Daily Commentary - 1 March 2018 | Merchant West

Daily Commentary - 1 March 2018

Contact Merchant West Capital Markets on: (+2711) 305-9500 or treasury@merchantwest.co.za - USD / ZAR 11.8276 - EUR / ZAR 14.4358 - GBP / ZAR 16.2808 -

Economic Events:

01 March : US Initial Jobless Claims ; ISM Manufacturing data

02 March : UK PMI ( Construction )  - EU PPI

Market Commentary:

Local front:

South Africa's rand weakened on bets of higher interest rates in the United States and worries triggered by another rating cut to state power utility Eskom by S&P Global Ratings. The rand hit a session-low of 11.7725 following new Fed chair Chairman Jerome Powell's upbeat views on the economy, which stoked bets on further interest rate hikes this year and lifted the greenback to near a three-week high. "The prospects of the Fed seriously considering four hikes throughout 2018 lifted the U.S. dollar against the CEEMEA currencies with the South African rand the weakest link as the bulls opted to take profits on the best performing EM currency," analysts at Rabobank said in a note.

Local Data front:

PPI - South Africa's producer price inflation (PPI) slowed to 5.1 percent year-on-year in January compared with 5.2 percent in December, the statistics agency said on Wednesday. On a month-on-month basis, January PPI fell to 0.3 percent from 0.6 percent in December, Statistics South Africa said.

Trade Balance - South Africa's much bigger-than-expected trade deficit in January wiped out 12 consecutive months of surpluses, as exports of major commodities and machinery fell sharply. The trade balance in January swung to a 27.66 billion rand ($2 billion) deficit, far beyond market expectations of a 5 billion rand shortfall, from a revised 15.3 billion rand surplus in December, according to South African Revenue Service (SARS) data released on Wednesday. The trade deficit was the country's biggest for over a decade but analysts said while it was a surprise it was not entirely negative because the surge in imports was a sign of an economic rebound.

"That the deficit was larger than expected shows there are high expectations for 2018. A lot of companies are expecting more trade activities in the domestic economy," said economist at Nedbank Johannes Khoza. National Treasury last week raised its 2018 economic growth forecast to 1.5 percent from estimated growth of 1 percent in 2017, citing improved business and consumer confidence as well as upbeat global growth. Business confidence hit its highest since late 2015 in January on expectations that new President Cyril Ramaphosa would lead economic reform and a clamp-down on corruption, while private sector purchasing activity has recovered from 20-month lows. Exports fell by 22.6 percent to 80.5 billion rand on a month-on-month basis in January, while imports rose 21.9 percent to 108.2 billion rand, the SARS said in a statement. Exports of vehicles and transport equipment plummeted by 47 percent, precious metals were down 34 percent, while mineral sales fell 21 percent in the month.

International front:

The dollar held firm on Thursday, drawing support after the Federal Reserve's new chief Jerome Powell struck an optimistic tone on the U.S. economy in a boost to rate hawks that sent global stocks tumbling. In stark contrast to the United States, benign inflation data in the euro zone dented expectations that the European Central Bank will dial back its stimulus, slamming the euro to five-week lows against the dollar and a six-month nadir against the yen.The dollar index rose to five-week high of 90.746, as Powell's optimism on the U.S. economy suggested the Fed is going to raise interest rates four times this year, one more than what markets had expected. The euro dropped to 1.21835 against the greenback, its lowest since Jan. 18. Against the yen, the single currency dropped to 129.86 yen, its weakest level since early September and down 5.6 percent from its 2 1/2-year high hit just a month ago.

"Markets are pricing in the chance that the ECB will raise interest rates as early as by the end of this year, so a return of a scenario of another extension in its bond buying and pushing back rate hike into 2019 could put pressure on the euro," Makoto Noji, senior strategist at Nikko SMBC said in report. The euro was also hurt by political uncertainties as Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.

International Data front:

U.S. economic growth slowed slightly more than initially thought in the fourth quarter after the strongest pace of consumer spending in three years depleted inventories and drew in imports as businesses struggled to produce enough goods and services. Gross domestic product expanded at a 2.5 percent annual rate in the final three months of 2017, instead of the previously reported 2.6 percent pace, the Commerce Department said in its second GDP estimate on Wednesday. Domestic demand grew at an unrevised 4.6 percent rate in the fourth quarter, the fastest pace in more than three years. “An economy that is at or beyond full employment ... cannot match this pace of demand growth and, therefore, must either sell from inventory and/or purchase from abroad," said John Ryding, chief economist at RDQ Economics in New York.

The moderation in GDP was also underscored by other reports on Wednesday showing factory activity in the Midwest slowing to a six-month low in February and contracts to purchase previously owned homes tumbling 4.7 percent in January to the lowest level since October 2014. Retail sales, home sales, durable goods orders and industrial production have also declined in January. Economists believe the economy will hit the Trump administration's 3 percent annual growth target this year, possibly putting pressure on the Federal Reserve to raise interest rates more aggressively than currently anticipated. The Fed has forecast three rate hikes for 2018. Financial markets expect the first increase to come in March.

Our range for the day : R 11.7000 - R 11.9500