Newton’s third law of motion

GM Daily: Newton’s third law of motion

Global: Twitter hack undermines tech stocks while China GDP fails to inspire hope

SA: IMF funds forthcoming

Rand: In need of global cheer to restore USD/ZAR16.50 levels

Local rates: IMF loan to take pressure off SAGBs

What to watch today

• CH GDP (y/y)
• UK Jobless Claims Change
• EC Trade Balance SA
• SA PPI
• US Philadelphia Fed Business Outlook
• US Initial Jobless Claims
• US Continuing Claims
• US Net Long-term TIC Flows
• US Total Net TIC Flows

Covid-19 update

Source: WHO, NICD

Economics and markets

• Newton’s third law of motion is the premise on which markets trade: what goes up must come down.
• Despite China’s outperformance in 2Q20, its 3.4% y/y expansion in growth failed to inspire further stock market gains.
• It is by no means a linear path to recovery.
• ECB expected to stay the course, but EUR/USD fate rests on fiscal outcomes.
• In SA, maintaining a strict protocol to ensure that the R230bn in expenditure cuts is realised over the next two years is crucial to the deployment of emergency funding from the IMF.
• USD/ZAR opens at 16.59; EUR/ZAR at 18.93; GBP/ZAR at 20.89 and CNY/ZAR at 2.39.

Newton’s third law of motion is the premise on which markets trade: what goes up must come down. Despite China’s outperformance in 2Q20, its 3.4% y/y expansion in growth – which was 1% higher than thought – failed to inspire further stock market gains. European and US equity futures shadowed early Asian stock losses as the 1.8% y/y slump in 2Q20 Chinese retail sales stressed the fragility of the recovery, which continues to necessitate policy support. A stark lesson for all policy officials as countries gradually reopen their economies. It is by no means a linear path to recovery.

This is a notion that the ECB is keenly aware of after a decade fraught with economic and fiscal distress. While the Bank is expected to stay the course at its meeting this afternoon, its president will need to justify whether current measures are adequate to underpin a recovery in regional growth. Further growth in the PEPP programme is anticipated by the end of the year. If paired with meaningful fiscal stimulus (the jury is still out on this one), the eurozone could be spared a double-digit contraction. EUR/USD remains a conduit for angst, paring gains ahead of the ECB virtual meeting this afternoon.

EM currencies have followed suit, relinquishing Wednesday’s vaccine hope-induced gains. Having touched 16.50, USD/ZAR has clambered back up to 16.69, weakening at a quicker pace overnight than its counterparts. Like gravity though, the local unit needs an ounce of global cheer to push it lower against the US dollar, which is down 0.2% YTD on a trade-weighted basis. But, with US jobless claims data still at elevated levels, twitter undermining tech stocks and US retail bankruptcies increasing at pace, it will require more than a data release to slow this merry-go-round.

We’re all too familiar with political and economic carousels in SA that dizzy investor sentiment. The fiscal debate raged on in the National Assembly yesterday as the minster of finance defended the Division of Revenue Amendments Bill. Resolute in his commitments, the minister pledged discipline in achieving the outcomes of the Special Adjustment Budget, albeit opposed by 119 of the 219-strong parliamentary caucus who voted against the bill. Cuts to provisional budgets have severe implications for healthcare and education spending as constituents question the efficient allocation of funds. The minister continued to advocate for zero-based budgeting, and the emphasis will probably translate into an official announcement in either October or February 2021.

Maintaining a strict protocol to ensure that the R230bn in expenditure cuts is realised over the next two years is crucial to the deployment of emergency funding from the IMF. Monies amounting to US$4.2bn (roughly R70bn) should be made available by the end of the month according to the National Treasury, once a letter of intent clarifying the terms of SA’s commitment towards debt sustainability is submitted to and tabled at the IMF’s next board meeting. The loan is a shot in the arm for the NT and should enable the provision of other DFI funds, which is vital to SA’s funding plan. Despite the dampened global risk environment, the local bond market should be supported by IMF news, though curve steepening will probably persist as SA’s incoming data shows no sign of recovery, necessitating further policy support.

Yesterday’s much anticipated CPI figure for May printed in line with expectation by falling to 2.1% y/y. In breaching 3%, it is the first time since the inflation-targeting regime was introduced that inflation has fallen below the lower end of the SARB’s inflation target band. Lockdown continued to pose a challenge to data collection for the May index, especially since there is a need for comparison to the April data collection, which meant that online data collection continued. Apparently, a way of life, even for StatsSA.

Our macroeconomics team expects inflation to remain stable at 2.1% y/y in June, closing 2Q20 at an average inflation rate of 2.4%, which is below the SARB’s May forecast of 2.8%. Driving the continued low inflation will be sustained negative fuel price inflation, albeit less aggressively so, but also as rental prices, surveyed in June, slow their pace of increase to sub-2.0% as the economy sinks further into recession and demand wanes. As a result, we still believe the MPC will have room to cut interest rates by 25bp at the July meeting. Remember, what goes up must come down. 

Nema Ramkhelawan-Bhana

Local rates

CPI came out just below expectations at 2.1%, which set in motion the curve bull steepening as investors start pricing in the likelihood of further rate cuts. R186s tightened by 17bp, while the R2048s moved 2bp higher on the day. As we get closer to the MPC, we should continue to see the curve steepen, particularly if supporting data remains weak and the currency remains stable at current levels. 

Overnight, we had news that South Africa will receive a US$4.2bn loan from the IMF by the end of July. This should provide a boost to SAGBs as it takes the pressure off bonds to carry the burden of funding the country's deficit. This week's non-comp options expiring at 11 should continue to put a bit of pressure on yields as another potential R6.6bn of bonds come to market again today. The R186s and R2030s are well in the money and will most likely be exercised, but the R2048s are at the money and might put more pressure on the steepening of the yield curve if these are exercised.  

Michelle Wohlberg