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Morning NOTE

27 January 2023

GOOD MORNING

The ZAR retreated on the back of a lower than expected SARB rate hike and also stronger than expected US economic data.

SUMMARY

The Rand retreated from a strongest level of 17.0100 to reach 17.2500, as the SARB MPC surprised the market with a lower than expected rate hike of 25 bps.

  • The market was firmly priced for 50 bps hike and the ZAR weakened accordingly.
    • Analysts alluding to the enormity of the Eskom load shedding problem, and the inevitability of its negative effect on economic growth and general aggregate demand.
    • Coupled with US GDP Q4 beating estimates as well as a better than expected weekly jobless rate, the market bets in favour of the dollar increased.
       
  • However, the SP500 painted a different picture with the broader index rallied strongly to reach 4060.
    • The better than expected US GDP, allowed for investor optimism and scaling back recessionary bets.
    • The 10YT however mildly weaker to 3.52% as markets continue to price for a 25 bps hike for by the FED.
  • The SA repo rate adjusted to 7.25% vs 7.50% previous and the SA prime rate adjusted to 10.75%.
  • Overall the Dollar found support across the board, halting its recent slide.
    • The index recovered to 102 after  better-than-expected fourth quarter US GDP numbers.
    • it raised hopes of a soft landing in the world’s largest economy, while investors cautiously await US PCE data for cues on the Federal Reserve’s interest rate path. 

Data this week
Yesterday

  • The SARB MPC raised the repo rate by 25 bps to 7.25%, while markets had expected a 50 bps increase.
    • It marked the 8th consecutive rate hike since policy normalization started in November 2021.
    • The move was to anchor inflation expectations more firmly around the mid-point of the target band of 3-6% and achieve the inflation target in 2024.
    • The move was driven by the Bank’s assessment that risks to the inflationary outlook remain skewed to the upside.
       
  • The US economy expanded an annualized 2.9% on quarter in Q4 2022, following a 3.2% jump in Q3 and beating forecasts of 2.6%.
    • Consumer spending rose 2.1%, below 2.3% in Q3 and forecasts of a 2.5% increase. 
    • It was better than the market had forecasted.
       
  • NB : Traders  look ahead to US PCE data, the Fed’s preferred inflation measure, with a lower-than-expected reading likely to pressure the dollar further.

    FRIDAY

  • 15H30 : US PRICE  PCE YOY 4.4% EXPECTED VS 4.7% PREVIOUS

Market Movement Today:

  • The ZAR traded weaker on a mixed bag of data on Thursday.
    • Firstly, the SARB disappointed the market with an unexpected rate hike of 25 bps vs the 50 expected,
    • Resulting in a dramatic weakening of the ZAR, and to add fuel to the fire, the US GDP also surprised markets to the upside as Q4 exceeded expectations.
    • The Dollar being oversold rebounded across the board, allowing for ZAR weakness.

 
The data however
1. SARB – confirms global inflation is slowing down-Risk assets positive.
2. US GDP – the world’s largest economy not heading for a disastrous recession, also risk asset positive.
 
**Conclusion : even though we had the knee jerk reaction, the landscape for a stronger ZAR continues to improve.
 

  • The FED meets next week, where markets have priced in 25 bps as a hike.
     
  • Today, we opening near the top end of the weekly range, allowing exporters opportunities to SELL foreign currency.
     
  • TRADE : SELL USDZAR on rallies.

Expected Ranges:

  • USDZAR :  Expect a range 17.0400-17.3700
    • Importers 17.1500-17.0400
    • Exporters 17.2600-17.3700
       
  • EURZAR :  Expect a range of 18.6100-18.8200
    • Importers 18.6800-18.6100
    • Exporters 18.7500-18.8200
       
  • GBPZAR :  Expect a range of 21.2200-21.4300
    • Importers 21.2900-21.2200
    • Exporters 21.3600-21.4300

OPENING RATES

  • USDZAR 17.2300
  • EURZAR 18.7300
  • GBPZAR 21.3200

SOUTH AFRICA

Fuel levies :

  • The AA  called on Finance Minister,  Enoch Godongwana not to increase fuel levies this year.
    • The AA said that Godongwana heard  its call last year not to increase the two main levies attached to the fuel prices, which are the general fuel and Road Accident Fund levies.
      • The AA forecasts that the petrol price will rise by 44 cents a litre next month, while diesel is expected to cost between 14 and 25 cents more and paraffin is set to go up by 30 cents.
    • The finance minister is currently preparing his Annual budget speech to be delivered in parliament on 23 Feb 2023

STAGE 4

  • Load shedding was on Friday morning reduced to stage four until further notice.
  • South Africans had been on stage five of the power cuts all of Thursday after Eskom’s announcement of a further breakdown of generation units each at several power stations.
  • The utility said that it would provide further updates in the event of any significant change to the system.

GORDHAN

  • The African National Congress Youth League (ANCYL) said that it wanted Public Enterprises Minister Pravin Gordhan to be redeployed to another ministry.
    • ANCYL accuses him of failing to resolve the country’s worsening power supply crisis.

