Tertia Jacobs

Tertia Jacobs

Treasury Economist

What we are watching this week

In South Africa this week, we are watching three important developments. The first is February’s inflation reading, the second is Tuesday’s government bond auctions and the third is the MPC meeting on Thursday.

 

24/3: Headline CPI inflation for February. We expect headline CPI inflation to recede from 3.2% in January to 3.1%, which is in line with Bloomberg consensus expectations. There is volatility risk attached to February’s reading in view of Discovery’s announcement of postponing the annual rate increase in medical aid tariffs to June. In calculating the contribution of medical aids to inflation, StatsSA does not attach a weight to the different schemes but implements an average rate of increase – this could possibly have a more muted effect arising from Discovery’s exclusion. February’s outcome is likely to be the inflection point with March’s inflation rate rising to 3.4% before accelerating to +4.5% from Q2 20 due to base effects and an increase in the oil price.

 

24/3: Government bond auctions: R2030’s, R213’s, and R2032’s of R2bn. Following the considerable steepening in the SAGB yield curve since the end of February following the rise in US Treasury yields which led to a selloff in SA government bonds, National Treasury is issuing shorter-dated bonds at the weekly nominal bond auction. Funding costs have increased with long-dated bonds yielding more than 11%. Additionally, the highly uncertain global fixed income markets have raised a preference for shorter dated bonds. The Fed is auctioning 7yr Treasuries on Wednesday to the amount of $62bn – the outcome of the auction is important following the failure of the 7yr auction on 24/2 and the growing budget deficit.

 

25/3: The SARB announces its interest rate decision on Thursday. The expectation is for the MPC to remain on hold and the key areas of focus will be the tone of the statement, the inflation forecast, and the balance of risk assessment to the inflation outlook. We expect the SARB’s tone to shift from dovish-neutral to neutral-cautious. The previous three meetings saw 2 of the five members continue to support a 25bps rate cut. But in view of an upward revision in the inflation trajectory and the global rate cutting cycle at an end, we suspect the members could adopt a neutral stance. The negative real implied rate trajectory could deepen as the inflation forecast is raised to reflect the higher oil prices, steep petrol price increases and the 15% increase the electricity tariff (SARB’s assumption was 8.2%). However, with the risk of a third wave of COVID-19 infections in Q2 21 and implications for the economy, we think that any talk or expectations of front loaded rate hikes is premature. Our base case interest rate scenario is for policy normalization to commence in Q1 22. Inflation expectations remain contained and the pass through effect from a weaker ZAR has moderated in the absence of demand-pull pressures. Higher inflation is mostly emanating from input costs and administered prices. The starting point for the ZAR is closer to R15.0/$ from R16.50/$ at the previous meeting. The rand has remained range-bound trading between R14.45/$ to R15.53/$ (currently at R14.82/$) notwithstanding a selloff in the local bond market on the back of rising US Treasury’s with supporting (1) stronger global growth expectations and expectations that a firmer US economy will lift growth in EM; (2) as well as a merchandise trade surplus and higher commodity prices.  However, we think it is possible that the QPM model could signal three 25bps rate hikes in 2021 from 61bps previously. The neutral policy rate is expected to remain at around 2.5% with the country risk premium emanating from the fiscal risk premium remaining high. The SARB’s take on the global neutral interest rate will be interesting. Both the Fed and ECB have communicated dovish messages at their recent interest rate meetings. However, higher inflation in some EM has seen Central Banks in EM such as Brazil (+75bps to  2.75%), Turkey (+200bps to 19%), and Russia (+25bps to 4.5%) hike rates last week.

 

Turkey is in turmoil again after President Erdogan fired the Central Bank, the third one, after the rate hike. So far, the selloff in the TRY has not yet spilled over to currencies such as the ZAR as traders are looking to raise liquidity to cut long positions.