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GM Daily: Hold – the order of the day
Global: BoE contemplates negative interest rates
SA: Focus shifts from SARB’s unchanged policy stance to NT’s next move
Rand: SARB decision supportive of the rand as SA/US interest rate differentials are maintained
Local rates: Rates on hold results in curve flattening
What to watch today
- JN National CPI
- GE PPI
- EC ECB Current Account SA
- US Current Account Balance
- US Leading Index
- US University of Michigan Sentiment
Covid-19 update
Source: WHO, NICD
Economics and markets highlights
- Hold is the order of the day among the various central banks that convened this week.
- There is room to pause globally, though in many cases fiscal support is still left wanting.
- The SARB is keen to assess the impact of the extensive accommodation provided to the economy.
- Unlike the Fed, the BoE’s change in policy narrative garners little interest outside of European markets.
- The rand gapped sharply lower, outperforming its EM peers.
- USD/ZAR opens at 16.15; EUR/ZAR at 19.14; GBP/ZAR at 20.96 and CNY/ZAR at 2.38.
Hold is the order of the day. At least it seems to be among the various central banks that convened this week. Brazil, Indonesia, Taiwan, Japan, the US, the UK and SA’s monetary authorities remained pat on policy rates after varying magnitudes of cuts since the onset of the covid-19 pandemic in March. Does this spell the end of global policy accommodation? Hardly, as monetary policy authorities continue to provide measures of unconventional support and stand ready to act if necessary. It’s remarkable how we’ve learnt to speak in central bank tongue. With a slowing of daily infection rates and, in some instances, a gradual albeit modest improvement in real economic activity, there is room for central banks to pause, though in many cases fiscal support is still left wanting.
A familiar challenge in SA. It appears that after front-loading its cuts, the SARB is keen to assess the impact of the extensive accommodation provided to the economy. Our sense is that the SARB is now looking to the National Treasury and the rest of government to enact highly anticipated structural and fiscal reforms.
The decision is by no means clear cut. The balance of preferences outlined in the statement showed that two SARB members were in favour of a 25bp cut and three members opted for a hold. The hurdle for further action (regardless of direction) is steep. Presumably, a significant worsening of economic data or a marked increase in SA’s sovereign risk would need to play out for the Bank to cut further. Equally, there would have to be a substantial turn in economic fortunes for the MPC to implement the hikes projected for 2021.
Market indicators were almost unchanged from their opening levels after the SARB’s meeting, suggesting an initial indifference towards the statement. Today’s FX and FI activity will be revealing. We anticipate modest rand gains as the US/SA interest rate differential is maintained, while longer-dated nominal bond yields should come off slightly (refer to the local rates section). Global determinants are still at play, exaggerating the effect of local influences on the rand while watering them down on yields. The US dollar’s retreat bodes well for the local unit, which has breached its 200-day moving average of 16.58, while the snapping up of US treasuries post the Fed meeting limits the downside on domestic bond yields. The rand has gapped sharply over the last week, outperforming its EM peers. USD/ZAR16.00 (last traded in mid-March) is now firmly in sight, but the currency pair is still well off its pre-covid levels.
Unlike the Fed, the BoE’s change in policy narrative garnered little interest outside of European markets, with much of the angst over negative interest rates being expressed through a weaker pound and falling yields on gilts. The damage to the spot pound has been limited by the EU Commissioner’s belief that an EU-UK deal is still achievable. The options market is more ambiguous, as the two-month GBP/USD risk reversal widened following the BoE address in favour of puts, while most other tenors narrowed.
While the politicians at Downing Street mull over the UK’s withdrawal from the EU, the bankers on Threadneedle Street are contemplating the operationalisation of a negative interest rates strategy under dire economic circumstances. A sharp change in tone, considering the bank’s earlier efforts to distance itself from a sub-zero rates policy. Notwithstanding a resurgence in virus cases or disruptions at the end of the Brexit transition period, the chances of the BoE dropping the policy rate below 0.10% are minimal.
But with the current QE programme drawing to a close (ahead of the Fed’s bond-buying programme and the EU’s PEPP), the BoE will need to extend further support. This will probably be an extension of asset purchases rather than another interest rate cut, which would impact the banking sector adversely. We need only look to the European bank’s behaviour to understand the extent of the fallout.
Central banks might be on hold, but we’re quite ready to let go of this week.
Nema Ramkhelawan-Bhana
Local rates
The curve steepening that we saw pre-MPC was undone somewhat after the SARB kept rates on hold. The yield on the R2023s moved up 13bp, while the yield on the R2048s dropped by 8bp. Foreign clients were reported as net buyers, while we saw local real money sell the front end of the yield curve after the meeting.
With the MPC out of the way, market participants will turn their focus to the MTBPS in October. A lot of negative sentiment has already been priced in, but we expect investors to treat SAGBs with caution until they have further information about the trajectory of SA’s fiscal state. With a fair amount of flattening of the curve already out of the way, we should struggle to see any meaningful flattening going into next week as the auction looming on Tuesday has a lot of duration for the market to absorb.
The National Treasury will come to market today issuing I2025s, I2038s and I2050s. This week’s auction is more evenly spread across maturities than last week’s, but the reduced bidding volumes seen suggests lower auction participation for today. We expect the back end to remain bearish, and portfolio rebalancing requirements should drive auction interest. Overall, we expect today’s auction to be sufficiently supported. In terms of clearing yields, all bonds are expected to close at or slightly weaker than current mark-to-market levels.