THE US 10Y TREASURY YIELD ROSE BY 0.08% TO END THE WEEK TRADING AT 2.37%.
There were more than a few key drivers behind this move. Firstly, hawkish rhetoric from Fed officials continued last week as New York Fed President William Dudley mentioned that US interest rates were likely to be raised as the overall economy was in good shape. The President of the Boston Fed added that one more hike this year was highly probable followed by three to four hikes next year owing to a labour market very close to full strength. According to him, if the current unemployment rate of 4.2% reached the Fed target of 4.0%, this would be a clear signal the US economy is overheating.
US SENATE APPROVED A BLUE PRINT FOR THE 2018 FISCAL YEAR.
This started the ball rolling for the Republicans to pursue their tax cut package without support from the Demo-crats. President Trump’s tax overhaul plan (reflation trade) is thus gaining momentum, albeit with an element of uncertainty pertaining to the specifics of these policies. Nevertheless, this drove treasury interest rates higher whilst US markets continued to rally with the Dow Jones Industrial Average, S&P500 and the Nasdaq ending the week 2.04%, 0.86% and 0.35% up respectively. And last but not least, rumours of a hawkish successor to Fed Chair Janet Yellen’s also pushed interest rates in the US higher. The hearsay between dovish and hawkish succes-sors (or no successor at all) is expected to continue till February next year and likely to be a source of market volatility.
COPPER ROSE ABOVE USD7000/TONNE FOR THE FIRST TIME SINCE 2014.
The upward revision of global growth by the IMF unquestionably had an impact on the copper price as this is often seen as a forward-looking indicator of economic health. During good times, global economic activity expands and the price of copper rises. Confirming this to some degree is the fact that PMI data in the US and Eurozone has been robust and likely to lead to a pick-up in demand for copper down the line. Similarly, China has reported a copper shortage despite copper being one of their largest imports in September. Moreover, the manufacturing of battery operated vehicles in China should result in increased demand as these vehicles require four times as much copper in their production compared to a standard vehicle. Copper close the week at USD7008.5/tonne having risen 2.19% (+27.40% year to date).
BRENT CRUDE OIL ENDED THE WEEK 1.01% HIGHER AT USD57.75/BBL.
The oil price was pushed up upon concerns of export supply issues from Iraq as oil in the region is at risk owing to conflict between Iraqi forces and Kurdish fighters. Additionally, the US may be imposing sanctions on Iran once again whilst an explosion at the Louisiana Lake oil rig was also the source of supply worries.
MARKETS GENERALLY UNAFFECTED BY ECONOMIC NEWS RELEASED FROM LAST WEEK.
Inflation in the UK ticked higher to 3.0% y/y in August from 2.9% presumably due to the weaker pound. It would not be surprising to see a 0.25% interest rate hike in the UK at the BOE’s next meeting in November, even though the BOE Governor defended the higher-than-target levels of inflation saying it’s a trade-off to support the UK economy and jobs.
INFLATION IN CHINA SQUARED WITH MARKET EXPECTATIONS COMING IN AT 1.6% Y/Y FOR SEPTEMBER.
Much the same, markets were not surprised with GDP growth of 6.8% for Q3 2017. This was slightly below the Q2 2017 figure of 6.9% and digging deeper into the statistic revealed that property and construction slowed the most. This shows the Chinese government’s efforts to try and rein in the surging debt levels, specifically in the property sector, may be starting to bear fruit.
PRESIDENT ZUMA RESHUFFLED HIS CABINET FOR THE TENTH TIME SINCE HIS INAUGURATION 2009.
These changes heighten political uncertainty in the run up to the Medium-Term Budget Policy State-ment (MTBPS) later this week and the ANC’s elective conference in December. Of particular concern are the changes made to the energy portfolio. David Mahlobo was moved from Minister of State Security to Minister of Energy, which could help President Zuma revive his nuclear power program. Additionally, SACP General Secretary Blade Nzimande, was dropped from his position as Minister of Higher Education and is no longer present in the cabinet placing additional pressure on the already fragile tripartite alliance between the ANC, SACP and COSATU.
All the uncertainty resulted in a spike in yield on South Africa’s 10Y government bond. The R186 end-ed the week 0.21% higher at 8.83%. The rand in the meanwhile depreciated by -2.83% to close the week at 13.63/USD.
THE JSE ALL SHARE INDEX TRADED RELATIVELY FLAT AND ENDED 0.14% HIGHER.
The financials board was the largest detractor dropping -0.87% whilst the JSE Resources 10 and the JSE Industrials 25 indices mostly likely benefitted from the weaker rand and rose 0.53% and 0.47% respectively.
INFLATION FOR SEPTEMBER RETURNED 5.1% Y/Y.
This was both above market expectations of 4.9% as well as August’s print of 4.8%. An increase in petrol prices was the main driver leading to a higher general price level whilst food prices (except meat products) fell once again.
CONSUMER SPENDING CONTINUED TO SHOW A POSITIVE REBOUND LAST WEEK.
Retail sales accelerated 5.5% y/y in August. This was significantly above the July figure of 1.6% and market expectations of 2.3%. Moreover, it was the biggest gain in retail sales since August 2012 and sales in textiles, clothing and footwear were the main contributors. The increase in retail sales bodes well for a decent Q3 2017 GDP print.