In today's market update, following the spectacular risk rally of recent weeks, market sentiment showed signs of souring on Tuesday as the USD regained its footing on the back of rising US Treasury yields.
BER business confidence: Q3
Analysis: Sentiment amongst business players improved notably in Q2, with the index reading reflecting that the number of respondents satisfied with prevailing conditions was now equal to that of those who were unsatisfied, this is likely to not have been sustained in Q3. The reintroduction of lockdown restrictions by the government aimed at curbing the spread of the delta variant and the unprecedented looting and civil unrest in KZN and parts of Gauteng, which disrupted supply chains and economic activity, suggest that business sentiment may have taken a knock during the quarter. Although the violence has subsided, the adverse impact of the looting and protests is likely to continue to be felt in the months ahead, which will further weigh on sentiment and impede on the economy's growth recovery prospects.
Following the spectacular risk rally of recent weeks, market sentiment showed signs of souring on Tuesday as the USD regained its footing on the back of rising US Treasury yields. Consequently, the ZAR bulls ran into headwinds against the greenback, with the local unit depreciating 0.50% through the session to close around the R14.3000 mark.
With the focus primarily on international developments, the market shrugged off a stronger-than-expected local GDP print. The data showed SA’s GDP growth improved from -2.6% y/y to 19.3% y/y in Q2, marking the fastest year-on-year growth rate on record. However, this came off a very low base due to last year’s lockdown-induced Q2 economic crash, while recent changes to Stats SA’s estimation methodology may have also have supported the print at the margin. Nevertheless, the quarter-on-quarter growth rate also came out stronger than expected, rising from 1.0% to 1.2% in the three months through June.
Looking ahead, the economy’s outlook is somewhat less rosy, with a contraction expected in Q3 due to the deadly July riots and stricter lockdown measures. The combination of these factors will have both a short-term and a long-term impact on business sentiment, which could weigh significantly on economic output going forward. Some of this is likely to be reflected in the BER’s business confidence index for Q3 that is scheduled for release today. Consensus expectations as per Bloomberg surveys are for a decline from 50 to 49, although the balance of risks is to the downside after the significant supply-chain disruptions at the start of the quarter.
GDP data released in the session yesterday painted the picture of an economic recovery that is underway. GDP growth topped the median consensus estimate while the prior was revised slightly higher. Yet, details of the report suggest that growth pressures could remain weak for some time to come. The headline figure had constant price GDP remaining well below the prior trend with gross expenditure at R4.505tn, a level more closely associated with the economy in Q3 2017. The constrained output would stand to reason given the various regulations and restrictions hampering output and growth.
While consumption expenditure by households rose y/y, many sectors such as restaurants and hotels, recreation and culture, and semi-durable goods continue to operate below the levels seen before lockdown. Interestingly, expenditure on communication and durable goods is higher than in Q2 2019, presumably as the restrictions have increased that which people need at home. Note that durable goods sales suggest that there could be some underlying momentum in the recovery, with households that benefitted from the lockdown generally having a little more free-flowing cash, according to the TransUnion CCI.
Demand at the bond auction remained below-par for the second week, with total bids coming in at R11.36bn from R9.585bn last week. It is plausible that demand remains constrained for some time given the looming elections, while rates markets are starting to price in an increased level of uncertainty, as seen in payer demand in the longer-dated FRAs. BER consumer confidence data will be of interest in the session ahead, with the Q3 figures capturing the business mood after the political violence. Other surveys have reflected marginal improvements to confidence.