Daily Commentary - 21 January 2019 | Merchant West

Daily Commentary - 21 January 2019

Merchant West Business Finance

Merchant West Capital Markets

USD/ZAR 13.8501 | EUR/ZAR 15.7647 | GBP/ZAR 17.8271

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JHB: (011) 305-9500 | PTA (012) 742-8600 | CPT (021) 552-7007 

email: treasury@merchantwest.co.za


Market Data:

21 Jan No Data of real importance

22 Jan US Existing Home Sales

23 Jan SA CPI Data | US MBA Mortage Applications | EC Consumer Confidence 

24 Jan SA BER Consumer Confidence | EC Markit Eurozone Manufacturing PMI | US Initial Jobless Claims ;Markit US Manufactruring PMI

25 Jan GE German IFO Business Climate 

Market Commentary: 

he main focus in terms of scheduled data releases from emerging markets (EM) this week is probably the usual monthly batch of Chinese data ‒ including GDP, retail sales and industrial production ‒ on Monday. We expect these numbers to indicate that economic growth continues to slow, and by more than is the consensus view ‒ our forecasts of Chinese growth have been below the consensus expectation for some time. Slower Chinese growth is not typically good news for EM in general, in light of its impact via what we call the ‘commercial transmission channel’ on other EMs’ current accounts. However, we remain positive on the market outlook for EM, in light of improving prospects for the broader ‘financial transmission channel’ onto EMs’ capital account. In fact, the broader financial environment for EM is improving on the back of at least three factors, in our view. First is the recent progress on US-China trade talks, which provide welcome relief to last year’s trade tensions. Second is the growing sense of an end-cycle backdrop in the US, as yields in advanced economies ease and the US Federal Reserve is increasing perceived as being close to the end of its tightening cycle, and some observers even start to wonder about eventual monetary easing. A third factor that can be very supportive for EM is the USD, especially if it starts a broader weakening trend towards what we think is its long-run equilibrium fair value – as we expect in coming quarters. All told, in the absence of an outright global recession, we think the current global backdrop is supportive for EM asset prices. Of course, as always, there will be variance within the EM space, in light of varying domestic, idiosyncratic stories. On that front, next week we will watch in particular any developments with respect to Brazil’s plans for pension reform, as President Jair Bolsonaro is expected to consider a proposal from his economic team before he joins the World Economic Forum in Davos. (BNP Paribas) 


In South Africa, the December CPI will be released on Wednesday (23 January). We expect the headline CPI to have fallen 0.3% on the month to register an annual growth rate of just 4.4% y/y, down from 5.2% in November. Most of the fall in headline inflation stems from a near 11% m/m fall in domestic fuel prices in December. We expect core CPI inflation to have risen modestly from 4.4% to 4.5% y/y, although with both headline and core CPI inflation close to the midpoint of the SARB’s 3-6% target range, there is likely to be little concern of demand-driven inflation pressures creeping into the economy. Our recently revised inflation projections for 2019 place us even further below the consensus, we now expect CPI inflation to average just 4.7%, with headline inflation around the SARB’s inflation target midpoint for most of H1 2019. As a result we think the SARB will probably hold off on rate hikes in the first half of the year. We have pencilled in a 25bp hike for November but the risks to our monetary policy and inflation calls appear to be skewed to the downside, suggesting that the SARB may not raise rates at all this year. (BNP Paribas) 


All eyes will also be on the Zondo inquiry as former Bosasa executive Agrizzi continues his explosive testimony from last week. Agrizzi is due to continue with his testimony at the state capture inquiry on Monday. In his jaw-dropping testimony last week, he detailed how the company, now known as African Global Operations, paid out millions of rand in bribes  every month in order to secure tenders at state institutions (Businesslive.co.za).


Range for the day: 13.70 – 14.00