In today's market, The EM currency basket showed mixed performances through yesterday as broader risk-on moves were limited ahead of the official US jobs report scheduled for later today.
4 reading min
02 Jul 2021
US Change in nonfarm payrolls: Jun
Analysis: Given the sensitivity of financial markets to inflation dynamics at the moment, although last week’s PCE Core miss has alleviated concerns somewhat, the June US job report will undoubtedly be eyed closely this week. The nonfarm payrolls will be key in determining inflation expectations going forward. While recent labour market data has disappointed, helping to quell inflation fears to some degree, inflation concerns remain elevated, underpinned by expectations for a further recovery in the jobs market in the months ahead. Assumptions for a solid recovery in the labour market are supported by vaccinations, a reopening economy, and another massive fiscal stimulus package. Although inflation risks remain elevated, we remain of the view that the Fed is unlikely to budge from its current ultra-accommodative policy stance until at least the latter part of 2022.
The EM currency basket showed mixed performances through yesterday as broader risk-on moves were limited ahead of the official US jobs report scheduled for later today. However, a late afternoon surge from the dollar saw most emerging markets and major currencies end domestic hours in the red. It was no surprise that the ZAR swung between gains and losses through the day, given its reputation as a bellwether for EM sentiment. After sticking to a narrow trading range around the 14.3000/$-handle for most of the day, the local currency ultimately sold off to close near 14.4300/$ as traders backed the US dollar and a potentially stronger than expected US non-farm payrolls print.
With yesterday concluding the heavy domestic data week, the ZAR is likely to trade at the mercy of broader sentiment as we head into the weekend. In the spot markets currently, EM currencies have continued to trade weaker against the USD, with the greenback remaining firm ahead of the US non-farm payrolls print scheduled for later in the day. The ZAR is currently trading amongst the weakest in the EM sample of currencies, with yesterday’s 0.75% decline seeing the USD-ZAR break above its 100-day moving average for the first time since late March, spurring further weakness in early morning trade.
NAAMSA vehicle sales data was released yesterday, with the headline total of 38,033 vehicles sold, which marked a 20.2% y/y increase. While this does suggest that demand is recovering relative to the collapse seen in lockdown, the total was still around 6% lower than the pre-lockdown trend. Linear estimation suggests that roughly 630k vehicles would have sold from March 2020 to June 2021, or approximately 42k vehicles per month. The actual data show that just 492.6k vehicles were sold over the period. This suggests that there has been a 22% suppression in overall sales, or a cumulative loss of around 140k vehicle sales since April last year. Not all that surprising, given less reason to drive thanks to lockdown.
Below trend vehicle sales, weak retail sales, low credit growth and a weak business environment feed into the view that economic actors are still relatively uncertain about the future, with consumptive demand therefore likely to remain weak. The BER consumer confidence survey corroborates an outlook for softer demand in coming months, too, as could be expected, with many question marks hanging over the future of SA. The SARB quarterly bulletin included data reflecting net savings by households at R22.4bn in Q1, also a marker of uncertainty. As a percentage of household disposable income, this represents the highest level since Q4 2004. The trend has been building since lockdown was announced but is more likely to be driven by a weak jobs market than actual lockdown. And the jobs market could remain weak after lockdown.
This should contain inflation potential and reduce the likelihood that we see the SARB erring on the side of aggressive rate hikes. With that said, some attention should be paid to the theme of potentially changing the inflation target at the SARB. Governor Kganyago was quoted saying that a lower inflation target could be a prudent development for the SA economy over the coming years. Kganyago argued that the 3-6% target could be reduced to 2-4%, which would bias SARB rates higher given a medium-term view for inflation to sit around the 4.5% mid-point of the SARB target band in coming years. SARB Deputy Governor Kuben Naidoo has since pushed back against speculation that this could be forward guidance, saying no talks are underway about changing the target band. This is an emerging theme that will no doubt be unpacked in forthcoming engagements between the SARB and the public.
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