Daily Commentary - 21 September 2017

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

- USD / ZAR 13.3675 - EUR / ZAR 15.9082 - GBP / ZAR 18.0631 -

Economic Events:

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

22-Sep: EC Eurozone PMI Data - US PMI

Market Commentary:

South Africa's rand recovered on Wednesday from its weakest in a month after consumer inflation figures for August suggested interest rates will fall further, reviving economic growth. At 17h30 the rand was 0.32 percent firmer at 13.2675 per dollar, reversing losses of the last week-and-a-half caused by a report showing stronger U.S. inflation, which pushed it as low as 13.3500, its softest since August 15. The rand has surrendered about 5 percent since Sept. 6, tumbling through crucial technical support that saw traders mark the currency for short-selling. The rand however recovered on Wednesday, after South Africa reported consumer inflation rose less than expected, to 4.8 percent year-on-year in August from 4.6 percent in July. The central bank concludes its three-day monetary policy committee (MPC) meeting on Thursday, and as broadly expected to cut the Repo Rate by another 25 Bpts. Petrochemical company Sasol dropped to a two-month low after announcing a plan to issue new shares. Shares in Sasol slumped 6.4 percent to 373 rand.

Domestic Data Front:

South African inflation rose less than expected in August, increasing the likelihood of interest rate cuts this week and later in the year. Consumer inflation rose 4.8 percent year-on-year in August from 4.6 percent in July, data showed on Wednesday. Economists had forecast 4.9 percent. All are well within the South African Reserve Bank (SARB) target range of 3 and 6 percent, and prices were subdued on a monthly basis, rising just 0.1 percent from 0.3 percent in July. The rand responded positively to the numbers, strengthening 0.28 percent to 13.2750 per dollar.

The SARB surprised many economists in July by cutting lending rates for the first time in five years. Now markets and analysts are pricing in as many as two more cuts before year-end. Forward rate agreements point to a 70 percent probability of lending rates being cut by 25 basis points when the SARB announces its latest decision on Thursday, and are factoring in a 30 percent chance of a 50 basis point cut. Markets also suggest there is a high probability of further cuts in November and January.

Finance Minister Malusi Gigaba's maiden budget speech in October and the ruling African National Congress leadership election in December would be key factors in determining the bank's future moves, he said. Before July’s surprise 0.25 percent cut, SARB Governor Lesetja Kganyago played down the prospects of cheaper borrowing costs, citing the risks of currency weakness. The rand backtracked this week as bets of another rate hike by the United States central bank resurfaced. Kganyago has long been viewed as a hawkish governor but that perception is beginning to change. "I don't think Governor Kganyago is any more or less hawkish than other MPC members. Inflation targeting is central to him," Standard Chartered's chief Africa economist Razia Khan said. "Yet there is also recognition that inflation targeting is what allows for a low interest rate regime, when it is possible and where it is needed, in order to support growth."

On the International Front:

The U.S. Federal Reserve left interest rates unchanged on Wednesday but signalled it still expects one more increase by the end of the year despite a recent bout of low inflation. The Fed, as expected, also said it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis. New economic projections released after the Fed's two-day policy meeting showed 11 of 16 officials see the "appropriate" level for the federal funds rate, the central bank's benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017, or 0.25 percentage points above the current level.

U.S. bond yields rose, pushing up the U.S. dollar after the Fed's decision, but U.S. benchmark stock indexes were little changed. U.S. benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since Aug. 8., a move which helped push bank stock prices higher also. “The Fed took another step on its path of beautiful normalization, announcing that the gradual balance sheet reduction will start next month and limiting revisions to both projections and policy guidance,” said Mohamed El-Erian, Chief Economic Adviser At Allianz, in California.

In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it's decision. It added that the near-term risks to the economic outlook remained "roughly balanced" but said it was "closely" watching inflation. Fed Chair Janet Yellen said in a press conference after the end of the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.

"What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent," she said. If they do, "it would require an alteration of monetary policy," Yellen said.While the interest rate outlook for next year remained largely unchanged in the Fed's latest projections, with three rises envisioned in 2018, the U.S. central bank did slow the pace of anticipated monetary tightening expected thereafter. “The US Federal Reserve has firmly signaled that a December rate rise is still on the table," said Luke Bartholomew, of Aberdeen Standard Investments Investment Strategist in London. "Clearly the Fed still believes that lower unemployment will eventually translate into a pick-up in inflation, but if inflation continues to undershoot it is hard to see the Fed following through on a hike,” he said.

The U.S. Federal Reserve will resume rate hikes in December and raise borrowing costs three more times in 2018, a Reuters poll found on Wednesday. The U.S. central bank will also reduce the size of its asset stock pile by about $1.4 trillion over the next several years as it seeks to restore a normal environment for monetary policy, according to the poll of Wall Street's top banks taken after the Fed's latest policy meeting, which ended on Wednesday.

Our Range for the day:  R13.1500 - R13.4500