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Morning NOTE

12 December 2022

GOOD MORNING

The ZAR weakened to reach 17.4000 on the back of profit-taking ahead of US PPI on Friday.

SUMMARY

The Rand retreated ahead of US PPI and also CPI and the final FOMC meeting of the year, as traders booked profits.

  • The Dollar rebounding slightly after US PPI beat expectations to the upside, but was still trending lower than the previous data reading.
    • The US10YT traded back above 3.55% to support the Dollar, but the inflation trend appears to indicate that we’ve seen the “high point “ of inflation.
    • AND that the FED will slow down and could even pause in 2023, if objectives are met given the “18 month lag” of interest rate increases.
       
  • With SA enduring 4 hours of load shedding at a time, as Eskom continues to struggle, we note that markets remain comfortable in play the “carry trade”
    • Traders thus continue to focus on yield differentials and lower US rates will support risk assets.
    • This will be highly ZAR supportive, especially as it appears that Cyril Ramaphosa will win his ANC leadership battle in the upcoming weekend.
    • This would result in the “political stability “ markets thrive on.
       
  • We now await US CPI on Tuesday and the FOMC on Wednesday.
    • The US FED  is widely expected to deliver a 50 basis point rate hike this week.
    • However, investors will be watching the Fed’s updated economic projections and Powell’s post-meeting press conference to guide the rates outlook.

Significant Market Data:
 
Tuesday

  • 11h30 :  SA MINING PRODUCTION OCTOBER YOY -2.3% EXPECTED VS -4.5% PREVIOUS
  • 11h30 :  SA GOLD PRODUCTION OCTOBER YOY -10.5% F/CAST  VS -12.4% PREVIOUS
     
  • 15H30 : US INFLATION NOVEMBER YOY 7.3% VS 7.7% PREVIOUS
  • 15H30 : US CORE INFLATION NOVEMBER YOY 6.1% VS 6.3% PREVIOUS

 
Wednesday

  • 10H00 : SA INFLATION  YOY NOVEMBER 7.4% EXPECTED VS 7.6% PREVIOUS
  • 10H00 : SA CORE INFLATION  YOY NOVEMBER 5.1% EXPECTED VS 5% PREVIOUS
     
  • 13H00 : SA RETAIL SALES -0.4% YOY OCTOBER VS -0.6% PREVIOUS
     
  • 21H00 : US FED FOMC INTEREEST RATE DECSION +50 BPS EXPECTED  ( Fed funds moves from 4% to 4.50% )
  • 21H00 : US FED CHAIR : JEROME POWELL  Q&A , WILL PAVE WAY FOR FUTURE RATE PATH AND PROJECTIONS.

 
Thursday

  • 11H30 :  SA PPI  NOVEMBER YOY 15.7% EXPECTED VS 16% PREVIOUS
  • 15H15 : ECB INTEREST RATE DECISION  +50 BPS EXPECTED :  LENDING RATE FROM 1.5% TO 2%
  • 15H30:  US RETAIL SALES -0.2% EXPECTED VS 1.3% PREVIOUS\

TODAY

  • After weakening to an overnight low of 17.4000, the ZAR opening stronger in “thin” Joburg trading.
    • The local unit gaining nearly 16 cents ahead of the European open as local banks hunt stops on the market making front.
    • Expect a “dollar bounce” when Europe opens at 10h00 CAT, but the ZAR remains a BUY.
    • Traders however remain focussed on this week’s US CPI and US FOMC meeting.
    • Inflationary conditions appear to be easing in the world’s largest economy.
    • This Supporting the view for a slowdown in Fed hikes and the possibility of lower rates in 2023.
      • This will be ZAR supportive and we expect a stronger ZAR in 2023.
         
    • Also, The ANC re-election appears to favour Ramaphosa and this will also be ZAR supportive.
       
  • Trade : SELL USDZAR on rallies.

Expected Ranges

  • USDZAR :  Expect a range 17.2100-17.5100
    • Importers 17.3100-17.2100
    • Exporters 17.4100-17.5100
       
  • EURZAR :  Expect a range of 18.1200-18.3900
    • Importers 18.2100-18.1200
    • Exporters 18.3000-18.3900
       
  • GBPZAR :  Expect a range of 21.0900-21.3600
    • Importers 21.1800-21.0900
    • Exporters 21.2700-21.3600

OPENING RATES

  • USDZAR 17.3400
  • EURZAR 18.2300
  • GBPZAR 21.2000

SOUTH AFRICA

  • Cyril Ramaphosa continues to grow in confidence ahead of the ANC’s 55th electoral conference.
    • Analysts predict that CR likely to win re-election and also avoid any impeachment proceedings in parliament over the PHALA-PHALA gate.
    • Cyril Ramaphosa returns to Nasrec, almost a shadow of the man he was five years ago when his election as party president symbolised hope for the nation and the ANC’s future. EWN
       
