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Morning NOTE

02 May 2023

GOOD MORNING

The ZAR weakened in thin Monday trading, as traders await tomorrow’s key US FOMC rate decision.

SUMMARY

The Rand lost nearly 16 cents in Monday trading on the back of nervousness ahead of the all-important FED rate decision.

  • Markets are widely expecting a 25 bps rate hike taking the Fed funds rate to 5.25% .
    • Interest rate swap prices show that investors are reducing bets that the central bank will still deliver rate cuts this year.
    • The US10YT spiking to 3.55% and the Dollar index trading above 102.
    • Inflationary pressures return in the world’s largest economy with ISM Manufacturing PMI in the US rose to 47.1 in April from 46.3 in March.
    • The data exceeding forecasts 46.8 as new orders improved and employment rebounded. 
       
  • Markets and yields also rebounded after JP Morgan agreed to acquire First Republic Bank’s assets and assume its deposits after the government stepped in and brokered a deal.
    • The US treasury stating its actions are to ensure stability and prevent additional strain on  the financial system.
       
  • This morning markets also trading softer in Asian trading after the Reserve Bank of Australia, unexpectedly raised rates by 25 bps 3.85%
  • The RBA stating that domestic inflation was still too high and that further tightening may be required to ensure inflation returns to target in a reasonable timeframe. 
  • Commodities lower across the board following the rise in rates , with Gold falling to $1985/oz.
     
  • However, all eyes on the FED as market prepare for another bumper data release.
  • In addition to the Fed we also have the ECB rate decision, US ISM ( services) as well as the US Non-farm payrolls due on Friday.

Data This week
Tuesday

  • 11h00 :  EU INFLATION  YOY  7% EXPECTED VS 6.9% PREVIOUS
  • 11h00 :  EU CORE INFLATION  YOY  5.7% EXPECTED VS 5.7% PREVIOUS
  • 16H00  US FACTORY ORDERS 1.1%  EXPECTED VS -0.7% PREVIOUS

WEDNESDAY

  • 14H15  US ADP EMPLOYMENT  +150K EXPECTED VS +145K PREVIOUS
     
  • 16H00  US ISM SERVICES PMI  51.8 EXPECTED VS 51.2 PREVIOUS
     
  • 20H00 :  US FED RATE DECISION  +25 BPS EXPECTED  – FED FUNDS 5.25% V PREVIOUS 5.00%
  • 20H30  : US FED PRESS CONFERENCE  – CHAIR JEROME POWELL

THURSDAY

  • 09H15  SA S&P GLOBAL PMI   50.2 EXPECTED VS 49.7 PREVIOUS
     
  • 14H15 :  ECB RATE DECISION  +25BPS EXPECTED   3.75 % VS 3.50% PREVIOUS
  • 14H45 : ECB PRESSER
     
  • 14H30 US INITIAL JOBLESS CLAIMS  240K  VS 230K EXPECTED

FRIDAY

  • 14H30  : US NON FARM PAYROLLS 180K EXPECTED VS 236K PREVIOUS
  • 14H30  US EUNEMPLOYMENT RATE  3.6%  EXPECTED VS 3.5% PREVIOUS

Market Movement Today:

  • The Rand weakened ahead of tomorrow’s US FED rate decision.
    • Markets remain nervous ahead of a widely expected 25 bps rate hike that will take the fed funds rate to 5.25%.
    • Monday’s stronger that expected US ISM manufacturing data causing a stir in the markets, with
      • Traders now  re-assessing the outlook that the Fed could cut rates in H2.
         
  • NB : as we’ve seen the last few month’s markets continue to exaggerate moves on single data points.
  • What however remains consistent is that CPI continues to fall and this will result in a Fed pause (RISK POSITIVE).
     
  • In addition, supporting a risk on narrative, the US government announced that JPM won the bidding rights to acquire the assets of FRB bank.
    • Treasury Sec Janet Yellen, commenting that it shows the commitment of the US Government to the banking sector.
    • Yields rose as investors move out of safe haven treasuries.
       
  • The focus however remains tomorrows FOMC meeting, with particular focus on the press conference afterwards.
    • The language will be a key determinant for future moves of the Dollar and the ZAR.
    • We expect risk off to be the “sentiment of choice” as we approach the meeting, with investors preferring to take money off the table ahead of the decision.
    • AND the ZAR will be remain on the back foot in this scenario, and for the next 2 session, we expect a weaker ZAR.
       
  • However : if the Fed states it is likely to pause, we can once again expect a risk rally and the ZAR will gain sharply on this news.
    • Trade : TRADE BUY USDZAR ON DIPS.

Expected Ranges:

  • USDZAR : Expect a range 18.2800-18.4600
    • Importers : 18.3400-18.2800
    • Exporters : 18.4000-18.4600
       
  • EURZAR : Expect a range of 20.0400-20.3100
    • Importers : 20.13000-20.0400
    • Exporters : 20.2200-20.3100
       
  • GBPZAR : Expect a range of 22.8400-23.0800
    • Importers : 22.9200-22.8400
    • Exporters : 23.00-23.0800

OPENING RATES

  • USDZAR 18.3500
  • EURZAR 20.1700
  • GBPZAR 22.9500

SOUTH AFRICA

  • The Prime energy drink frenzy has hit the country, with some consumers reporting that it’s sold out at Checkers stores, where it’s being sold for a fraction of the initially reported price.
    • Checkers is the country’s official retail partner of the drink, which went on sale last night for almost R40 each.
    • The drink is owned by popular YouTube stars, KSI and Logan Paul.
    • In scenes reminiscent of Black Friday, people –
      • particularly parents, across the country woke up bright and early to queue outside Checkers stores to be the first to buy the popular Prime energy drink.  EWN
         
  • Eskom ramps up load-shedding
    • As the country get’s back to business on Tuesday the power utility will reduce pressure on the grid to prevent collapse.
      • Eskom has announced that it will increase load shedding this week due to a delay in returning nine generating units to service.
      • Eskom said it will implement Stage 4 load shedding — in which 4,000 megawatts is removed from the grid to prevent its collapse — from 05:00 on Tuesday, then 6 000 megawatts will be cut from 16:00.
         
