 handle, we still see the bias lying in rand weakness ahead of the MPC’s repo rate decision on Thursday, as the dollar is still exhibiting a firmer bias.
Rates strategy: Rates lagging global developments in run-up to the MPC decision. The sell-off in US Treasuries initiated last Friday was strongly extended yesterday as political opposition to the Fed’s asset purchase programme grew. An unexpectedly strong set of retail sales numbers for October also helped propel the US 10-year yield above 2.95% briefly – the first time since July. Despite this, SA yields have been well-behaved, although lagging the general EM response. Today’s primary event risk lies with official discussions around Irish solvency. There is also substantial dataflow from the Eurozone and the US.
Today’s highlights
- Improvement in consumer confidence likely. The FNB/BER Consumer Confidence Index likely improved in Q4:10, after having inched up to 15 pts in Q3:10, from 14 pts in Q2:10. The benign inflation outlook, coupled with expectations for further monetary easing (Thursday), might have been supportive of a slight uptick in the index. The rise in confidence could spur increased household spending in Q4:10; however, concerns over continued job losses may temper growth in expenditure.
- Inflation in UK and EU to rise modestly in October. Bloomberg consensus estimates predict a rise in CPI inflation in UK and EU for October. CPI inflation in the UK is anticipated to have risen by 0.2% m/m in October, from 0.0% m/m in September. Inflation is expected to have remained unchanged at 3.1% y/y – above the 2% upper limit of the BOE’s target range. Today’s release of the final estimate of EU CPI is expected to confirm that consumer prices increased by 0.3% m/m in October, from 0.2% m/m in September. On a y/y basis, consumer prices are expected to have climbed by 1.9% y/y in October, from 1.8% y/y in September.
- Increases expected in US industrial production and capacity utilisation. Growth in US industrial production is expected to have edged up by 0.3% m/m in October, from a decline of 0.2% m/m in the previous month (Bloomberg consensus). Capacity utilization is also expected to have marginally increased to 74.9% in October, from 74.7% in September.
Yesterday in review
- Japanese GDP surprises on the upside. The preliminary estimate of Japanese Q3:10 GDP growth of 3.9% q/q s.a.a.r has beaten market estimates of a 2.5% s.a.a.r increase. GDP growth for Q2:10 was revised up to 1.8% q/q s.a.a.r. from an initially reported increase of 1.5% q/q s.a.a.r. The main driver of growth in the quarter came from the household sector, as households purchased newer, more fuel-efficient vehicles ahead of the expiration of a subsidy programme.
- EU records an unexpectedly large trade surplus. The Eurozone achieved a trade surplus of €2.9bn in September, far greater than the €0.1bn market consensus (Bloomberg) estimate. August’s data, however, was revised to reflect a greater trade deficit than had initially been reported. The trade deficit for August reached €5bn, initially reported as €4.3bn. The bumper surplus was on the back of a second consecutive monthly rise in exports, while imports dropped. Although September’s trade balance exceeded expectations, the revision of August’s data may stoke existing fears that the euro’s recent gains will hurt the region’s export competitiveness.
- US advance retail sales up, but manufacturing takes a knock. Advance retail sales for October accelerated to 1.2% m/m, from an upwardly revised 0.7% m/m in September (initially estimated at 0.6% m/m). The 1.2% monthly gain was the biggest in seven months and, combined with the upward revision in retail sales growth for September, suggests that consumer spending may be increasing. Indications are, however, that the manufacturing sector may continue to struggle: the empire state manufacturing index fell to -11.1 pts in November, after recording a massive leap in October to 15.7 pts from 4.1 pts in the month prior. This represents the first contraction in manufacturing production in the New York region in over a year. Worryingly, one of the biggest drags on the index came from the new orders sub-index: the measure dropped to -24.3 pts in November, from 12.9 pts in October.
Gordhan still worried by QE2, but heartened by progress on global currency coordination. Finance Minister Gordhan, speaking at a press conference in the wake of the G20 summit, indicated that global leaders would continue to discuss reforms to the global financial system – including currency dynamics. The Minister reiterated his view that the potential risks to developing countries of QE2 outweighed the advantages, and said that that government would look into extending targeted support for industry in a bid to boost economic growth and job creation in SA
*This article was first published in the Standard Bank South Africa Today newsletter
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