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GOOD MORNING
The ZAR gained sharply after a dovish FED hiked rates by an expected 25 bps and citing the possibility of a pause.
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SUMMARY
The Rand gained nearly 2.50% after the Fed delivered an expected 25 bps rate hike, amidst the turmoil in the American banking system.
- Before the collapse of SVB, it was consensus that the FED would hike by 50 bps to combat inflation.
- This all changed as the US government via the Treasury continues to provide assistance to smaller regional banks who have seen large deposit withdrawals.
- The panic in financial markets on the back of bailouts for First Republic Bank and the UBS acquisition of Credit Suisse, effectively forced the FED’s hand to adopt a dovish approach.
- The Fed also cited that rate hikes might be nearing an end, given the sharp contraction in bank lending to the economy due to the crises.
- The decision , sent the Dollar tumbling
- And G7 & EMFX gaining sharply against the buck.
- However, the SP500 did not follow suit indicating a more defensive approach from equity investors after;
- Janet Yellin, the Treasury secretary testified before the US Senate where she said there are not yet plans to guarantee all bank deposits, without congressional approval.
- Following the collapse of Silicon Valley Bank as well as Signature Bank ,
- The amount of money banks borrowed from the Fed’s discount window set a new record in the week ending March 15,
- Suggesting many banks are still worried they could face a rush of withdrawals.
The ZAR tracking stronger on the back of the weaker Dollar to find support ahead of the European Open.
Data this week
WEDNESDAY
- The Fed raised the fed funds rate by 25bps to 4.75%-5% in March 2023, matching the February increase,
- and pushing borrowing costs to new highs since 2007, as inflation remains elevated.
- The decision came in line with expectations from most investors although some believed the central bank should pause the tightening cycle to shore up financial stability.
THURSDAY
- 14H00 : UK BANK OF ENGLAND RATES DECISION +25 BPS 4.00% TO 4.25%
- 14H30 : WEEKLY US JOBLESS CLAIMS 193K EXPECTED VS 192K PREVIOUS
FRIDAY
- 14H30 : US DURABLE GOODS EXPECTED +1.2% VS -4.5% PREVIOUS
Market Movement Today:
- The ZAR opened stronger on the back of a weaker Dollar and dovish Fed remarks.
- The Fed opting to raise rates by 25bps as the banking crises took centre stage ahead of the ongoing fight against inflation.
- The local unit tracking the Euro’s moves against the Dollar that has seen a strong uptick in the single currency.
- The Euro strengthened above $1.0900, the highest since early February, as investors digest the latest FOMC meeting.
- The tone was seen more dovish than expected.
- The Fed is now seen delivering another 25bps hike in May, before pausing the tightening campaign.
- In Europe however, ECB President Lagarde said that inflation remains far too high and that a robust strategy going forward is essential.
- This will likely favour the Euro vs the US Dollar and also provide support to the ZAR.
- In addition, SA inflation surprised to topside with CPI at 7% vs 6.9% previous.
- This will likely add pressure on the SARB to hike rates further as CPI remains above the 3%-6% band of the MPC.
- Markets are pricing from another 25bps hike by the SARB and thus matching the FED.
- This will provide support to the local unit.
isk : and escalation of the banking crises will likely place pressure on risk assets and this would favour the dollar.
- Trade : after the sharp gains by the local unit in the last 24 hours, we encourage importers to hedge short terms commitments.
- The banking crises is on going and remains a risk to RISK ASSETS, as is evidenced by the lower SP500.
Expected Ranges:
- USDZAR : Expect a range 17.9900-18.3800
- Importers 18.1200-17.9900
- Exporters 18.2500-18.3800
- EURZAR : Expect a range of 19.5600-19.9800
- Importers 19.7000-19.5600
- Exporters 19.8400-19.9800
- GBPZAR : Expect a range of 22.1400-22.5300
- Importers 22.2700-22.1400
- Exporters : 22.4000-22.5300
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OPENING RATES
- USDZAR 18.1400
- EURZAR 19.7900
- GBPZAR 22.3600
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SOUTH AFRICA
- SA’s annual inflation rate edged up to 7% in February 2023 from 6.9% in the prior month.
- It was the first rise since last October, while markets had expected it to remain steady at 6.9%.
- Main upward pressure came from prices of food & non-alcoholic beverages (13.6% vs 13.4% in January),
- The annual core inflation, which excludes prices of food, non-alcoholic beverages, fuel and energy, picked up to 5.2% in February, the highest since February 2017, from 4.9% in the prior month.
- On a monthly basis, consumer prices were up by 0.7%, the most in seven months, following a 0.1% decrease in the prior month and above market forecasts of 0.6%. source: Statistics South Africa
- Economists blaming loadshedding for the recent rise in food inflation.
- Nedbank economist Isaac Matshego said load shedding was among the factors to blame for the 13.6% rise in food inflation – which accounts for the largest portion of the total consumer inflation.
- “Load shedding has compelled producers, particularly in food production, to rely on petrol and diesel to run generators which is more expensive to operate so that is adding to the cost pressures.” Moneyweb
- Public service unions are close to clinching a two-year wage deal with government, following tumultuous negotiations at the Public Service Coordinating Bargaining Council (PSCBC).
