The ECB signals that it will (at least) stay the course

• At yesterday’s post-meeting press conference, ECB President Draghi put paid to market speculation that the Bank might be contemplating an early end to the QE program launched last month. He acknowledged the recent improvement in economic conditions, even noting that while the risks to the economic outlook remained to the downside, they were no “better balanced”. However, he stressed that the Bank’s economic outlook, or envisioned recovery path, was dependent on the QE program being fully implemented.

• G20 finance ministers are due to meet today and tomorrow on the fringes of the IMF meetings. Steve Barrow (our G10 FIC Strategist) thinks it unlikely that much is going to get done at the G20 meeting but acknowledges that’s probably the market view as well.

• Fed Vice Chairman Fischer speaks on a panel at the IMF spring meetings. The subject under discussion is the “elusive pursuit of inflation”. This could be an interesting discussion for the market – which is a shame as markets will be pretty threadbare by the time the debate gets going.

• On the domestic front, Stats SA released the February retail sales yesterday Bloomberg consensus expectations had pencilled in an improvement in sales.

• Retail sales growth was expected to have increased to 1.9% y/y in February from 1.7% y/y in January. In the event, retail sales growth overshot expectations, coming in at 4.2% y/y in February from an upwardly revised 1.9% y/y in January.

• The rand weakened on Wednesday, closing at 12.06, compared to Tuesday’s close of 12.01. The rand traded between a low of USDZAR11.9989 and a high of USDZAR12.2073 intraday.

International developments

At yesterday’s post-meeting press conference, ECB President Draghi put paid to market speculation that the Bank might be contemplating an early end to the QE program launched last month. He acknowledged the recent improvement in economic conditions, even noting that while the risks to the economic outlook remained to the downside, they were no “better balanced”. However, he stressed that the Bank’s economic outlook, or recovery path, was dependent on the QE program being fully implemented. The ECB intends to buy EUR60 billion of public and private sector assets each month until at least September 2016 and, in any case, until it sees a sustained adjustment in the path of inflation.

G20 finance ministers are due to meet today and tomorrow on the fringes of the IMF meetings. Steve Barrow (our G10 FIC Strategist) notes that the recently released World Economic Outlook from the IMF seemed to highlight more of the things that are still going wrong in the world (such as disappointing growth) and could go wrong in the future (taper tantrum mark two) than the things that are going right. With this in mind, G20 ministers may appear to have a lot on their plate but Steve is sceptical that ministers can – or will – do much to address the issues the IMF raises. For instance, US calls for Eurozone surplus countries – mainly Germany – to boost demand fall on deaf ears so reliably that it’s almost not worth trying anymore. There might also be a bit of friction between the US and other countries following the decision of other major nations to join the Asian Infrastructure Investment Bank (AIIB). There’s currently 57 members of the AIIB including key G20 players outside of Asia such as the UK and Germany – but not the US. Putting all these things together Steve thinks it unlikely that much is going to get done at the G20 meeting but acknowledges that’s probably the market view as well.

Fed Vice Chairman Fischer speaks on a panel at the IMF spring meetings. The subject under discussion is the “elusive pursuit of inflation”. Peter Praet of the ECB is on the same panel – and presumably is looking even harder than Fischer given that Eurozone inflation is stuck below the zero line right now. It’s clearly the sort of topic that lends itself to a dovish discussion given that central banks have found it hard to generate higher prices. That falls nicely into the hands of the ECB’s Praet, what with the Bank’s €60 billion per month QE. But it does not suit the Fed’s Fischer as much as he will presumably try to justify why the Fed is looking to tighten policy in spite of its inability to generate an inflation figure close to its 2.0% long-term objective. Hence, Steve thinks this could be an interesting discussion for the market – which is a shame, as markets will be pretty threadbare by the time the debate gets going.

Local developments

On the domestic front, Stats SA released the February retail sales yesterday Bloomberg consensus expectations had pencilled in an improvement in sales. Retail sales growth was expected to have increased to 1.9% y/y in February from 1.7% y/y in January. M/m sales growth was expected to have swung into positive territory in February, to 1.2% from -0.1% in January. In the event, retail sales growth overshot expectations, coming in at 4.2% y/y in February from an upwardly revised 1.9% y/y in January, while m/m sales increase by 1.9% from a revised 0.2% in January.

Durable sales (i.e. hardware and furniture) accelerated to 4.2% y/y from 2.1% y/y in January, driven mainly by hardware sales growth which increased significantly to 9.0% y/y up from 6.1% y/y in January and contributed 0.7 pps to y/y sales growth in February. Semi-durable sales (i.e. textiles and all other retailers) slowed, to 3.3% y/y from 6.0% y/y in January. The pressure on semi-durables came from textiles, which decelerated to 2.4% y/y from 6.8% y/y in January. Non-durable sales (i.e. general dealers, food and beverages and pharmaceuticals) rebounded, from a 0.3% y/y contraction in January to a 4.7% y/y expansion in February. The main driver was general dealer sales which grew 4.8% y/y after contracting 2.1% y/y in January.

We expect lower levels of inflation to be supportive of retail sales growth over the year. However, the recovery is likely to be constrained by, amongst other things, electricity supply constraints, household deleveraging, and the delayed effect of a 75 bps interest rate hike in 2014.

Markets

The rand weakened on Wednesday, closing at 12.06, compared to Tuesday’s close of 12.01. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted losses against the pound (0.4%), the euro (0.3%) and against the yen (-0.2%). The rand lost ground against all of the major crosses; the pound (0.9%), the euro (0.6%) and the yen (-0.6%). The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the second-worst performance amongst the EM currencies, only ahead of the HUF. The rand traded between a low of USDZAR11.9989 and a high of USDZAR12.2073 intraday.

Commodity prices were all up on Tuesday. Gold and platinum were both up by 0.8%, while copper was up by 0.2%. The price of Brent increased on Wednesday, by 3.2%, to close higher at $60.32/bbl. The developed world MSCI was up by 0.2% on Wednesday, while the MSCI EM was largely unchanged. The ALSI increased by 0.8% on the day to a new record high. Non-residents were net sellers of equities (-ZAR396 million) on Wednesday. The EMBI spread widened by 3 bps, while SA’s 5yr CDS widened 10 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.8%.

Latest SA publications

SA Macroeconomics: Feb retail sales 4.2% y/y, up from 1.9% y/y in Jan: General dealers grow 4.8% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (15 April 2015)

SA Macroeconomics: Risk on as global monetary policy remains accommodative: SA consumption expected to outpace production in February by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 April 2015)

Credit & Securitisation Monthly: Quarterly update: Q1 2015 by Steffen Kriel (10 April 2015)

SA FX Weekly: Dollar takes a breather by Marc Ground and Shireen Darmalingam (10 April 2015)

SA Macroeconomics: Economics Note: Trade balance & PSCE this week: Fitch on the sovereign; PPI declines; employment rises; & wage negotiations continue by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 March 2015)

SA Macroeconomics: Economics Note: Weaker growth, higher inflation, unchanged repo rate: Hawkish tone, but SARB's outlook still does not justify a hike by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 March 2015)

SA Fixed Income MPC Comment: Defending not to hike by Asher Lipson and Walter de Wet (26 March 2015)