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Morning NOTE

14 April 2023

GOOD MORNING

The ZAR strengthened dramatically after another weak US inflation release as PPI reported below expectations.

SUMMARY

TThe Rand gained 2.3%, after US PPI dramatically reported to the downside.

  • US PPI on a Month on month basis reporting negative indicating the disinflationary process is well on the way.
    • A combination of rapid rate increases,
    • an easing of supply chain pressures due to China’s re-opening
    • depressed commodity prices (oil remains below $100/bl)
    • as well as the decrease in bank lending following the recent banking crises…. all likely to have contributed.
  • US Producer prices for final demand in the US fell 0.5% mom in March of 2023, the biggest decline since April of 2020, compared to forecasts of a flat reading.
    • Two-thirds of the decline can be attributed to a 1% decrease in prices for final demand goods, namely gasoline (-11.7%). 
    • Year-on-year, producer prices increased 2.7%, the least since January of 2021 and below expectations of 3%.
    • The core rate eased to 3.4% as expected but core prices went down 0.1% mom, beating forecasts of a 0.3% rise. source: U.S. Bureau of Labor Statistics
       
  • The data supporting Wednesday’s lower than expected CPI print as inflation continues to track lower, and henceforth making the case for a sharp FED PIVOT.
    • The data does not support a prolonged hiking cycle, no matter what the governors say.
    • It is unlikely they continue at this path as they would risk a deep recession in the world’s largest economy.

A crashing Dollar?

  • The dollar index fell below 101 on Friday. The Buck hitting its lowest levels in more than a year on back of cooling US inflation.
    • Data supporting the narrative that the Federal Reserve might be approaching the end of its tightening cycle.
    • The latest FOMC minutes also showed that officials considerably scaled back expectations of aggressive rate hikes this year;
      • and indicated that the recent banking crisis would likely tip the economy into recession later this year.
  • Markets are currently priced for a 25 basis point rate hike from the Fed in May, while projecting a series of rate cuts from July through the end of the year.
    • The dollar weakened across the board, with the most pronounced selling activity against the euro and antipodean currencies.
       
  • All of this bodes well for the ZAR, EMFX and other risk assets (stocks, crypto), all rallying strongly on the latest data.
  • We continue to expect a stronger ZAR in 2023.
  • US 10YT : 3.39%
  • DXY : 100.500
  • Euro : 1.1069
  • SP500 : 4,142
  • USDZAR : 18.0300

** Today we have the US retails sales at 14h30.

Data This week
THURSDAY

  • On THURSDAY
  • 08H00  UK GDP MOM 0.1% EXPECTED  VS 0.3% PREVIOUS
  • 11H30 : SA MINING PRODUCTION +1.75% EXPECTED YOY VS -1.9% EXPECTED
    • Mining production in South Africa sank by 5% YOY in February 2023, following an upwardly revised 2.7% decline in the prior month and defying market estimates of a 1.75% rise.
    • This was the 13th consecutive month of contraction in mining activity,
    • amid the adverse impact of prolonged load-shedding imposed by troubled utility Eskom.
       
  • 14H30  US PPI  3% EXPECTED YOY VS 4.6% PREVIOUS
    • The Producer Price Index for final demand in the United States increased by 2.7% from a year earlier in March 2023,
      • easing from an upwardly revised 4.9 percent rise in the previous month and below market expectations of 3 percent.
    • The rate of inflation was the lowest since January 2021,
      • adding to signs that inflationary pressure in the world’s largest economy might be cooling following the policy tightening delivered by the Fed over the past year. 

FRIDAY

  • 14H30 :  US RETAIL SALES 3.2% EXPECTED VS 5.4% PREVIOUS

Market Movement Today:

  • The Rand opening significantly stronger after softer than expected US inflation data.
    • The local unit nearly reaching R18/$ after a weekly low of R18.55/$ reached on Easter Monday.
       
  • Traders citing softer than expected US Inflation data and the prospects of a FED pivot, as the reason for a sharp decline in the Dollar.
    • The Greenback under pressure across the board as investors exit the Dollar in favour of risk assets.
       
