Daily Commentary - 29 September 2017

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

- USD / ZAR 13.4963 - EUR / ZAR 15.9291 - GBP / ZAR 18.1094 -

Economic Events:

29-Sep: EC CPI - SA Trade Balance - US Univ. of Michigan Sentiment

Market Commentary:

The main risk for the rand today will be the publishing of local budget data for August.  This will provide the market with the opportunity to assess if there has been any fiscal slippage ahead of the Medium Term Budget Policy Statement scheduled for the 25th of October. Strong seasonality in tax collection means that the August deficit is likely to be substantially smaller than the R92.2 billion recorder for July.  SARS is due to release August merchandise trade data where the consensus is for a surplus of R3.9 billion.  While trade data is highly volatile and subject to seasonal swings, August is typically characterized by a fall in exports and a strong increase in imports.

Yesterday SA Headline PPI inflation came in higher than expected in August at 4.2% YoY, up from the 3.6% published in July.  The increase has mainly been driven by higher fuel prices resulting in the coke, petroleum, chemicals rubber and plastics category jumping 7.3% in August.  Formal non-agricultural employment contracted by 34k in the 2nd quarter with a dull picture being painted for quarter 3.  Across the sectors, the biggest job losses were reported in manufacturing, construction and community and personal services.

The US economy expanded a touch fasted than what was projected in the second quarter, recording its fastest rate of growth in more than two years at 3.1%.  This may have been even higher if it were not for such a devastating hurricane season.  The US market reacted extremely positively to the announcement of Trumps market-friendly tax plan.  The only question to ask is to whether or not Congress will accept it.  One should not be fooled into thinking that the full scope and expected US benefit of this plan is close to fully priced in.  Recall that Congress has clogged Trumps plans to repeal Obamacare and that was initially one of the requirements for pushing ahead with further tax breaks as the ultimate impact of the expansive fiscal stance is not abundantly understood.

After hitting an exaggerated 13.71 level yesterday morning, the Rand has capitalized on the Greenback losing steam and has opened today around the 13.50 level.  The rand’s return to a more justified level reflects that in US markets.  SA’s R186 10 year government bond reached 8.72% yesterday having traded as high as 8.48% as recently as Tuesday afternoon.  US yields firmed yesterday and the expectations of a December rate hike have come off a touch to a 73% probability.  The rand looks set to close the week below the 13.60 level with a modest recovery still very much on the cards for today.

Range for today: 13.3500 - 13.6500