Daily Commentary - 20 September 2017

Contact Merchant West Capital Markets on: (+2711) 305-9500 or treasury@merchantwest.co.za

- USD / ZAR 13.2808 - EUR / ZAR 15.9400 - GBP / ZAR 17.9573 -

Economic Events:

20-Sep: SA CPI - US FOMC Rate Decision

21-Sep: US Jobless Claims - EC Consumer Confidence - SA Interest Rate Decision

22-Sep: EC Eurozone PMI Data - US PMI

Market Commentary:

On the Local Front:

On the local front the only focus is on the CPI print being released at 10h00. Expectation is leaning towards a slight uptick to 4.9% y/y with core inflation a slight downtick to 4.7% y/y from 4.6% and 4.7% respectively. The expected increase in headline inflation is mainly due to the following:

  • The increase in Petrol Inflation in August’s to 5.7% y/y from July’s deceleration of -3.6% y/y.
  • Food inflation is expected to remain at current levels – even with the decrease in maize prices and better rainfall, bearing in mind meat prices are still fairly elevated.
  • The downtick in core inflation will continue to portray a reflection of weaker demand pressures.

We do not really expect Today’s CPI print to cause movements beyond any of the Rand margins, only perhaps if there is a surprise in the data.

The continued disinflationary trend that we experience are still believed to be already priced in, therefore markets eagerly await the SARB’s meeting and rate decision that will be finalised on Thursday.

On the International Front:

The U.S. current account deficit jumped to its highest level since 2008 in the second quarter amid a decline in both secondary and primary income. The Commerce Department said on Tuesday the current account deficit, which measures the flow of goods, services and investments into and out of the country, increased to $123.1 billion from a downwardly revised $113.5 billion in the first quarter. That was the highest level since the fourth quarter of 2008. Economists polled by Reuters had forecast the current account deficit slipping to $115.1 billion from a previously reported $116.8 billion shortfall. The second-quarter current account deficit represented 2.6 percent of gross domestic product, the largest since the first quarter of 2016, up from 2.4 percent in the first quarter. The current account deficit has dropped from a record high of 6.3 percent of GDP in the fourth quarter of 2005 as rising domestic oil production and lower global oil prices curbed the import bill. In the second quarter, the surplus on primary income – which includes investment income such as dividends, and employee compensation - decreased by $2.9 billion. The deficit on secondary income, U.S. government grants, pensions, fines and penalties, and worker remittances surged by $7.5 billion in the second quarter.

China's yuan firmed against the U.S. dollar on Wednesday as companies sold dollars to take profits on recent gains and square positions ahead of a Federal Reserve policy decision later in the session. The mood among German investors improved more than expected in September after falling three months in a row, a survey showed on Tuesday, suggesting that markets expect Europe's biggest economy to continue its solid upswing in coming months. The Mannheim-based ZEW research institute said its monthly survey showed its economic sentiment index rose to 17.0 from 10.0 in August. This beat a Reuters consensus forecast for an increase to 12.5.

On the International Data Front:

The U.S. Federal Reserve is set on Wednesday to announce the start of a plan to trim its $4.5-trillion portfolio of assets, much of it amassed in response to the 2007-2009 financial collapse, marking another milestone in bringing to an end the crisis-era measures. If Fed Chair Janet Yellen gets her way, financial markets that had swung wildly with past shifts to the policy will barely shrug when the asset reduction begins, probably in October. The plan is for the Fed to stop buying bonds so gradually that it will take years for its holdings to shrink to $3 trillion, around where some policymakers and economists estimate it will settle. The Fed's asset holdings stood at about $900 billion in mid-2008, before it began buying bonds to spur hiring and economic growth. Years of planning and months of careful public messaging should make the asset-unwinding process about as riveting as "watching paint dry," according to Reserve Bank of Philadelphia President Patrick Harker. The U.S. central bank is expected to leave interest rates unchanged at its Sept. 19-20 policy meeting, according to a Reuters poll of nearly 100 economists, with markets pricing in a 52 percent chance of a rate hike coming at a December meeting. The Fed will also release a fresh round of projections on Wednesday, laying out policymakers' own expectations for rate hikes ahead. Under Yellen, the Fed has raised interest rates four times from near zero and stopped accumulating assets. The next stage is not to sell holdings but to halt the reinvestment of proceeds from maturing bonds. "The market is going to be very sensitive to what's going on here," Peter Hooper, a former Fed economist who is now chief economist at Deutsche Bank Securities, said earlier this month. "But we no longer need all this extraordinary monetary easing that we have seen since the crisis, so it's time to do so."

Our range for the day : R 13.1000-R13.4000