Reinventing the wheel

GM Daily: Reinventing the wheel

Global: Trade relationships on an edge

SA: The wait is over, 2Q20 GDP will be released later today

Rand: Subject to weakening bias if GDP print surprises to the downside

Local rates: Has a poor GDP been priced into SAGBs?

What to watch today

• JN GDP
• GE Trade Balance
• GE Current Account Balance
• EC GDP
• SA GDP
• US NFIB Small Business Optimism
• US Consumer Credit

Covid-19 update

Source: WHO, NICD

Economics and markets

• Donald Trump proposes that the US economy decouples from the Chinese economy.
• Boris Johnson has also suggested he is willing to see Brexit finalised without a trade deal with the EU as the eighth round of trade negotiations begins, pushing the pound weaker.
• Asian asset markets are trading in the green today despite the news flow, with US futures suggesting that last week’s rout is at an end for now.
• SA’s markets will be waiting for the 11:30 GDP release for 2Q20, and we are expecting an annualised contraction of 45.4% q/q, but the margin of expectations is wide.
• USD/ZAR opens at 16.74; EUR/ZAR at 19.78; GBP/ZAR at 22.05 and CNY/ZAR at 2.45.

It is always interesting to wake up and discover that yesterday was a day of politicking and posturing. The politicking can only be coming out of the US as its presidential elections loom ever nearer. Yesterday, the incumbent, Donald Trump, proposed a possible decoupling of the US economy from China, which he claims would ensure it doesn’t lose billions of dollars. At the same time, and as the eighth round of Brexit negotiations begins in London today, Boris Johnson has stated that he is willing to walk away from these talks without a deal. In the case of both propositions, the question is, is this merely posturing or reality? 

In both cases, we are seeing the rolling back of free(r) trade narratives between the US and China or between the UK and the EU. These efforts seem to be on the back of each economy targeting greater control over its own respective economy and purportedly creating more economic activity and opportunity on home soil. 

For me, though, it feels like they are reinventing the wheel, and it will be square. My reason, the good ol' comparative advantage theory. A practical example of this is that China has a substantially larger population of relatively semi and unskilled workers than the US, whereas the US has more skilled workers. Thus, for example, it is better to manufacture clothing in China where the cost of the workers will be lower and productivity high enough, while the production of skilled services such as programming and tech development would be better centred in the US, where the time of its skilled workers would be better used. If the US wanted to take on more manufacturing and ensure it is able to meet its demand, it might have to move some of its more skilled workers to work in fields in which their skills are wasted and at a higher cost per worker. This has been the argument for free trade for quite a while. 

We have never experienced a pure version of free trade globally, as the free movement of labour and goods and services has never existed completely, however the trend has been towards freer trade across different blocs and countries in recent times. Many economists would argue that the reason the global economy has done so well is due to these developments, which have effectively allowed the globe to produce more than if each country had to produce what it needed and wanted. And yet here we see the potential unwinding of some of these relationships being mooted, and I personally am not convinced that this will result in greater economic activity for those countries proposing it. Sometimes these lessons have to be learnt the hard way. 

Today, we will see renewed activity in asset markets as the US returns to business after a long weekend. It would seem that markets are generally trading in positive territory with the Japanese, Australian, Chinese, Hong Kong and Indian bourses all in the green. S&P 500 futures have moved a bit higher, which could indicate that last week’s tech rout will dampen and could result in a slight recovery in US bourses, while renewed concerns over geopolitical tensions could hamper a US asset recovery. The pound has weakened after Boris Johnson’s latest comments and as the prospect of a no-deal Brexit seems to become more probable. The rand, like the rest of us, will probably be driven by global sentiment, however, a surprise to the downside or to the upside in the GDP print at 11:30 could cause a jump in the currency, and we feel that a downward surprise is more probable than an upside surprise. Our current forecast is for an annualised 45.4% q/q contraction, slightly more optimistic than the 47.2% contraction which makes up the Bloomberg survey median estimate. However, this print is probably one that faces the greatest amount of uncertainty given the circumstances SA and the world faced in the second quarter, which is illustrated by the very wide 33ppt gap between the high and low estimates in the Bloomberg survey. 

In some certain good news, at least for now, load-shedding has been suspended until 16:00, after which it will be ramped up to only level 1 until 22:00 as more generating capacity has been restored. 

Siobhan Redford

Local rates

With Monday being a US bank holiday, markets were generally quiet with both SAGBs and the rand content to trade in a narrow range. With no real stimulus to move markets, SAGB price action was directed by flows with the curve steepening somewhat, driven by a rally in the front and belly of the curve, while the back end only managed to rally by 1-2bp. 

Today, we should be in for an interesting day with both the SAGB auction on the cards as well as GDP for the second quarter announced at 11:30. The National Treasury will issue R186s, R2030s and R2035s. Given the recent price action, R186s and R2030s should fair relatively well, but the R2035s are expected to tail in comparison to the others as this part of the yield curve remains better offered. 

All eyes will be on today’s GDP print. With the market expecting 47% (RMB expects 45%), any positive surprise will most likely result in a rally in SAGBs and the curve should flatten as market participants price out the likelihood of another rate cut. Should it print worse than expected, however, the yield curve will steepen as the front end of the yield curve prices in another possible rate cut. 

Michelle Wohlberg