The ZAR continued its recent gains and reached 17.0500 ahead of the Fed’s final FOMC meeting on Wednesday.
The Rand strengthened to 17.0500 before losing some ground on profit-taking ahead of the final FOMC meeting of 2023.
- The Fed did not disappoint and delivered a smaller rate hike of only 50 basis points, citing easing inflationary conditions.
- They however lifted the terminal rate to above 5%, indicating more rate hikes in 2023.
- This will of course be data dependent, especially after another benign inflation report, that showed CPI falling to 7.1% vs 7.7% previous.
- This morning however, South Africans will wake up to the news that ESKOM CEO Andre’ De Ruyter resigned.
- He handed in his resignation to the Eskom Board chair Mpho Makwana .
- Energy analysts predictin , the country already on the way to stage 7 as breakdowns intensifies at the aging PowerStation fleet.
- SA and the investor community now awaiting, the next appointment as we head into the weekend’s ANC elections as well as Xmas holiday period.
- Earlier in the day, SA Inflation also reported lower at 7.4% vs 7.6 previous, but Retail sales disappointed to negative 0.6% YOY,
- This as South African’s face a cost of living crises on a daily basis.
Back to the Fed :
- Markets reacted negatively at the close when the terminal rate was lifted and Policymakers projected rates would reach 5.1% next year,
- before being lowered to 4.1% in 2024, a higher level than previously indicated.
- The trend is however for lower inflation and this will be Risk asset supportive and also see ZAR gains in 2023.
- For the ZAR, the “ NEW canary in the coal-mine” however remains ESKOM !
Significant Market Data:
- 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
- The Rand reached 17.0500 BEFORE reversing ahead of the Fed’s FOMC last night.
- The US FED raised rates by the anticipated 50 bps, but markets were left nervous after the committee raised the terminal rate to 5.1%
- It was higher than the 4.6% previously set and could likely result in more hikes in 2023.
- However, the trend of inflation does not support this view, and it appears the FED COULD AGAIN MISS INFLATION.
- RECALL: They missed the inflation spike with the now infamous TRANSITORY rhetoric, and could likely miss the boat on the way down again !
- This by hiking rates, even though inflation appears to have peaked and seems to be reversing.
- The flipside is that it could result in more aggressive rate cuts in Q4 as rates would need to be adjusted to reflect lower inflation.
- This would be a real positive for risk assets and especially high yielding currencies like the ZAR.
- This morning the ZAR giving up hard earned gains after the resignation of Eskom CEO Andre’ De Ruyter.
- And like the “CAUTION first approach” adopted when CR faced impeachment, the market now keen to see who replaces him.
- The spikes however represent opportunities to SELL USDZAR, as the inflation trend and lower rates will support this play.
- Today, we also have the BOE AND ECB adjusting rates, and their press conference likely to indicate more “dovishness” following the recent UK CPI print.
- SA also releasing PPI INFLATION AT 11H30 with a lower number also on the cards at 15.7%
- RISK EVENT(s) : WHO REPLACES DE RUYTER ? SA PPI and ECB / BOE RATE MEETINGS.
TRADE : SELL USDZAR ON RALLIES
- USDZAR : Expect a range 17.0100-17.3700
- Importers 17.1300-17.0100
- Exporters 17.2500-17.3700
- EURZAR : Expect a range of 18.1900-18.4600
- Importers 18.2800-18.1900
- Exporters 18.3700-18.4600
- GBPZAR : Expect a range of 21.1600-21.4600
- Importers 21.2600-21.1600
- Exporters 21.3600-21.4600
- USDZAR 17.2100
- EURZAR 18.3400
- GBPZAR 21.3200
ESKOM CRISES CONTINUES
- Andre De Ruyter resigned and it is now widely expected that current board Chair Makwana will return to the position he occupied in 2009.
- In 2009, Makwana – then a non-executive director – acted in that role for seven months.
- He was reappointed to the board and installed as chairperson in October this year.
- He has promised to bring down the price of electricity, while committing Eskom to dramatically improve the performance of the company’s creaking power stations. IOL
- Andre’ De Ruyter resigned after severe political attacks from within the ANC government
- and no public backing from either President Cyril Ramaphosa (himself under pressure following Phala-Phala) as well as
- Public enterprises minsters Pravin Gordhan, who has also stayed silent.
- De Ruyter felt his position to be untenable and subsequently issued his resignation
- The Minister of Public Enterprises, Pravin Gordhan, wished André de Ruyter well after he resigned as Eskom’s chief executive officer (CEO).
- Gordhan said De Ruyter “carried an enormous burden on behalf of South Africa” and thanked him for what he called “sacrifice and resilience in a difficult job”. News24
Loadshedding level : 5
- Another strike is looming at Makro, as workers affiliated to the union Saccawu are set to down tools, along with workers at other companies within the Massmart group.
