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Morning NOTE

GOOD MORNING

The ZAR continues to trade on the backfoot against a rampant Dollar as US yields continue to rise.

OPENING RATES

• USDZAR : 19.3000
• EURZAR : 20.7400
• GBPZAR : 23.8600

SOUTH AFRICA

MPC DAY

• The SARB’S Monetary Policy Committee (MPC) is expected to hike the repo rate on Thursday, and a better inflation figure is expected to see a lower increase this time around.
  • Statistics South African recorded a 0.3% inflation contraction for April – cooling from the 7.1% in March to 6.8%.
  • This is the lowest inflation reading in almost a year – when inflation dropped to 6.5%
     
• The SARB has been aggressive in its stance to curb inflation, increasing the repo rate beyond 125 basis points higher than what it was before the COVID-19 pandemic.
  • Interest rate FORWARD RATE AGREEMENTS (FRA’S) ARE PRICING A 75% CHANCE OF 50 BPS HIKE, while economists are calling for 25 bps.
  • A higher oil price and weaker ZAR likely to force the SARB into 50 bps. EWN

The government and inflation

• As the country braces yet another hike, some economists believe politicians are to blame for the runaway interest rates and not the South African Reserve Bank (Sarb).
• Some expect 25 basis points, while others are betting on 50 basis points.
• While the rising inflation will be top of the driving factors, some economists believe the damning accusations that South Africa sold arms and ammunition to Russia have triggered an economic storm.
• President Cyril Ramaphosa, his Cabinet and security advisors have also been dealing with the political fallout of the accusations. Moneyweb

Eskom

• Electricity Minister Kgosientsho Ramokgopa said that Eskom was doing all it could to prevent stage 8 load shedding during winter.
• He said that while he could not say with certainty that this would be the case, a lot of work was being done to bring the utility’s power units back online.
• Ramokgopa has visited the Kusile power station in Mpumalanga to assess progress made in restoring three units there. EWN

GLOBAL MARKETS

Stocks

• US Nasdaq 100 futures jumped as much as 1.7% on Thursday after Nvidia surged 25% in extended trading on an earnings and revenue beat, as well as a stronger-than-expected revenue guidance driven by AI chip demand.
   
• S&P 500 futures also gained 0.5%, while Dow futures fell 0.2% after Fitch Ratings placed the United States’ AAA rating on a negative rating watch.
  • The ratings agency said the ongoing debt ceiling negotiations have raised the risks that the government could miss payments on some of its obligations.
     
• In regular trading on Wednesday, the Dow declined 0.77%, the S&P 500 dropped 0.73% and the Nasdaq Composite tumbled 0.61%, with ten out of the 11 S&P sectors finishing lower.
  • Those losses came as an ongoing struggle among US lawmakers to reach an agreement on the country’s debt ceiling weighed on the market.
     
• Meanwhile, the FOMC minutes showed Fed officials were less confident about the need for more rate hikes.

Bonds

• The yield on the 2-year and 10-year U.S Treasury notes briefly traded near their highest levels since March as investors pondered the economic outlook and debt ceiling negotiations dragged on.
• The yield on the 2-year Treasury was last up by a basis point to trade at 4.331%, after briefly touching its highest level since March.
  • The benchmark 10-year Treasury yield pulled back about 2 basis points to 3.701%, having also touched its highest level in more than two months.
  • Yields and prices have an inverted relationship. One basis point is equivalent to 0.01%.
    • House Speaker Kevin McCarthy said debt ceiling negotiations between his team and the White House were making progress.
      • But McCarthy’s optimism stood in contrast to guidance given to members of the House an hour later,
      • as representatives were informed they wouldn’t be required to remain in Washington over the weekend.
    • Congress faces a June 1 deadline to raise or suspend the debt ceiling in order to avoid a catastrophic default.
      • Fitch said it still thinks there will be a resolution to the situation, but added,
      • “The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges ,
      • that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness.” CNBC

Yesterday

• DOW -255 to 32,799
• SP500 -30 to 4,115
• NASDAQ  -76 to  12,484

  image: Trading economics

OVERNIGHT HEADLINES

The US dollar

• The US dollar topped the 104 mark on Thursday, scaling its highest levels in over two months.
  • Rising yields and indication as signs that the US economy could withstand the Federal Reserve’s aggressive tightening campaign and hawkish remarks.
    • Central bank officials prompted investors to scale back bets for interest rate cuts this year.
  • The latest FOMC minutes also revealed that some members saw the need for more rate hikes this year, while others anticipated that decelerating growth would eliminate the requirement for further tightening.
    • The currency benefited as well, ironically, from safe-haven demand amid mounting concerns about a potential US debt default,
      • with Fitch Ratings saying that the ongoing debt ceiling negotiations have raised the risks that the government could miss payments on some of its obligations. Fx news

Asian markets mixed after the Fed FOMC minutes showed a lack of consensus around the future path of interest rates.

• Half of the committee wants to pause and the other half wants to continue the hiking cycle.
  • In Japan, the Nikkei 225 rose 0.39% to close at 30,801, as gains among technology stocks offset losses in other sectors.
    • Japanese technology names tracked Nasdaq futures higher as Nvidia shares surged in extended trading on solid quarterly results and stronger-than-expected revenue guidance driven by AI chip demand.
    • Meanwhile, lingering uncertainties around the ongoing debt ceiling negotiations in Washington continued to weigh on market sentiment.
    • Notable losses were seen from index heavyweights such as Mitsubishi UFJ (-1.9%), Toyota Motor (-0.9%).
       
  • In Australia, the ASX 200 fell 1.05% to end at 7,138 on Thursday, closing at its lowest level in two months.
    • Mining and financial stocks leading the decline.
    • Australian shares also tracked losses on Wall Street overnight as lingering uncertainties around the ongoing debt ceiling negotiations in Washington weighed on market sentiment.
    • Heavyweight iron ore miners led the market lower, with losses from BHP Group (-1.6%), Fortescue Metals (-3.2%) and Rio Tinto (-1.6%). REUTERS

Crude oil

• WTI crude futures eased toward $74 per barrel on Thursday in a likely technical correction after rising for three consecutive sessions.
  • The US oil benchmark gained nearly 4% over the past three sessions amid tightening supplies and an improving demand outlook.
  • Saudi Arabia’s energy minister warned short sellers to “watch out” for potential consequences, raising speculations that OPEC+ could consider further output cuts at a meeting on June 4.
    • Meanwhile, official data showed that US crude inventories unexpectedly declined by 12.456 million barrels last week, the largest drop in six months and defying expectations of a 0.775 million increase.
    • The IEA also projected in its latest monthly report that global oil demand will exceed supply by 2 million barrels per day in the second half of 2023, with Asia driving most of the demand growth. Gulf energy news

Gold

• Gold declined to $1955/oz Thursday, hovering close to its lowest levels in two months.
  • Bullion prices under pressure due to the rise in Treasury yields and the US dollar.
  • Traders are closely monitoring the ongoing debt ceiling impasse and the likelihood of prolonged higher interest rates, particularly in the US.
  • The FOMC minutes revealed that some officials saw the need for more rate hikes while others anticipated that a deceleration in growth would eliminate the requirement for further tightening. Kitco metals report