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Morning NOTE

 15 February 2023

GOOD MORNING

The ZAR traded in a wide range, before trading weaker towards R18/$ after the US CPI report.

SUMMARY

The Rand lost nearly 37 cents after initially trading stronger following the release of the US CPI report.

  • US CPI disappointed market expectations, printing at 6.4% YOY vs 6.2% expected.  The number was however lower than the previous data of 6.5%.
    • Risk assets initially rallying on the lower print, before selling off.
      • The yields on the US 10YT spiking to 373%, as traders concluded that the Inflation number allows the Fed to stay the course and continue to hike rates in 2023.
      • The higher terminal rate above 5%, also a concern as investors rebalance portfolios.
      • The SP500 remains higher for the week and the Dollar also continues to below highs set earlier in the week.
         
  • However, sentiment this morning in favour of the Dollar, due to the rise in yields, and we expect the entire Risk complex to remain on the defensive.
     
  • This morning we had  UK CPI at 09h00 , with  the inflation rate  ALSO DECLINING  to 10.1% YOY
  • Markets expected  10.3% and 10.5% previous US10YT 3.74%.
     
  • SP500 4112
  • DXY  103.53

Data this week 

WEDNESDAY:

  • 09H00 UK  INFLATION YOY PREVIOUS  10.5% VS 10.2 EXPECTED.
  • 09H00 UK CORE INFLATION PREVIOUS  6.3% VS 6.2% EXPECTED
     
  • 10H00  SA INFLATION 7.2% PREVIOUS VS 6.9% EXECPTED
  • 10H00  SA CORE INFLATION 4.9% PREVIOUS VS 4.9% EXPECTED
     
  • 13H00 SA RETAIL SALES  0.4% PREVIOUS VS -0.1% EXPECTED.
     
  • 15H30 US RETAIL SALES -1.1% PREVIOUS VS +1.6% EXPECTED
     
  • 16H00 ECB PRESIDENT CHRISTINE LAGARDE SPEECH

THURSDAY:

  • US PPI  6.2%   PREVIOUS  VS 5.4%  EXPECTED
  • US CORE PPI  5.5% PREVIOUS  VS 4.9%   EXPECTED

Market Movement Today:

The ZAR remained on the back foot as the global risk complex retreated following,

  • This morning the local unit back at R18/$ after previously hitting 17.6300 immediately after the data release.
    • Markets continue to digest the CPI report and now expect the Fed to continue hiking to ensure a terminal rate is above 5%.
    • On Tuesday, US CPI  was lower than previous, but higher than the market expected.
    • This resulted in a spike in bond yields, dragging the dollar higher and the ZAR lower.
       
  • This morning UK CPI ALSO lower than before, also showing a slowdown in global CPI.
     
  • We also had  SA CPI at 10h00 coming in line at 6.9% expected vs 7.2% previous YOY.
    • Indicating the likelihood of a stronger SARB and possible further rate hikes.
    • This will be ZAR supportive.
       
  • View – although CPI was higher than expected, it continues to decline as it was lower than previous.
    • In addition, UK CPI lower indicates a global slowdown in price pressures.
       
  • These remain opportune levels for ZAR exporters who are also able to utilise both the Options and forward curves to hedge exposure forward.

Trade :  short term importers to exact cover and exporters to utilise both fx options and FEC’s

Expected Ranges:

  • USDZAR :  Expect a range 17.7400-18.1300
    • Importers 17.8700-17.7400
    • Exporters 18.0000-18.1300
       
  • EURZAR :  Expect a range of 19.0900-19.3600
    • Importers 19.2700-19.3600
    • Exporters 19.1800-19.0900
       
  • GBPZAR :  Expect a range of 21.6400-21.9700
    • Importers 21.7500-21.6400
    • Exporters 21.8600-21.9700

OPENING RATES

  • USDZAR 17.9700
  • EURZAR 19.1900
  • GBPZAR 21.9400

SOUTH AFRICA

  • Members of Parliament will continue their debate on the State of the Nation Address (Sona) on Wednesday after opposition MPs tore into the president’s address on Tuesday.
    • Opposition parties took turns in criticising President Cyril Ramaphosa’s address, with some calling for his resignation.
    • But ANC members came to Ramaphosa’s defence, especially on Eskom and the power crisis.
       
  • Mineral Resources and Energy Minister Gwede Mantashe on Tuesday said the country doesn’t have two years to wait for the resolution of the power crisis.
    • He said there must be clear time frames.
    • He also added that  the new electricity minister should focus his or her energy on improving the energy availability factor of the most problematic power stations.
       
