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Today’s Talking Point

Leading Indicator: Dec

Expected:

Prior: 123

Analysis: The leading indicator provides valuable insights on future economic conditions in the country. For most of 2022, the leading indicator has pointed towards stabilising economic conditions. However, the stabilisation has given way to a downward trend, pointing towards deteriorating economic conditions. This will likely continue to be the case in December and the coming months ahead as domestic failures such as power outages, and global headwinds weaken South Africa’s macroeconomic backdrop. With the leading indicator pointing towards bleak economic conditions, businesses will face difficult operating conditions, dragging output levels down and leading to weaker growth.

Rand Update

The South African government’s meeting with Russian Foreign Minister Sergei Lavrov and President Ramaphosa’s statement that load-shedding will be around for a while are dominating headlines this morning. However, despite the negative optics around these issues, the ZAR has not sold off. While it struggled for traction against the USD, it continued to consolidate around the R17.2000/$ mark at the start of the new week Focus on SARB.

This implies that the market is not focused on politics or load-shedding, but on the SARB’s policy decision later this week. There is plenty of speculation around whether the SARB will raise rates by 25bps or 50bps come Thursday. The professional market is positioned for the former, while consensus expectations as per Bloomberg surveys point to the latter. There are strong arguments either way, and any change will take place at the margin. The thinking is that either the SARB will raise the benchmark rate by 50bps and call it a day on its tightening cycle, or it could opt for a 25bps increase and leave the door open to potentially hiking again in March.

Given the uncertainty around this week’s SARB meeting, it holds plenty of market-moving potential. The December edition of the SARB’s leading indicator stats, due for publication today, will thus likely be relegated to the backburners, especially since SARB policymaking is currently primarily a function of maintaining a healthy spread over funding nations and defending the ZAR.

The ZAR may find some directional inspiration from external developments today, with PMI prints out of the Eurozone, the UK, and the US interesting in this regard as they will provide a read on economic momentum at the start of 2023. However, barring any significant surprises, the ZAR will likely continue to trade in range as the market awaits the outcome of the SARB’s policy meeting later this week. The SARB’s conservative monetary policy has been key in shielding the ZAR from any material depreciation against the US in recent months, and therefore holds plenty of market-moving potential.

Bond Update

Bonds/Yield Curve: As US Treasury yields have nudged a little higher in the past two trading sessions, local bonds have also come under pressure. The fact that the ZAR consolidated at these weaker levels has also contributed to the modest uptick in bond yields. Not much to say about this other than that bonds are responding to short-term market factors. It does not detract from the attraction of SA’s bond market at the moment nor the more upbeat assessment for the year ahead if inflation can indeed subside as anticipated. The SARB’s guidance will be key, although focus today will turn to the weekly bond auction to see whether the strong demand seen in the previous two weeks will be repeated once more.

FRAs: Some modest paying interest came through the FRA market yesterday in the lead-up to the SARB’s decision on Thursday. Although the underlying theme of interest rates topping out has not changed, the pace of the reversal,

lower once rates have topped out, is in question. The short end of the FRA curve has not changed much and remains positioned for a 25bp hike. Any movements of significance have occurred further out the curve as investors have moderated their expectations on the prospects of rate cuts towards the end of the year and the start of next.

Repo: The SARB has thus far kept in lockstep with the Fed to ensure that negative speculation against the ZAR is discouraged. They have been successful in that, and their conservative stance on monetary policy means that the monetary space for inflation to take hold no longer exists. There may be one more 25bp hike at the first meeting of 2023, but after that, the SARB may signal that they have done enough.

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