DAILY COMMENTARY - 29 APRIL 2019

Merchant West Financial Services Company

Merchant West Capital Markets

USD/ZAR 14.3275 | EUR/ZAR 15.9925 | GBP/ZAR 18.5439

Please feel free to contact us on the details below:

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

email: treasury@merchantwest.co.za

Market Data:

29 April - EC Economic Confidence 

30 April - SA Private Sector Credit | South Africa Budget | Trade Balance Rand

01 May - SA Workers Day Holiday | US - FOMC Rate Decision 

02 May - SA Manufacturing PMI | Electricity Production | Electricity Consumption | US - Initial Jobless Claims

03 May - US Change in Nonfarm Payrolls | Uneployment rate

Market Commentary:

The local unit recovered some lost ground against the dollar, appreciating to a low of R14.2800/$ before closing at R14.3900/$ following Friday’s US GDP reading for Q1 which revealed that the burst in US growth was driven by trade and the largest accumulation of unsold goods since 2015 -temporary factors that are likely to reverse in the coming quarters. In the day ahead, investors will have to keep focus on US data once again with the March reading for Core Personal Consumption Expenditure (PCE), the Fed's favoured inflation measure, expected to print to the downside. This raises concerns whether the Fed will find recent inflation readings soft enough to justify a rate cut and thereby putting a further cap on broad-based dollar strength and potentially benefit emerging market currencies, including the Rand (Absa).

Foreign exchange - Calm settled over Asian currency markets on Monday as Japan kicked off a week of holidays, giving investors an extra excuse to sit on their hands ahead of a Federal Reserve policy meeting and U.S. jobs numbers. All eyes are on the Fed to see what they made of the first-quarter gross domestic product report, which showed strong growth of 3.2 percent, but largely for one-off reasons including a surge in inventories. Core inflation, on the other hand, surprised by slowing sharply, leading speculators to actually narrow the odds on a rate cut this year. Fed fund futures now imply a rate of 2.20 percent by year end, from 2.41 percent now. The March reading for core personal consumption expenditures (PCE), the Fed's favoured inflation measure, is due later Monday and there is a risk it might slow to 1.6 percent or even 1.5 percent. "The single biggest macro issue at the moment concerns Fed policy and whether inflation is soft enough to justify an 'insurance' rate cut - or two," said analysts at JPMorgan. "Chicago Fed President Charles Evans has implied a sustained core PCE at 1.5 percent would justify "insurance" cuts even with growth staying healthy and investors will be listening very closely to (Fed Chair Jerome) Powell on Wednesday for any hints about his thoughts on this topic." The European Central Bank is under pressure to keep its stimulus in place, if not to do a new rounds, while markets are pricing in rate cuts for Australia and New Zealand following weak inflation readings. The Bank of Japan last week pledged to keep its policy super easy for at least another year, an effort to dispel talk it was wavering in its commitment. Chinese markets are also closed from Wednesday to Friday, which is expected to drain liquidity even more in Asia (Reuters.com).

International data front - U.S. economic growth accelerated in the first quarter, but the burst in growth was driven by a smaller trade deficit and the largest accumulation of unsold merchandise since 2015, temporary boosters that are seen weighing on the economy later this year. The surge in growth reported by the Commerce Department on Friday put to rest fears of a recession, that were stoked by a brief inversion of the U.S. Treasury yield curve in March. But it also exaggerates the health of the economy as consumer and business spending slowed sharply, and investment in homebuilding contracted for a fifth straight quarter. Gross domestic product increased at a 3.2 percent annualized rate in the first quarter, the government said in its advance GDP report. Growth was also driven by increased investment in roads by local and state governments. “The gain in first-quarter GDP would seem to make a mockery of claims that the U.S. economy is slowing as the fiscal stimulus fades," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. "Looking beyond the headline number, however, there are plenty of causes for concern." (Reuters.com)

International trading - U.S. negotiators head to China on Tuesday to try to hammer out details to end the two countries' trade war, including the shape of an enforcement mechanism, the success or failure of which could set the trajectory of ties for years to come. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for talks beginning on April 30, followed by a visit by Chinese Vice Premier Liu He to Washington for more discussions starting on May 8. Both sides have cited progress on issues including intellectual property and forced technology transfer to help end a conflict marked by tit-for-tat tariffs that have cost the world's two largest economies billions of dollars, disrupted supply chains and rattled financial markets.Those issues are still on the table, according to the White House, but U.S. officials say privately that an enforcement mechanism for a deal and timelines for lifting tariffs are sticking points. Agreeing to a way to enforce a deal is one thing. Ensuring it holds up under ties strained by growing mistrust and geopolitical tensions will be another, say watchers of the relationship. “An effective enforcement mechanism will define the deal," Tim Stratford, chairman of the American Chamber of Commerce in China (AmCham), told Reuters (Reuters.com).

Range of the day: 14.25 - 14.50