FED LOOKING AT FASTER PACE FOR HIKING INTEREST RATES
Gold closed the week 0.08% higher, trading at USD1233/ounce. The dollar traded weaker against most major currencies, ending at CHF0.99/USD (-0.17%) and EUR1.06/USD (-0.25%). Brent crude oil had another volatile week and closed -1.57% lower at USD56/bbl.
Fed Chair Janet Yellen struck a hawkish tone last week, which surprised markets somewhat. Yellen, who is normally very dovish, said it would be unwise for the Fed to increase rates too slowly. However, she did not commit to a time period but mentioned that every Fed meeting is live, meaning interest rates could be hiked as soon as next month. Richmond Fed President Lacker echoed Janet Yellen’s sentiment saying the Fed should raise rates sooner than the market is currently expecting owing to an in-crease in inflation and tightness in the labour market. He went on to mention that increasing interest rates soon at a gradual pace would be superior to increasing rates later on at an accelerated pace. US Fed official Fisher and Boston Fed Chair Rosengren had similar sentiment in their speeches last week.
In economic news, US CPI for January was higher than market expectations coming in at 2.5% y/y, up from 2.1% in December.
An increase in retail sales prices was the main contributor to the higher inflation figure, which increases the probability of an interest rate hike sooner rather than later. US PPI for January also beat market expectations returning 1.6% y/y, against consensus of 1.5%.
In Europe, the Bank of Greece warned about the consequences that the new round of debt required to bail Greece out of their debt crisis would have. Fitch ratings agency then cautioned that Greece is at risk of being downgraded from their already junk status (CCC) if they do not resolve their differences with creditors. Greece’s next payment is due in July and talks will resume this week between the parties. The Greece 10y bond, seen as a proxy for the development of the bailout plan, saw a yield spike to 7.71% (increase of 45bps) as risk increased.
Inflation in China for January rose to 2.5% y/y. This was above the December figure of 2.1% y/y and is the fastest increase since August 2011. The figure was mainly driven by low base effects and an increase in food prices but price increases in China are expected to slow down due to tighter monetary policy and a slowdown in property prices. The MSCI World index closed the week 1.20% up whilst the MSCI Emerging Markets index also closed higher at 0.95%.
LOCAL CURRENCY AT BEST LEVEL SINCE OCTOBER 2015
The rand closed the week at 13.12/USD, an appreciation of 2.24%. The last time the rand was at these levels was in October 2015. Year to date, the top three emerging market currencies versus the dollar is the rand (appreciation of 4.74%), the Russian rouble (appreciation of 2.46%) and the Brazilian real (appreciation of 0.19%), while the Turkish lira was the worst performer losing 2.85%.
Unemployment figures released by Statistics SA for Q4 2016 surprised markets on the upside. Markets expected the unemployment rate to have contract to 27.0% from 27.1% in Q3 2016. In the event, the unemployment rate came low-er at 26.5% for Q4 2016, meaning 235k more jobs were created last quarter. The majority of new jobs created emanated from formal sector employment.
Statistics SA then released January inflation statistics. Markets were expecting inflation to have moderated to 6.7% y/y from 6.8% in December. In the event, CPI dropped to 6.6% y/y owing to lower prices increases from tobacco and alcoholic beverages, recreation and culture as well as from restaurants and hotels. Negative contributions came from food and non-alcoholic products (+11,4% y/y) and transport (+6.7%y/y).
Retail sales for December, also released by Statistics SA, came in at 0.9% y/y. This was below the 3.8% y/y seen in November and disappointed the market, which was expecting a figure of 2.2%. The main culprits for the drop in retail sales were lower sales of textiles, clothing and footwear products.
The JSE All Share index closed the week 0.88% down. The largest detractors emanated from the resource and industrial boards, closing 2.65% and 1.46% down respectively. In the week ahead, focus will be on the release of PPI data on Thursday. Markets are anticipating a figure of 7.0% in January, a slightly lower number than 7.1% from the month before so the jury is out to see if the market is disappointed with the actual print or not.