Between a rock and a hard place

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Between a rock and a hard place

GM Daily: Between a rock and a hard place

Global: EU leaders make exceptionally slow progress

SA: Clarification sought from Basic Education on school closures

Rand: Settled at USD/ZAR16.70

Local rates: Decent ILB auction

What to watch this week

Monday

JN Trade Balance
CH 1-Year Loan Prime Rate
GE PPI (y/y)
EC ECB Current Account SA

Tuesday

JN Natl CPI (y/y)
JN Nationwide Dept Sales (y/y)
UK Public Finances (PSNCR)
UK Central Government NCR
SA Leading Indicator
US Chicago Fed Nat Activity Index

Wednesday

JN Jibun Bank Japan PMI Mfg
JN BOJ Outright Bond Purchase 1~3 Years
JN Supermarket Sales (y/y)
US MBA Mortgage Applications
SA Retail Sales Constant (y/y)
SA Retail Sales (m/m)
US FHFA House Price Index (m/m)
US Existing Home Sales

Thursday

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

Friday

UK GfK Consumer Confidence
CH Bloomberg July China Economic Survey
UK Retail Sales Inc Auto Fuel (y/y)
GE Markit/BME Germany Manufacturing PMI
EC Markit Eurozone Manufacturing PMI
UK Markit UK PMI Manufacturing SA
US Markit US Manufacturing PMI
US Markit US Services PMI
US Markit US Composite PMI
US New Home Sales
US New Home Sales (m/m)

Covid-19 update

Source: WHO, NICD

Economics and markets

Frugal five softening tone on EU stimulus.
Technical valuation suggests US dollar at risk of further weakness.
This as the National Treasury staves off challenges by labour unions to enforce the 2020 apportionment of the three-year public sector wage agreement.
Having already cut rates substantially since March, the SARB is expected to cut the repo rate by 25bp to 3.50% on Thursday.
After more than 115 days of lockdown, regulations are still being clarified.
While the economic data calendar is dominated by one key event, the political schedule is littered with meetings.
USD/ZAR opens at 16.68; EUR/ZAR at 19.05; GBP/ZAR at 20.95 and CNY/ZAR at 2.38.

Four days into a long and protracted negotiation and EU leaders are still at an impasse over a €750bn economic recovery fund. Did you expect something to the contrary? After a decade of to and fro on various support mechanisms, it’s no surprise that politicking is standing in the way of pragmatism. The indecisiveness has dragged on European assets, bearing down on EUR/USD, which leapt to 1.14 as hopes of stimulus were priced in. Much of that optimism will be retained in the price as a plan will be forthcoming… at some stage. Certain states are already softening their tone on the amount that should be earmarked as direct grants and it seems as though the leaders of the frugal five are willing to come together this afternoon to settle outstanding issues.

A favourable backdrop against which risk investors begin the week, as the US dollar spot index slips below its 200-day moving average, signalling a possible downward trend that would reinforce the value of EM assets. A firm catalyst is required to entrench a weaker US dollar, though in theory, the greenback should weaken as global growth is restored. A wall of corporate earnings results should provide steer on the outlook for US retailers, but it’s the stimulus debate that will probably lead sentiment as the supplemental unemployment benefit expires at the end of the month. Markets are clamouring for further stimulus, which would provide another leg up to risk currencies. The rand is no exception, holding firm at USD/ZAR16.70. Like its compatriots, it will ebb and flow alongside EUR/USD this week, though still sensitive to local happenings.

As the DPE lays bare its difficulties in sourcing funding for SAA, Minister Gordhan sought to clarify the position of the Finance Ministry, which has committed to help mobilise financing but not pledged any monies. "Where it comes from, from whom it comes and what form it comes in is something that is still being worked on.” This as the National Treasury staves off challenges by labour unions to enforce the 2020 apportionment of the three-year public sector wage agreement penned in 2018, underscoring NT’s funding stress, that would limit any direct intervention elsewhere.

The interplay between monetary and fiscal policy is always an interesting one. Now more than ever, as South African consumers and corporates struggle to stay afloat amid a deeply entrenched economic contraction. Having already cut rates substantially since March, the SARB is expected to cut the repo rate by 25bp to 3.50% on Thursday as new data (published since the last MPC meeting) is expected to result in the downward revision of the SARB’s inflation and GDP forecasts. We believe this will be the second-last cut for the current cycle, with only one more cut of 25bp expected at the September meeting. Given that our base case is priced into the market and implied by the FRAs, the three-month interbank rate will adjust by at least 25bp to reduce the spread between itself and the policy rate.

While the economic data calendar is dominated by one key event, the political schedule is littered with meetings. Most of the parliamentary gatherings will centre on the provincial implications of the special adjustment budget and its bearing on healthcare and education. In what might seem a rare occurrence, Deputy President David Mabuza will appear before the National Council of Provinces to answer questions on various lockdown-related topics and the age-old issue of service delivery.

After more than 115 days of lockdown, regulations are still being clarified. As the number of infected grows in the thousands per day, the risk of spread among school goers and teachers continues to grow. Teachers unions, the Federation of Governing Bodies of South African Schools and the South African Human Rights Commission are at odds over whether schools should remain open as SA nears its covid-19 peak. With the Basic Education Minister still locked in consultations with the Council of Education Ministers, there is little indication as to when an announcement on the matter will be made. Ultimately, the decision lies with the cabinet and must balance the unfettered right of children to basic education against the strains on the health system. An unenviable position for the state.

Nema Ramkhelawan-Bhana

Local rates

Flows across the bond desks were relatively light on Friday; local were better buyers of R186s, R2032 and R2044. Tomorrow, the National Treasury will be issuing R186s and stock around the belly-area of the curve (R2032 and R2037) which has been relatively well attended in recent auctions. The interest rate derivatives market had local fast money accounts looking for the 3x6 and 6x9 on the FRA curve ahead of the MPC this week, the swap market is inactive for now, but there are some payers for the 5-yr around the 5.00% handle. Packs are trading thinly with the 5-yr/R186, 10-yr/R2030 and 30-yr/R2048 middling at -2.52, -2.44 and -3.57 respectively.

Friday’s inflation-linked auction attracted some offshore interest for the I2046s, the I2029s cleared auction at 4.45 at a bid-to-cover ratio of 2.69, the I2038s cleared auction at 4.91 at a bid-to-cover ratio of 1.77, while the I2046s cleared auction at 4.92 (market 4.9450) at a bid-to-cover ratio of 3.16.The National Treasury issued 620m, 640m and 740m of the I2029s, I2038s and I2046s, respectively. The event calendar is relatively light today, we have SA May retail sales on Wednesday ahead of the much-anticipated SARB rates decision on Thursday.