  • Cape Town Mayor Geordin Hill-Lewis has strongly condemned the docking of a Russian battleship in the city’s harbour.
    • Replying to a tweet on the Russian government page, Hill-Lewis did not mince his words about South Africa hosting the ship.
    • “We are not hosting this warship, nor is it welcome in the Mother City. Cape Town will not be complicit in Russia’s evil war,” he said.
    • Hill-Lewis said that President Cyril Ramaphosa “must answer for his complicity”.

GLOBAL MARKETS

  • On  Tuesday, the Dow and S&P 500 lost 0.46% and 0.03%, respectively, while the Nasdaq Composite gained 0.57%.
    • US stock futures eased on Wednesday as investors assessed January’s higher -than-expected inflation report and the latest Federal Reserve commentary.
       
  • On Wednesday , The annual CPI rate in the US slowed slightly to 6.4% in January from 6.5% in December, the lowest since October 2021
    • but above market expectations of 6.2%.
    • Analysts suggested the strong CPI reading was not entirely a surprise so the market took it in stride.
    • Investors also sifted through remarks from Fed officials who largely backed further rate hikes,
      • though Fed’s Harker said “we are likely close” to being restrictive enough.

Bonds:

  • The yield on the US 10-year, seen as a proxy for global borrowing costs, approached 3.8%, a level not seen in more than a month.
    • Investors adjust their portfolios for a higher Fed Funds terminal rate.
    • The closely watched US CPI reading for January landed at 6.4%, the lowest since October 2021, still above economists’ forecast of 6.2%.
    • Traders citing it opens the door to further rate hikes by the Federal Reserve.
    • Money markets have now priced at least two more 25 basis point rate hikes this year and see interest rates peaking at 5.2% by July.

Yesterday

  • The Dow declined 156 to 34,089
  • The SP500 was flat at 4,136
  • The Nasdaq gained 68 points to 11,960

:  image: Trading economics

OVERNIGHT HEADLINES

  • The US dollar strengthened above 103, finding some support after a stronger-than-expected US CPI report bolstered expectations the Federal Reserve will need to keep pushing interest rates higher to bring down inflation.
    • The latest Fed commentary also showed that policymakers largely backed more rate increases,
      • BUT Philadelphia Fed Bank President Patrick Harker said the Fed was nearing the point where rates were restrictive enough.
    • Investors now look ahead to US retail sales data for more clues about the economy.
    • The dollar strengthened across the board, with the most pronounced buying activity against the Australian and New Zealand dollars. FX news
       

Asian markets fell on Wednesday as a higher-than-expected US inflation report supported the case for further Fed rate hikes.

  • Investors also assessed the impact of Kazuo Ueda’s nomination as the next BOJ governor, as well as the PBOC’s decision to add more cash into the financial.
    • Shares in Australia, Japan, Hong Kong and China all declined.
  • In Japan, the Nikkei 225 fell 0.37% to close at 27,502, giving back gains from the previous session.
    • Traders citing the latest inflation reading in the US came in higher than markets anticipated, supporting the case for further Federal Reserve interest rate hikes.
    • Investors also continued to assess the implications of Kazuo Ueda’s nomination as the next Bank of Japan governor, who will be the first academic economist to run the central bank in post-war Japan.
    • Technology stocks led the retreat, with notable losses from SoftBank Group (-1%). Reuters
       
  • Brent crude oil declined towards $85/bl  per barrel on Wednesday, sliding for the second straight session after an industry report showed US crude inventories jumped by 10.5 million barrels last week.
    • The increase was much higher than market forecasts for a 321,000 barrel increase.
    • Investors also assessed a US inflation report which signaled the Federal Reserve will need to push interest rates higher.
    • Also, on Tuesday, oil prices came under pressure after the US government announced plans to release an additional 26 million barrels of oil from strategic reserves.
      • Supply worries also eased after the EIA said it expected record March production from the seven largest US shale basins.
      • Keeping a floor under prices, OPEC has revised its 2023 oil demand forecast by 100,000 barrels per day, citing higher demand from China.
      • On top of that, the cartel trimmed its supply outlook, saying it plans to stick with production quotas fixed late last year for the rest of 2023. Gulf energy News
         
  • Gold declined below $1,850/oz on the back of a rebound in the US dollar.
    • The Yellow metal, sliding back to its weakest levels in over five weeks.
    • Traders citing a stronger-than-expected US CPI report increasing  expectations the Federal Reserve will need to keep pushing interest rates higher to bring down inflation.
    • The latest Fed commentary also showed that policymakers largely backed more rate increases,
      • though Philadelphia Fed Bank President Patrick Harker said the Fed was nearing the point where rates were restrictive enough.
      • Markets now expect the Fed funds rate to peak around 5.26% in July from the current range of 4.5% to 4.75%.  Kitco metals report

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