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Today’s Talking Point

CPI Y/Y: May

Expected: 6.2%

Prior: 5.9%

Analysis: CPI was unchanged in April; however, expectations are for an acceleration to have occurred in May, due to the impact of elevated oil and food prices globally. CPI is expected to have increased to 6.2%, which is above the SARB's target range of 3-6%. If we see this occur, it could force the SARB to consider hiking interest rates more aggressively, especially after the recent move by the Fed. The main components which are likely to have led to the increase CPI for May are transportation prices, fuels, electricity, as well as oils and fats, which have seen prices surge globally. Core inflation, which excludes the price of food, non-alcoholic beverages, and fuel and energy, is also expected to have increased last month, however it is expected to have remained below the target midpoint of 4.5%, which indicates that inflation is mainly being driven by these external factors as local demand remains quite weak.

Rand Update

The ZAR had the wind at its back on Tuesday, appreciating 0.90% against a broadly-weaker USD amid a tentative improvement in market sentiment. Investors should be cautious of reading too much into this, however, as there is still significant uncertainty over the global economic outlook and how aggressively the likes of the US Federal Reserve and other major central banks will need to tighten monetary conditions to ease inflationary pressures.

Against this backdrop, Fed Chairman Powell’s testimony in Congress today and tomorrow will attract plenty of attention. Powell may provide a more detailed explanation for the outsized 75bp rate hike implemented a week ago, and also issue additional forward guidance for the upcoming policy meetings through the rest of the year.

As things stand, the Fed looks set to front-load its rate hike cycle with more big rate hikes in the months ahead, until there are material signs that inflation expectations and core inflation are declining. Thereafter, it may begin to discuss a flatter rate-hike trajectory to try and avoid a so-called “hard landing” for the economy. However, in the meantime, the Fed’s hawkish outlook will likely keep the USD supported, while emerging-market currencies may remain under pressure for a while longer.

Locally, the CPI reading today will hold focus, CPI was unchanged in April; however, expectations are for an acceleration to have occurred in May, due to the impact of elevated oil and food prices globally. CPI is expected to have increased to 6.2%, which is above the SARB's target range of 3-6%. If we see this occur, it could force the SARB to consider hiking interest rates more aggressively, especially after the recent move by the Fed. The main components which are likely to have led to the increase CPI for May are transportation prices, fuels, electricity, as well as oils and fats, which have seen prices surge globally. Core inflation, which excludes the price of food, non-alcoholic beverages, and fuel and energy, is also expected to have increased last month, however it is expected to have remained below the target midpoint of 4.5%, which indicates that inflation is mainly being driven by these external factors as local demand remains quite weak.

Bond Update

CPI data will hold market focus today and could have implications for the SARB rate outlook. Recall that the outlook for fuel inflation remains towards the upside, while investors will be monitoring the data for evidence of second-round effects. Core CPI has been accelerating marginally but remains soft amid tepid consumer affordability. However, it is also expected to have increased last month, but still remain below the target midpoint of 4.5%, which indicates that these external factors are mainly driving inflation as local demand remains quite weak.

Offshore, the focus will sit with Fed Chairman Powell who is set to testify to lawmakers. This is often market-moving as the Fed chairman is forced to justify his position on rates in detail.

In looking at the bond market, note that the vanilla bond auction was stronger than last week, with total bids rising to R8.75bn from R8.67bn last week and bond yields tightening. While the R2035 and R2040 were also auctioned last week, the duration of the slate was lengthened this time with the R2048 auctioned instead of the R2040. The R2048 was clearly unloved in generating a bid-cover ratio of just 1.72x, marking the lowest demand level in records dating back to 2020. The slight pick-up in aggregate bids to R8.750bn mark the third-lowest this year; below the year-to-date average of R10.807bn.

High yields and low demand in the long end suggest that the market remains concerned with fiscal risk, which tends to be priced into the long end. Interestingly, this is taking place against the backdrop of a doubling in corporate bond issuance in 2022 relative to last year. Bloomberg reports that the corporate bond market has issued R131bn year-to-date, which suggests that issuance to the market will exceed its prior annual record of R137bn just six months into the year.

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About the Author

Research Team
Sasfin Bank, Media