- The deal would include an average increase of 7.5% in the first year.
- Disputes over the 2022/23 financial year were finally settled recently, paving the way for the current financial year to go ahead.
- Talks at the bargaining council kicked off earlier in 2023 with calls for a 10% wage increase.
- Government said that it wants to bring the salaries of public servants in line with the market. EWN
GLOBAL MARKETS
Stocks:
- US stock futures stabilized on Thursday after the major averages sold off sharply during Wednesday’s regular session,
- as the Federal Reserve shot down hopes for interest rate cuts this year while Treasury Secretary Janet Yellen’s latest comments rattled bank shares.
- Futures contracts tied to the three major indexes drifted flat to slightly positive. In regular trading on Wednesday, the major averages initially rallied after the Fed delivered a widely expected 25 basis point rate hike.
- However, they reversed course late in the afternoon, with the Dow falling 1.63%, the S&P 500 dropping 1.65% and the Nasdaq Composite tumbling 1.6%.
- Those losses came as Fed Chair Jerome Powell said officials don’t see rate cuts this year and that they are prepared to raise rates higher than expected if needed.
- Yellen also told lawmakers that the US government was not considering a “blanket insurance” for bank deposits. CNBC
Bonds:
- The yield on the US 10-year Treasury note fell past the 3.5% mark, as investors digested the dovish rhetoric from the Federal Reserve along with the loosely-expected 25bps hike in its funds rate.
- The Fed indicated that it was on the verge of pausing its tightening campaign to address recent risks to financial stability, as bank failures this month threatened the health of systemic banks.
- Concerns that high interest rates may increase the risk of a crisis drove the FOMC to keep year-end forecasts of the funds rate unchanged at 5.1%.
- In the meantime, the yield on the 2-year note fell 20bps to under 4%, narrowing the inversion on the yield curve. Reuters
Yesterday
- The Dow fell 530 points to 32,030
- The SP500 fell 65 to 3,936
- The Nasdaq fell 190 to 11,669
 image: Trading economics
OVERNIGHT HEADLINES
The US dollar
- The US dollar fell below 102 on Thursday, remaining under pressure near seven-week lows as the Federal Reserve delivered a widely expected 25 basis point rate hike.
- The Fed however dropped language about “ongoing increases” being needed and hinted at just one more rate rise.
- Still, Fed Chair Jerome Powell said officials don’t see rate cuts this year and that they are prepared to raise rates higher than expected if needed.
- Meanwhile, Treasury Secretary Yellen told lawmakers that the US government was not considering a “blanket insurance” for bank deposits, reigniting concerns about the banking crisis.
- Investors now look ahead to the weekly jobless claims and new home sales data in the US on Thursday.
- Elsewhere, the Bank of England is expected to tighten policy further on Thursday after a hotter-than-expected inflation print for the UK. FX news
Asian markets
- Markets mixed in early pacific trading following the FOMC’S decision to hike rates by 25bps. The Committee citing softer inflation conditions as well as stress on the Banking system.
- In Japan, the Nikkei 225 fell 0.17% to close at 27,420, giving back gains from the previous session and tracking Wall Street lower.
- The Federal Reserve raised interest rates by another 25 basis points while Fed Chair Jerome Powell said officials don’t see rate cuts,
- this year and that they are prepared to raise rates higher than expected if needed.
- Treasury Secretary Janet Yellen also told lawmakers that the US government was not considering a “blanket insurance” for bank deposits, weighing on financial stocks.
- Meanwhile, investors digested data showing Japanese manufacturers remained pessimistic for the third straight month in March,
- amid concerns about slowing global growth that could hurt the country’s export-heavy industries.
- Financial, healthcare and technology stocks led the retreat, with losses from Mitsubishi UFJ (-1.4%), Takeda Pharmaceutical (-2.6%) and Keyence (-1.6%). REUTERS
Crude oil
- WTI crude futures fell to around $70/bl on Thursday.
- Prices weighed down by weak global sentiment after the Fed pushed back against bets for interest rate cuts this year .
- Official data also showed that US crude inventories unexpectedly expanded by 1.1 million barrels last week to the highest level since May 2021.
- Analysts citing large builds on the Gulf Coast outweighed a decline at the Cushing, Oklahoma, storage hub.
- Still, the market remains bullish on the outlook for top crude importer China, with the IEA stating recently that the country is expected to drive a 2 million barrel rise in daily global oil demand this year.
- On the supply side, Russia Deputy Prime Minister Alexander Novak said the country has decided to keep its output at a reduced level through June, taking into account the current situation. Gulf energy news
Gold
- Gold firmed up above $1,970/OZ on Thursday after gaining 1.6% in the previous session.
- Traders citing the Federal Reserve delivered a widely expected 25 basis point rate hike, but dropped language about “ongoing increases” being needed and hinted at just one more rate rise.
- Still, Fed Chair Jerome Powell said officials don’t see rate cuts this year and that they are prepared to raise rates higher than expected if needed.
- Gold is highly sensitive to the rates outlook as higher interest rates lift the opportunity cost of holding non-yielding bullion and vice versa. Kitco metals report
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