  • The Rand ignoring poor economic data, and all focus turning to the end of the Fed’s hiking cycle.
    • The local unit advancing as the demand for G7 currencies as well as Gold  continued at the expense of the Dollar. 
       
  • This morning we will likely see some early profit taking ahead of the European open, resulting in a weaker ZAR.
    • NB: this will merely be book runners filling orders and clearing out weak stops.
    • And the USDZAR remains a SELL ON RALLY.
       
  • Hedging opportunities:
    • FX Volatilities and forward spreads remain elevated and there remains value in the those structures for exporters.
    • Any rally in the dollar can be used as a an opportunity for Exporters.
       
  • Trade : SELL USDZAR on Rallies.
    • Sell 18.1200-18.1800
    • Buy 18.0000-19.9400

Expected Ranges:

  • USDZAR :  Expect a range 17.9400-18.1200
    • Importers : 18.0000-17.9400
    • Exporters : 18.0600-18.1200
       
  • EURZAR :  Expect a range of 19.9700-20.0200
    • Importers : 19.9200-19.8700
    • Exporters : 19.9700-20.0200
       
  • GBPZAR  :  Expect a range of 22.5800-22.5400
    • Importers : 22.5800-22.5400
    • Exporters : 22.6200-22.6600

OPENING RATES

  • USDZAR : 18.0300
  • EURZAR : 19.9500
  • GBPZAR : 22.6000

SOUTH AFRICA

Ramaphosa’ s investment summit

  • The SA president’s fifth investment conference kicked off in Johannesburg on Thursday, April 13, 2023.
  • The first was held in 2018 and at that the president set a target of R1.2 trillion for South Africa.
  • Today this target was surpassed, although the figure will be announced only sometime later.
  • But the president has now set a new target, and that is R2 trillion, which must be attracted to South Africa over the next five years.

Amazon continues to invest in SA

  • Various companies made huge announcements [on Thursday], or confirmed existing investments in South Africa.
  • One of these businesses is the American group Amazon, or more specifically, their web services business, Amazon Web Services.
    • The group announced that over the next six years it would invest an additional R15 billion in South Africa,
      • and that follows it already having injected almost R16 billion into this country since 2018.
    • The vast majority of this investment and the intended investment is in the Western Cape, where they have built big data centres. Money web

Eskom

  • National Treasury is rolling out an ambitious plan to rid struggling municipalities of their ever-growing debt to Eskom,
    • but only if they adhere to strict conditions to permanently change problematic behaviour at council and consumer level.
    • If successful, the plan – set out in a circular to municipalities dated 31 March –
      • will deal with Eskom’s outstanding municipal debtors, who collectively owe the power utility R56 billion.
      • But only if they cut off defaulting consumers’ power and water. EWN

Bankers

  • Banker salaries likely to make headlines again after Absa’s top executives’ earned a collective R207 million.
  • According to Absa’s single-figure report,
    • CEO Arrie Rautenbach’s pay amounted to R46.05 million in 2022 – an 82.7% increase from the R25.22 million he received in 2021.
    • This comprises his fixed salary of R9.28 million and a cash incentive of R9.75 million.
    • The group CEO also got a deferred award of R8.75 million as well as a performance award vested of R18.28 million.
    • Rautenbach’s salary equates to him earning around R126,164 a day. Moneyweb

GLOBAL MARKETS

  • On Thursday, the Dow gained 1.14%, the S&P 500 jumped 1.33% and the Nasdaq Composite rallied 1.99%, with ten out of 11 S&P sectors finishing higher led to the upside by technology stocks.
     
  • Those moves came as fresh factory-gate inflation and jobs data came in softer than expected, raising hopes that the Federal Reserve might be approaching the end of its tightening cycle.
     
  • US stock futures eased on Friday as investors looked ahead to the start of the corporate earnings season.
    • The  major banks such as JPMorgan, Wells Fargo and Citi set to report later in the global day.
    • The producer price index, which gauges the prices received for final demand products, fell 0.5% over the previous month in March, while analysts expected a flat reading.
    • Also, labour market data softened as initial jobless claims for the week ended April 8, hit its highest level since January 2022. CNBC

Bonds

  • US 10 Year Yield was 3.44 % holding onto gains after US PPI supported the drop in US CPI indicating the Fed might be nearer to the end of its hiking cycle.
    • Markets remains priced for another 25bps hike in May.