  • Eskom returned the country to Stage 5, but as of now no communication has been made public about how long loadshedding will last.
    • there’s no news yet on how long the current stage five power cuts will continue, as the country begins a new week.
      • Last week saw the rolling blackouts escalated to stage six, the highest stage the country’s seen since September.
    • Speaking about the power crisis at the weekend, President Cyril Ramaphosa said that there was no time frame for when rolling blackouts would come to an end for good.
      • “There can’t be a time frame when you are dealing with a broken system,” Ramaphosa said.
      • Ramaphosa on Saturday pointed to skills issues, power station design problems and sabotage, among others, as some of the challenges in this “broken system”. EWN
         
  • After severe hail storms and heavy rains the SA weather service announced that Gauteng residents should brace for more rain in upcoming days.
    • The SAWS said there’s a 60% chance of showers and thundershowers expected in Gauteng as well as, the Free State, KwaZulu-Natal, the Eastern Cape and parts of the North West and the Western cape.
    • This comes with a warning of possible localised flooding.

GLOBAL MARKETS

  • US stock futures edged lower on Monday ahead of a busy calendar week, with US consumer price data and the Federal Reserve’s interest rate decision taking center stage.
    • Futures contracts tied to the three major indexes were all slightly down in Asian trade.
    • Last week, the Dow fell 2.77%, the S&P 500 dropped 3.37% and the Nasdaq Composite declined 3.99%.
       
  • Traders remain focused on the central bank to deliver a more modest 50 basis point rate hike this week after raising rates by a hefty 75 basis points in each of the past four meetings,
    • though investors will be watching the Fed’s updated economic projections and Powell’s post-meeting press conference to guide the rates outlook.

Bonds:

  • The yield on the US 10-year Treasury, rebounded to above 3.5% from the three-month low of 3.4% touched on December 7th after the producer price index print surprised to the upside,
  • Traders worried that consumer inflation could refrain from slowing further.
  • Better than expected ISM services data and a strong jobs report for November also extended leeway for the Federal Reserve to continue raising borrowing costs,
  • Still, markets continue to price a rate of 50bps in December.
     
  • NB: With inflation trending lower traders are betting for lower rates in 2023.

ON FRIDAY

  • The Dow lost 305 points to close at 33,746
  • The SP500 lost 305 points to close at 33,746
  • The Nasdaq fell 77 points to 11,004

OVERNIGHT HEADLINES

Asian markets mixed in early trading ahead of US CPI and the Fed this week

  • In Japan the Nikkei 225 fell 0.21% to close at 27,842, giving back some gains from the previous session as investors braced for interest rate decisions from major central banks this week.
    • Also as US consumer price data that could influence the rates outlook.
    • Investors also digested data showing annual producer prices in Japan exceeded forecasts in November, while the business outlook for large manufacturing firms weakened in the fourth quarter.
  • In Australia the ASX 200 Index fell 0.45% to close at 7,181 on Monday, erasing gains from the previous session.
    • utility stocks leading the retreat following the federal government’s intervention in the gas market.
    • Australia will impose a price cap on domestic natural gas and thermal coal prices for a period of 12 months, and provide as much as A$1.5 billion in energy bill relief to help households with the cost of living crisis.
       
  • The US dollar index rose above 105 on Monday, extending gains from the previous session when data showed that US producer prices rose more than expected in November.
    • Investors look ahead to US consumer price data and the Federal Reserve’s interest rate decision this week.
    • The US CPI report on Tuesday will be the last major data before the Fed announces its policy decision on Wednesday.
      • Although the Fed is widely expected to deliver a smaller 50 basis point rate hike this week,
      • expectations around the terminal fed funds rate which currently hovers at about 5% could change as inflation remains elevated. FX news
  • US crude oil WTI traded above $71/bl on Monday as the Keystone Pipeline that connects fields in Canada to refiners in the US Gulf Coast remained shut.
    • Investors also continued to assess the effect of the latest European Union sanctions on Russian oil, though analysts said that they had little impact on global markets so far.
    • On the demand side, investors welcomed China’s loosening Covid restrictions that could revive energy consumption in the world’s largest crude importer.
    • Meanwhile, the US oil benchmark plunged more than 10% last week as renewed fears of a global recession gripped commodity markets.
    • Investors were worried that major economies would not be able to achieve a soft landing as central banks are set to raise interest rates further to bring down inflation. Gulf energy news
       
  • Gold fell below $1,790/oz ending a four-day advance as the dollar gained on stronger-than-expected US producer price data.
    • This while investors prepare for US CPI data and the Federal Reserve’s interest rate decision this week.
    • The US CPI report on Tuesday will be the last major data before the Fed announces its policy decision on Wednesday.
    • The US central bank is widely expected to deliver a smaller 50 basis point rate hike this week;

Also other major central banks including the ECB, the BOE  and the SNB  are set to decide on monetary policy this week as well.  Kitco metals

 

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