[Hurricane] Laura is the face in the misty light

GM Daily: [Hurricane] Laura is the face in the misty light

Global: Markets gear up for Hurricane Laura and Jackson Hole

SA: CPI nudges back into the target band

Rand: Outperformance continues, though consolidation is probable

Local rates: ILBs are the new cool kids on the block

What to watch today

• EC M3 Money Supply
• SA PPI
• US GDP Annualized (q/q)
• US Core PCE (q/q)
• US Initial Jobless Claims
• US Continuing Claims
• US Kansas City Fed Manf. Activity
• GE Retail Sales (m/m) 

Covid-19 update

Source: WHO, NICD

Economics and markets

• Said to be the most powerful storm to strike Louisiana, the tempest Laura could result in US$25bn in damage and economic losses.
• The US dollar might be blown weaker by the impending storm at Jackson Hole if the Fed takes a dovish leaning.
• The natural offset to that would be stronger risk currencies, though performances remain differentiated.
• The outcomes of Jackson Hole, US-China tensions over the disputed South China Sea and virus developments will continue to provide steer.
• On the virus front, at least 220,000 people are estimated to have registered for vaccine trials.
• USD/ZAR opens at 16.87; EUR/ZAR at 19.96; GBP/ZAR at 22.29 and CNY/ZAR at 2.45.

I’m keen on song titles, especially those that remind me of my childhood. Sinatra was another household favourite. As Hurricane Laura makes landfall in the US, I’m reminded of the opening notes of Frankie’s 57 classic, “Laura is the face in the misty light”. Said to be the most powerful storm to strike Louisiana, the tempest could result in US$25bn in damage and economic losses, shuttering nearly 3mbpd of refining capacity on the eastern shoreline. While we have much to envy of the US in terms of its economic prowess (factually of course), we do not covet its geographical positioning. South Africa has been devastated by many a disaster over time. Thankfully, though, we are largely guarded from natural phenomena, safely tucked away in the southern tip of Africa. 

Markets might not escape the impact of the actual and proverbial hurricane on the horizon. The US dollar might be blown weaker by the impending storm at Jackson Hole if the Fed takes a dovish leaning at its monetary policy framework review, believing the US downturn to be more prolonged than initially thought. The committee’s inklings might be made worse depending on the eventual damage inflicted by Hurricane Laura, reinforcing a lower-for-longer rates narrative. The risk though is that inflation is allowed to overshoot the 2% mark for an extended period of time, nudging bond yields and equities higher despite no fundamental underpinning. The overture is dollar negative. 

The natural offset to that would be stronger risk currencies, though performances remain differentiated, with almost half of the EM basket tracked by Bloomberg trading in the red this morning. The rand’s phenomenal run of strength is being tested as the spot level retreats to 16.90 against the greenback. Trading volumes remain light despite the level of variation in the spot rand, with the range of movement in market volatility being relatively subdued. The outcomes of Jackson Hole, US-China tensions over the disputed South China Sea and virus developments will continue to provide steer to the local unit in the absence of local determinants. We would allow for consolidation at current levels. 

On the virus front, at least 220,000 people are estimated to have registered for vaccine trials, with pharmaceutical companies at the forefront of developments already recruiting for phase III of trials. The WHO estimates there are 30 vaccines in clinical evaluation and 139 in preclinical stages, accentuating the value of global bourses of the organisations involved. 

There might never be an effective tonic to cure the hangover from 2020. For South Africans, the after effects are made worse by structural challenges that predate the virus. Not least reliability, maintenance or midlife refurbishments on Eskom power stations, which implies continued load-shedding at least for the next year! That is according to the utility’s CEO. Despite the rotational power cuts, Eskom estimates that it will use a substantial amount of diesel for the rest of the year to run its open-cycle gas turbines, adding to financial and operational pressures. 

With headline inflation returning to within the target band in July, it has pushed our expected inflation for 2020 to 3.2%. This keeps inflation below the SARB’s forecast for CPI (presented at the July MPC meeting), and the bank could maintain its inflation forecast at 3.4% at the September meeting. The SARB has emphasised data dependency during this very uncertain period. 

As the probability of the bank’s inflation forecast remaining stable at the next meeting given today’s print is high, our economists believe that it will be the 2Q20 GDP print (scheduled to be published on 8 September 2020) which will be most telling. Should this surprise the SARB to the downside, it will give impetus for the MPC to cut interest rates by a further (and final) 25bp. We currently expect the economy to contract by 8.2% for 2020, while the SARB’s most recent forecast was for GDP growth of -7.3%. 

Like Sinatra, the SARB is going to do it “my way”. 

Nema Ramkhelawan-Bhana

Local rates

Demand and supply seem to be driving price action at the moment, with very little on the news front to get excited about. Yesterday’s price action in SAGBs was predominantly driven by the auction announcement. Bonds opened up slightly stronger on the back of a strong currency, but quickly reversed its gains once the R2032s, R2040s and the R2044s were announced for next week’s auction. The market still struggles to absorb these large auctions and judging by the price action post the announcement, the market is sceptical that things have changed despite coupons being paid at the end of the month.

CPI surprised to the upside yesterday and provided a flurry of activity in the linker market. For the next two months, short-dated linkers provide attractive positive carry, and this, teamed with the higher than expected CPI, resulted in ILBs being the trade of the day. The curve has steepened significantly, with most of the demand seen in the front end. We expect demand to continue into month-end as investors position themselves ahead of the next two months.

Michelle Wohlberg