Today's Talking Point Oil Update Analysis: Oil looks poised for a third-straight weekly gain as the marke
Today’s Talking Point
Oil Update
Analysis: Oil looks poised for a third-straight weekly gain as the market was jolted this week by OPEC’s decision to slash output by 1mn barrels per day over the coming months. Prices have retreated from Monday’s highs, but Brent is still up more than 25% from the mid-March lows when the banking sector crisis prompted a shift away from riskier assets. Brent is trading near $84.15 per barrel, while WTI has dipped just below $80 per barrel in the US. Traders are now balancing what will be tighter supply conditions over the coming months with expectations that global economic growth will come under pressure. This was evidenced yesterday by some weaker-than-expected PMI and labour market figures out of the US. The market is starting to see that bad news is actually bad news, as these soft data releases pressured equity markets and will be weighing on the demand outlook for oil going forward. Therefore, we expect that crude prices may be near their peaks even as OPEC+ cuts output.
Rand Update
The government rescinded two controversial measures instituted to tackle South Africa’s energy crisis yesterday. FinMin Godongwana first announced that a days-old exemption granted to Eskom from reporting irregular spending had been withdrawn temporarily, at least until engagements with the auditor-general on tighter checks and balances are concluded. Thereafter, the government said that the state of disaster introduced in February to deal with load-shedding had been scrapped. The U-turns raise serious questions over the government’s ability to solve SA’s energy crisis, and will weigh on the very little investor confidence that remains.
On the data front, South Africa’s March S&P Global PMI dashed some of the promise shown in the February data as output returned to contraction. SA’s economy-wide PMI reading fell to 49.7 points from 50.5 points, coming in below Bloomberg consensus expectations for a 51.0 print. The March print reflects a more pessimistic business environment as the economy grapples with persistent load-shedding and rising economic uncertainty. It portends further economic weakness, and highlights the need for deep-routed structural economic reforms.
Looking externally, it is worth noting that ADP employment change data out of the US showed private employers added fewer jobs than expected in March, underscoring signs of cooling demand for labour in the US as reflected in Tuesday’s JOLTS job openings data. Should growing weakness in the labour market be confirmed in tomorrow’s official non-farm payrolls print, it would bolster the case for the US Federal Reserve to pause its rate-hike cycle and begin thinking of a pivot to looser monetary policy. Tomorrow’s data may thus kick up a fair amount of dust in the markets, not least because liquidity conditions will be extremely thin with much of the world taking a break over Easter.
The USD-ZAR is trading back above the 18-handle after drifting higher in benign market conditions this week. After a surge in oil prices triggered some market cautiousness at the start of the week, the ZAR has struggled to regain its footing even as the USD has come under pressure more broadly. The pair is now pivoting around its 50-session moving average, with all eyes on the US employment data scheduled for release tomorrow. The data could trigger excessive volatility into next week given that liquidity conditions will be thinner than usual over Easter, meaning a fresh bout of directional impetus is to be expected in the coming sessions.
Bond Update
Bonds/Yield Curve: SA’s bond yields have moderated and extended the trend that began in mid-Feb. The curve has also flattened as the shorter end moved to price in another rate hike. Interestingly, the ZAR’s depreciation has not altered the underlying bias, which remains tilted towards further bond market strength. As investors position for an economic slowdown which will detract from inflation, they will target lower yields and given the dynamics unfolding in the equity market; bonds will likely offer a great mix of returns and lower risk for those seeking shelter from the vagaries of the SA economy. No ILB auction is scheduled for this week to offer a fresh perspective on inflation expectations, which means that most of the focus will shift to developments in the US and the labour market releases. The JOLTS data and the ADP figures both disappointed, which has set the stage for the upcoming weekly jobless claims and the all-important non-farm payrolls data scheduled for Friday. Due to the public holiday, investors will need to wait for Tuesday to respond.
FRAs: FRAs have settled into a more consolidative range in the past two trading sessions as investors position for more tightening. More direction will follow once the US labour data is out of the way and global markets have responded with their tweaks to US rate expectations. Domestically, the rates and bond markets are not yet responding to the ZAR volatility, which they may view as temporary. However, any further soft readings out of the US will likely encourage lower UST yields, which in turn will enhance the lower yield bias in SA rates. The market remains convinced that the next rate hike will be the last.
Repo: With a 50bp rate hike announced, the SARB has now caused a rethink in interest rate expectations. The hawkish SARB statement only further raises the possibility that the SARB may hike again at the next meeting, although it is unlikely to be by another 50bp increment. Investors have moved quickly to price in another 25bp move at the next meeting, although the inflation data and performance of the ZAR will have the final say if this unfolds. So far, the ZAR’s response has been favourable and reinforced the SARB’s commitment to fighting inflation.
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