    • In addition. Eskom’s has board shortlisted five candidates for the position of chief executive officer, according to the chairman of the beleaguered power utility.
    • The entity was scheduled to meet last Monday to start the process of choosing a leader to run the utility,
      • Eskom chairman Mpho Makwana, said at an event broadcast online. He didn’t indicate when the board expects to complete the process. Moneyweb

GLOBAL MARKETS

  • In regular trading on Monday, the Dow fell 0.14%, the S&P 500 shed 0.04% and the Nasdaq Composite lost 0.11%.
  • US stock futures edged lower on Tuesday as investors geared up for the Federal Reserve’s policy meeting.
  • Futures contracts tied to the three major indexes were all down at least 0.1%.
     
  • Those losses came as investors reacted to news that JPMorgan won the weekend auction for troubled First Republic Bank.
     
  • The FED is widely expected to deliver another 25 basis point rate hike, and markets will focus on guidance for the future path of rates.
  • Investors now look ahead to job openings, factory orders and light vehicle sales data on Tuesday.

Bonds

  • The  US 10-year yield rose above  the 3.55% level, approaching the one-month high of 3.6% from April 16th.
    • Traders citing  evidence of high inflation and eased concerns over turmoil in the banking sector.
    • JPMorgan agreed to acquire First Republic Bank’s assets and assume its deposits in a government-led deal,
      • ending the risks that the troubled lender posed on the financial system and lowering demand for the safety of US Treasuries.
  • In the meantime, PMI data from ISM and S&P showed that inflationary pressures rebounded considerably in April.
    • Markets are in full consensus that the Federal Reserve will raise rates by 25bps this week,
      • BUT swap prices show that investors are reconsidering bets that the central bank will still deliver rate cuts this year. CNBC

Yesterday

  • DOW fell 46 to 34,051
  • SP500 declined -1.61 to 4,167
  • NASDAQ  unchanged 12,212

  image: Trading economics

OVERNIGHT HEADLINES

The US Dollar

  • The  US dollar moved above 102 on Tuesday after rising for three straight sessions.
    • The Buck supported by better-than-expected US manufacturing data and firm expectations that the Federal Reserve will raise interest rates again this week.
    • The ISM Manufacturing PMI in the US rose to 47.1 in April from 46.3 in March, exceeding forecasts 46.8 as new orders improved and employment rebounded.
    • The Fed is widely expected to deliver another 25 basis point rate hike on Wednesday.
    • But analysts remain split on whether the central bank would keep borrowing costs elevated for the remainder of the year or start cutting rates in the second half.
    • Other major central banks including the European Central Bank and Reserve Bank of Australia will also decide on monetary policy this week. FX news

Asian markets mixed, with mainland China higher following a positive session on Wall Street after JPM acquired FRB’s assets.  However the RBA’s surprise hike curtailing further gains.

  • In Japan, the Nikkei 225 rose 0.12% to close at 29,158, with Japanese stocks struggling for direction amid weak cues from Wall Street overnight.
    • The benchmark indexes reached multi-month highs on Monday as the Bank of Japan’s dovish stance spurred a selloff in the yen.
    • The weakness in the Yen boosting the outlook for export-heavy Japanese industries and making Japanese assets more attractive to foreign investors.
    • Japanese stocks traded mixed on Tuesday. Reuters

Crude oil

  • US WTI crude futures remained below $76/bl on Tuesday after losing 1.5% in the previous session.
    • Traders continued to worry about the prospect of further interest rate hikes, growing recession fears and lingering uncertainties around Chinese demand.
    • The FED and ECB are expected to raise interest rates again this week, fuelling concerns that tightening financial conditions could dampen global growth and hurt energy demand.
    • Elsewhere, data released over the weekend showed that China’s manufacturing activity unexpectedly shrank in April, raising concerns about the strength of the country’s economic recovery.
    • Analysts noted that China was expected to be the biggest factor driving oil demand growth this year.
    • Meanwhile, OPEC+ is set to reduce output this month amid efforts to shore up market stability, offering some support to oil prices. Gulf energy news

Gold

  • Gold prices held remained $1,985 /oz after a rebound in US yields.
  • Bullion  remaining under pressure as investors braced for another rate hike by the Federal Reserve this week.
    • The central bank is widely expected to raise rates by 25 basis points on Wednesday in response to robust US economic data and persistent inflationary pressures.
    • This week, other major central banks, including the European Central Bank and Reserve Bank of Australia, are also scheduled to announce their monetary policy decisions.
    • However, in April, gold prices increased for the second consecutive month due to growing speculations that the US central bank could soon end its aggressive tightening cycle.
    • Concerns about a possible recession and renewed worries about the US banking sector have also fuelled the demand for safe-haven assets.
    • Given that gold is highly sensitive to the rates outlook, higher interest rates could raise the opportunity cost of holding non-yielding bullion and vice versa. Kitco metals report

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