US Change in nonfarm payrolls: Jul
Analysis: The June jobs data came in stronger than expected, confirming that the US labour market remains tight. More jobs were added than forecast while the unemployment rate held near a five-decade low, providing signs of strong demand that supports the Federal Reserve’s aggressive policy stance. After last week’s 75bp rate, investors will eagerly anticipate the July jobs report as it will help guide the future path of the Fed. A stronger than expected number could further embolden the Fed, while a soft number could signal that policy tightening is starting to weigh on employment, particularly in interest rate-sensitive sectors, adding to growth concerns. If recent jobless claims figures are anything to go by, the risk to this release is to the downside.
Another strong day on the ZAR, and it could end relatively flat after a relatively volatile week. The core driver yesterday in the ZAR’s appreciation was the retreat in the USD. Debates are raging around whether the USD will enjoy one last leg higher, or whether there is so much priced into the USD that the risks sit overwhelmingly in favour of a retreat. On the one hand, majors such as the EUR and the GBP face unprecedented geopolitical and growth risks that must be priced for. On the other, the USD is already fully priced. All other central banks are also hiking rates, with the BoE and the RBA both hiking by the strongest amounts in decades.
As we head into what will turn into a long weekend in South Africa, some traders will look to close out positions that were most likely long USD positions. There also seems to be some decent demand returning for SA bonds as investors look through the current spike in inflation and rates to the slowdown that will inevitably follow. The outlook for the ZAR remains constructive. It enjoys healthy carry attractiveness and is no more economically fragile than many other countries, while ETM’s ZAR Sentiment Indicator has spiked to point to a phase of ZAR appreciation. Whether that is a function of local factors or a weaker USD is not clear, but it will most likely be a combination of both.
Domestically, there is not much to focus on other than the usual political noise, which means that much of the focus will turn to the US non-farm payrolls data as investors try to gauge the strength of the underlying US economy. Any sign of weakness will likely count heavily against the USD, although it may still be too soon for that weakness to have manifested.
Nonetheless, with so much priced into the USD, it remains vulnerable, and exporters are encouraged to view current levels as offering decent value over the next 6-12 months. Importers may need to be patient and wait for the market t unwind some of its long USD positionings in order for greater value to be extracted.
The Bank of England delivered a 50bp rate hike yesterday with the promise of further tightening in the months ahead. Concerningly, the BoE warned that a recession will begin in the final quarter of the year and last all the way through 2023. That would be the longest slump since the financial crisis, with officials expecting the economy to shrink by around 2.1% in total. Meanwhile, the inflation peak was revised higher to 13% in October amid a surge in gas prices and the bank warned that price gains will remain elevated throughout 2023. It is, therefore, fair to say that the core market remains in an environment of tightening monetary policy yet rising recession risk.
This will keep capital availability to EMs like South Africa constrained, with cross-currency basis swaps (a derivative instrument that reverses the effect of currency and interest rate changes) inverted in the 5y+ portion of the curve to suggest that longer-term financing is coming at a high cost to SA. Global recession favours an allocation into bonds rather than equities, which seems to be supporting a rally in the domestic market. Despite an upbeat "whole economy" PMI that was released this week, a similar outlook can be painted for SA when considering that household incomes remain constrained by the weak economy. Investors continue to price in a weak retail sector outlook, with the recent Massmart earnings result and outlook reflecting an environment of constrained consumer budgets.
Falling oil prices and some ZAR strength meanwhile seem to be supporting receiving interest in the FRA market, which suggests that the market is speculating that the SARB will be hard pressed to raise rates aggressively in the months ahead. The 21x24 FRA rate has compressed to 7.73% in overnight pricing, down nearly 100bp from recent peaks