- The union said that it would go on strike on Thursday, supported by workers from stores such as Game, Fruitshop, and Builders Warehouse.
- This strike over wage increases follows another unsuccessful engagement with Massmart at the CCMA last week. EWN
- The Dow lost 150 points on Wednesday, while the S&P 500 and the Nasdaq dropped 0.6% and 0.7%, respectively,
- Investors digested the latest decision on monetary policy and subsequent remarks from Fed Chair Jerome Powell.
- The FED raised its federal-funds rate by a half percentage point to a 15-year high.
- At the same time, the peak for the federal funds rate is now projected at 5.1% next year, with cuts in rates coming only in 2024.
- Meanwhile, Powell said at the news conference following the decision that interest rates would stay elevated for some time
- but that the central bank is getting close to reaching the end of a tightening cycle. Reuters
- The yield on the 10-year US Treasury note fell back to under the 3.5% mark, on projections of a sharp slowdown in the US economy.
- The move showing investors challenging the Federal Reserve’s hawkish signals in its December meeting.
- The Fed delivered a 50bps interest rate hike to 4.25%-4.5% as widely expected, slowing from the four consecutive 75bps increases since June.
- The inversion of the spread between the 2-year and the 10-year bond yields widened past 76bps, approaching the 1981-high of 85bps touched on December 7th.
- South Africa’s 10-year government bond yield was around 10.3%.
- It was the lowest since November 30th, after the majority of SA’s parliament voted not to initiate impeachment proceedings against President Cyril Ramaphosa.
- Investors were spooked in recent weeks by the uncertainty surrounding the fate of Ramaphosa and the continuity of his reform agenda.
- On the domestic monetary policy front, SA inflation dropped to 7.1% that could affect the SARB’s monetary policy tightening agenda in 2023. Bloomberg
- The Dow declined -142 to 33,966
- The SP500 dropped -24 to 3,995
- The Nasdaq was lower by -85 to 11,170
- The Federal Reserve continued its battle against inflation by raising its benchmark interest rate to the highest level in 15 years.
- The Federal Open Market Committee (FOMC) voted to boost the overnight borrowing rate by half a percentage point, taking it to a targeted range between 4.25% and 4.5%.
- Along with the increase came an indication that officials expect to keep rates higher through next year, with no reductions until 2024.
- The new level marks the highest the fed funds rate has been since December 2007.
- More importantly it was last this high just ahead of the global financial crisis, whereafter the Fed loosened monetary policy aggressively.
- …to combat what would turn into the worst economic downturn since the Great Depression. CNBC
Asian markets mixed on the back of a topsy turvy Wallstreet. Markets welcoming the FED’s 50 bps hike but then retracing on comments that rates will continue to rise in 2023.
- In Japan, the Nikkei 225 opened sharply lower on Thursday before recovering to around breakeven.
- Traders citing the US Federal Reserve’s widely expected 50 basis point rate hike, BUT the case for higher rates in 2023 spooking investors.
- Investors also reacted to data showing Japan’s trade deficit expanded more than expected in November as imports outpaced exports.
- Technology stocks mostly declined and tracked their US peers lower. Reuters
- The US dollar continued to slide on the back of benign inflation data as well as a smaller rate hike by the Fed.
- The world’s largest central bank hiking rates by 50 bps causing the Greenback to fall below the 104 mark.
- The Buck hovering at the lowest level in six months as investors digested the Fed’s interest rate hike and fresh economic projections.
- The central bank raised its key rate by 50bps as largely expected, but FOMC members indicated that its key interest rate will be at 5.1% by the end of 2023.
- This was well above September’s projections of 4.6%, and challenging expectations that interest rate cuts would start in the third quarter of next year.
- However, with inflation and price pressures easing across the globe, expect an adjustment to this policy. Fx news
- Crude oil WTI rose more than 3% to above $77/bl and Brent crude followed by also rising more than 2% to $83/bl.
- A chance of a demand recovery in China supporting the market.
- OPEC and the International Energy Agency offered a somewhat bullish outlook for markets next year,
- citing the reopening of the Chinese economy and a less aggressive tightening from major central banks as crucial drivers for growth and fuel demand.
- On the supply side, OPEC+ decided to stick to their existing policy of reducing oil output by 2 million barrels a day from November through 2023.
- At the same time, the Keystone Pipeline that connects fields in Canada to refiners in the US Gulf Coast remained shut. Gulf energy news
- Gold prices traded lower, but remained above $1800, retreating from session-highs of $1812.9.
- Gold traders citing the Federal Reserve delivered a smaller 50bps rate hike as expected but signalled the terminal rate will be higher than initially expected.
- At the same time, no interest rate cuts are anticipated before 2024.
- Traders now await the ECB, the BoE and the Swiss National Bank monetary policy decisions due tomorrow.
- Still, gold prices have been trading at six-month highs this month, as investors bet major central banks will soon start slowing the pace of rate increases. Kitco metals