All eyes on the MPC

GM Daily: All eyes on the MPC

Global: Tensions escalate further between China and the US

SA: Decision Day

Rand: Will probably be quite directionless until after the SARB decision later in the day

Local rates: To cut or not to cut, that is the question

What to watch today

• CH Swift Global Payments CNY
• GE GfK Consumer Confidence
• US Initial Jobless Claims
• US Continuing Claims
• US Bloomberg Economic Expectations
• US Bloomberg Consumer Comfort
• US Leading Index
• EC Consumer Confidence
• US Kansas City Fed Manf. Activity
• SA SARB Announce Interest Rate
• UK CBI Retailing Reported Sales

Covid-19 update

Source: WHO, NICD

Economics and markets

• After what has been a relatively quiet week economically, the event for the week will commence at 3pm SA time, when the MPC will deliver its July repo rate decision.
• We anticipate a cut of 25bp as the SARB is expected to revise inflation and GDP lower, but is also probably going to keep signalling that the end of the cutting cycle is either near, or here.
• SA reached a new, undesirable high – 572 covid-19 related deaths – the highest one-day rate thus far.
• The rand should bumble along at current levels of around R16.45 to the greenback, awaiting the MPC’s pronouncement later in the day.
• The JSE will follow the mixed market movements seen during Asia’s trading session so far today in response to escalating tensions between the US and China.
• USD/ZAR opens at 16.48; EUR/ZAR at 19.07; GBP/ZAR at 20.99 and CNY/ZAR at 2.35.

At long last, it is MPC announcement day. After what has been a relatively quiet week economically, the event for the week will commence at 3pm SA time, when the MPC will deliver its July repo rate decision. We anticipate a cut of 25bp as the SARB is expected to revise inflation and GDP lower, but is also probably going to keep signalling that the end of the cutting cycle is either near, or here. This is in line with the median Bloomberg expectation. Among the data the MPC will have perused in reaching today’s decision would be yesterday’s retail sales update released by StatsSA. This publication gave an update on retail sales volumes for April and May. Unsurprisingly, retail sales plummeted over 50% y/y and m/m in April, as all retail categories experienced decreased activity, with general dealers and sellers of pharmaceuticals faring relatively better than all other categories, only declining 16.0% y/y and 13.4% y/y, respectively. Textile products, household products, hardware and other retailers all declined by more than 88% in April. May showed a reasonable recovery as SA’s lockdown eased, decreasing 12.0% y/y, and recovering 74.2% m/m. StatsSA did underline though that these figures are all preliminary and thus subject to revision as it manages to obtain more data. 

In the meantime, confusion reigns – a tweet by a government account yesterday suggested that alcohol and tobacco sales would be banned for the remainder of lockdown, but this has since been retracted and it has been restated that for now level 3 regulations will remain in place. There are also a lot of unknowns concerning the current academic year. Further, SA reached a new, undesirable high – 572 covid-19 related deaths – the highest one-day rate thus far. The Medical Research Council is suggesting that excess deaths in SA are increasing substantially, further underlining the impact coronavirus is having on our country overall. 

However, the rand is unlikely to be moved by this poor news, rather bumbling along today at current levels around R16.45 to the greenback, awaiting the MPC’s pronouncement later in the day. The JSE will follow the mixed market movements seen during Asia’s trading session so far today. This has been spurred by the further escalation in tensions between the US and China, with the US telling China to close its Houston mission. It seems quite probable that China will retaliate, kicking US diplomats out of Wuhan has been rumoured, but if it wants to put forward a stronger message, China may require that the US scale down its Hong Kong mission substantially. Further, China, in retaliation to the UK’s decision to not use Huawei components in its 5G network going forward, has decided to not screen any further Premier League soccer matches for the current round. 

However, here in SA our focus will be SARB-ward, with many hopes for additional stimulus to our flailing economy. 

Siobhan Redford

Local rates

With coupons of R28bn due at the end of the month, it's no surprise that we've seen strength in the bond market over the last few days. Yesterday, bond yields tracked aggressively lower and the curve flattened too after the National Treasury announced an auction with shorter-dated bonds on offer. The National treasury will issue R186s, R2030s and R2032s next week. With R6.6bn in coupons well in the money, the non-comp options will definitely be exercised, but we could see some bond weakness leading up to 11am when these options expire, as investors crystallise their profits. 

Today's main event is the MPC decision at 3pm. While the general consensus is for a 25bp cut, there are a lot of differing views in the market of how this MPC meeting will play out. There are calls for a hold in interest rates, as well as a cut of 50bp being discussed. The bond market might sell off slightly if a 25bp cut is combined with a hawkish tone, but if we see a 50bp cut, the yield curve could continue tracking lower, though I'd suspect a bit of curve steepening by the end of the day.  

Tebogo Mekgwe