Cape Town

  • Mayor Geordin Hill-Lewis said that the City of Cape Town hoped to completely shield Capetonians from power cuts over time.
  • On Thursday, he outlined the metro’s three-phase independent power producer (IPP) plan before council.
  • The plan would provide protection for Capetonians from the first four stages of power cuts in the next three years.

GLOBAL MARKETS

  • On Thursday, the Dow rose 0.61%, the S&P 500 gained 1.1% and the Nasdaq rallied 1.76%.
    • Those moves came as investors cheered better-than-expected fourth quarter US GDP numbers that raised hopes of a soft landing, though recession fears persist.
    • US stock futures fell on Friday after the major averages extended their winning streak in Thursday’s regular session.
    • Today, investors look ahead to more economic data and earnings reports that could guide the outlook for growth and monetary policy. 
       
  • In extended trading, Intel plunged almost 10% after the chipmaker missed earnings and revenue estimates and offered a weak forecast.
    • Hasbro and KLA Corp also tumbled on disappointing updates, while Visa jumped on an earnings beat. 

Bonds:

  • The yield on the US 10-year rose to the 3.5% mark.
     
  • The yield extending the rebound the four-month low of 3.38% touched on January 18th.
    • Recent  economic data underscored the resilience of the US economy and added leeway for the Federal Reserve to extend its hawkish momentum.
    • The US GDP expanded by 2.9% in the fourth quarter, beating market expectations of a 2.6% increase and extending the 3.2% rise in the previous period.
       
  • Durable goods orders also expanded past expectations, while initial unemployment claims unexpectedly fell to nine-month lows.
     
  • Still, money markets expect the Federal Reserve to raise its key rate by a softer 25bps next week and end its tightening campaign at 5% in March before cutting the rate in November,
    • This in direct contrast to the central bank’s pledge of a 5.25% terminal rate for the whole year. Reuters

Yesterday

  • The Dow added 205 to 33,949
  • The Sp500 added 44 to 4,060
  • The Nasdaq  gained 199 to 11,512

OVERNIGHT HEADLINES

US Dollar

  • The dollar rebounded above 102 on Friday as better-than-expected fourth quarter US GDP numbers raised hopes of a soft landing in the world’s largest economy.
  • However, investors cautiously await US PCE data for cues on the Federal Reserve’s interest rate path.
  • The US economy expanded annually by 2.9% in the fourth quarter, beating forecasts for a 2.6% growth.
  • However, there were some signs of challenges to the economy, with most analysts expecting a mild recession by the second half of 2023.
  • Easing US inflation also reinforced the case for a smaller rate hike , while traders  look ahead to US PCE data, the Fed’s preferred inflation measure, with a lower-than-expected reading likely to pressure the dollar further. FX news

Asian markets higher across the board, following a rally on wall street. The US GDP supporting risk assets .

  • In Japan, the Nikkei 225 rose 0.07% to close at 27,382, recovering losses from the previous session and taking cues from a strong lead on Wall Street.
    • Sentiment also supported by better-than-expected Q4 US GDP numbers raised hopes of a soft landing in the world’s largest economy.
    • Investors also digested data showing Tokyo inflation exceeded expectations in January, adding pressure on the BOJ to adjust its policy of ultra-low interest rate further.
    • The benchmark index advanced for the third straight week amid a global equity rally and the BOJ’s firm commitment to massive stimulus. CNBC
  • In Australia, the ASX 200 rose 0.34% to close at 7,494 in post-holiday trade on Friday.
    • The index scaling its highest levels in nine months, with heavyweight financial stocks leading the charge.
      • Australian shares also tracked gains on Wall Street overnight after better-than-expected US GDP data raised hopes of a soft landing, though recession fears persist.
      • Financial stocks led the market higher, but other index heavyweights also advanced, including BHP Group (0.6%), Rio Tinto (0.4%). Reuters
  • US WTI crude oil edged above $81/bl on Friday,
    •  Demand support: prices extending recent gains amid hopes of continued demand recovery in top crude importer China.
    • Also better-than-expected fourth quarter US GDP numbers raised hopes of a soft landing in the world’s largest economy.
    • China’s economic reopening from Covid curbs sparked optimism about a rebound in crude consumption this year.
    • On the supply side, OPEC is expected to maintain current oil production levels when they meet next, keeping supply tight. Gulf energy
       
  • Gold weakened toward $1,920/oz, retreating further from nine-month highs as better-than-expected fourth quarter US GDP.
    • Data indicated that the American economy was more resilient than markets anticipated.
    • The US economy expanded annually by 2.9% in the fourth quarter, beating forecasts for a 2.6% growth.
    • The Federal Reserve is expected to deliver a smaller 25 basis point rate hike at the next policy meeting.
    • Investors now look ahead to US PCE data, the Fed’s preferred inflation measure, with a lower-than-expected reading likely to support gold prices.
    • Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion and vice versa. Kitco metals

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