In South Africa

  • The  10-year government bond yield was around 9.84%, holding close to its lowest level since February 14th.
  • The benchmark bond tracking falling Treasury yields amid mounting evidence of a U.S. slowdown and prospects of a global recession.
  • Recent data suggested the Fed’s monetary tightening was having its intended effect and raised expectations that the U.S. central bank could adopt a less hawkish stance.
  • Domestically, the SARB hiked its main lending rate by a larger-than-anticipated 50 basis points to 7.75% on March 30th on the back of high inflation and persistent load shedding.
  • Governor Lesetja Kganyago, in his policy statement,
    • said it might be too soon to predict the end of the tightening cycle as the harsh economic conditions are projected to persist, at least in the short-to-medium-term. Source : SARB
       

Yesterday

  • The Dow gained 383 to 34,029
  • The SP500 added 54 to 4,146
  • The Nasdaq added 236 to 12,166

  image: Trading economics

OVERNIGHT HEADLINES

The US Dollar

  • The dollar traded towards the key 100 level, hitting its lowest levels in a year.
    • The signs of cooling inflation in the US reinforced expectations that the Federal Reserve might be approaching the end of its tightening cycle.
    • US producer prices unexpectedly fell month-on-month in March by the most in nearly three years.
    • It backed up the previous day’s US CPI  that also missed expectations.
    • The latest FOMC minutes also showed that officials considerably scaled back expectations of aggressive rate hikes this year.
    • In addition it indicated that the recent banking crisis would likely tip the economy into recession later this year.
    • Markets are currently priced for a 25 basis point rate hike from the Fed in May, while projecting a series of rate cuts from July through the end of the year.
    • The dollar weakened across the board. FX news

Asian markets

  • Asian equity markets rose on Friday, tracking gains on Wall Street overnight.
    • A surprise decline in US producer prices raised hopes that the Fed might be approaching the end of its tightening cycle.
  • In Japan, the Nikkei 225 jumped 1% to above 28,400, rising for the sixth straight session, helped by gains in the retail sector.
    • Japanese shares also tracked a strong rally on Wall Street overnight as softening US economic data.
    • Traders citing the data raised hopes that the Federal Reserve could stop hiking interest rates soon.
    • Leading the retail sector higher, Fast Retailing shares surged 9% after the Uniqlo-owner posted better-than-expected quarterly earnings and offered an upbeat outlook.
  • In China, the Shanghai Composite rose 0.5% to above 3,330, hitting its highest levels in over a month and taking cues from a positive lead on Wall Street.
    • The surprise decline in US producer prices raised hopes that the Federal Reserve might be approaching the end of its tightening cycle.
    • On Thursday, investors digested data showing Chinese exports unexpectedly surged in March, allaying some concerns about a slowing global economy.
    • New energy and technology stocks led the advance. Reuters

Crude oil

  • US WTI crude futures held above $82 per barrel and Brent crude futures held above $86 per barrel on Friday,
    • Prices hovering near its highest levels in over two months amid signs of tightening global oil supplies and surging Chinese imports
      • Analysts pointed to another decline of US crude inventories last week at a key storage hub in Cushing, Oklahoma.
      • Earlier this month, OPEC+ also surprised markets by announcing an output cut of 1.16 million bpd from May until the end of 2023.
    • On the demand side, latest data showed that top crude importer China shipped in the most oil in almost three years in March. Gulf energy news

Gold

  • Bullion Continued its spectacular rally on the back of a falling Dollar.
  • Prices steadied around $2,040/oz on Friday, hovering at its strongest levels in over a year.
    • Soft US economic data bolstered expectations that the Federal Reserve is nearing the end of its tightening cycle.
    • Data from the US Labour Department showed that US producer prices unexpectedly fell month-on-month in March by the most in nearly three years,
      • coming a day after inflation data pointed to a moderation in consumer prices.
    • Gold is also on track to advance for the second consecutive week. Kitco metals report

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