South Africa Recession

South Africa has entered recession for the first time in eight years, data showed on Tuesday, piling pressure on a government facing corruption allegations and credit downgrades.

Data from Statistics South Africa showed the first quarter contraction was led by weak manufacturing and trade, suggesting high unemployment and stagnant wages were dragging down South Africa’s long-resilient consumer sector, analysts said.

Political instability, high unemployment and credit ratings downgrades have dented business and consumer confidence in South Africa and the rand extended its losses against the dollar, while government bonds also weakened.

South Africa’s economy contracted by 0.7 percent in the first three months of 2017 after shrinking by 0.3 percent in the fourth quarter of last year, lagging market expectations of a quarter-on-quarter GDP expansion of 0.9 percent.

It was the first time two consecutive quarters showed contraction — a definition of recession — since the second quarter of 2009, although there have been individual quarters of so-called negative growth in more recent years.

A consumer frenzy helped the South African economy grow by an average 5 percent a year in the five years before the 2009 recession, but it has struggled to register much growth since.

“The slowdown in Q1 was due to much worse results from usually stable consumer-facing sectors that had been the key drivers of growth in recent years,” Capital Economics Africa economist John Ashbourne said.

The worst performing sector was trade, catering and accommodation, which contracted by 5.9 percent, while manufacturing – one of the key sectors – fell by 3.7 percent.

Standard Chartered Bank’s Chief Africa Economist Razia Khan said the “awful” data showed weakness where it was not expected.

“Economy in tatters”

The poor growth numbers will pile more pressure on the ruling African National Congress (ANC) to get the economy back on track faster as it tries to stave off further credit ratings downgrades and stem falling voter support.

Pressure on President Jacob Zuma, including from within the ANC, has risen since a controversial cabinet reshuffle in March that led to downgrades to “junk” status by S&P Global Ratings and Fitch and allegations of influence peddling.

Zuma has denied any wrongdoing over the allegations.

Corruption allegations escalated when local media reported this week on more than 100,000 leaked emails they say show inappropriate interference in lucrative tenders.

“Our economy is now in tatters as a direct result of an ANC government which is corrupt to the core and has no plan for our economy,” Mmusi Maimane, the leader of the opposition Democratic Alliance, said.

South Africa’s Treasury has said it would work to finalise policies critical for boosting confidence and economic growth.

S&P Global Ratings and Fitch last week said risks to South Africa’s ratings include weak economic growth and political uncertainty ahead of the ANC conference in December when a successor to Zuma as party leader will be chosen.

Zuma can remain as head of state until an election in 2019.

Moody’s — whose Baa2 rating is two notches above “junk” — is reviewing South Africa for a possible downgrade.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

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Red Flag For Bonds

As of late Monday trading, the 10-year U.S. Treasury note was trading at a yield of 2.25 percent per year, while the two-year note yielded 1.28 percent per year. At 0.97 percentage point, the “spread” between the longer-maturity note and the shorter-maturity one is hovering at the lowest levels seen since October.

This is not only a titillating factoid to discuss with friends, but a sign that bond investors aren’t quite buying the idea that the economy is heating up.

Longer-term bonds generally command greater yields than shorter ones, and the more enthusiastic the expectations for inflation, the greater this difference tends to be. After all, an investor doesn’t want to lock up their money for a decade only to receive a sum that’s worth less in those future dollars. Since faster economic growth is thought to lead to greater inflation, and inflation expectations tend to change the yields for longer-term bonds more dramatically than that of shorter-term bonds, it is easy to see why the yield spread is commonly taken to be an indicator of economic growth expectations.

Right now, is doesn’t appear to be indicating anything good.

“The Treasury market is telling us a very different story about the big pickup in growth that the consensus is looking for in the second half of the year,” Matt Maley, equity strategist at Miller Tabak, wrote in a Monday commentary piece.

As Peter Boockvar of The Lindsey Group sees it, the spread is telling a story about both what traders think the Federal Reserve will do, and how they think the economy is likely to respond to those actions. As he alludes to, short-term bonds tend to be guided closely by expectations of Fed policy, while longer-term yields more purely reflect economic expectations.

When it comes to the falling spread, “It’s becoming clear the reasoning and that is a Fed that is intent on raising short rates due to their statistical employment and inflation hurdles having been met (and thus backward looking viewpoints) and market worries about how the economy will handle that reflected in the drop in long rates,” Boockvar wrote in a Monday note.

Others say the yield spread is not serving up a yield sign — yet.

The short end of the yield curve is “rising on expectations of tighter monetary policy, while the low end is more correlated to growth … so I think the case could be made that the curve continues to narrow,” Oppenheimer technical analyst Ari Wald said on Monday.

Yet this doesn’t worry Wald, who noted that the yield spread turned fully negative before each of the four most recent recessions.

“We don’t think the flatter curve is a warning,” he said. “As long as banks can borrow short[-term debt] and lend long[-term debt], we think the economy can do just fine and the stock market can do just fine.”

“In fact, the level and direction of the yield curve now looks a lot like it did in 1994 and it looks a lot like it did in 2004 — years where you still wanted to be invested in stocks,” Wald added.

Kevin Caron, a portfolio manager at Washington Crossing Advisors, agreed that only an inverted yield curve would be a real warning signal, and pointed out that a spread at this level has been seen “a couple times already in this recovery, and it didn’t indicate anything in the way of a recession.”

However, he granted that the decline in the yield curve is telling us something about investor sentiment.

“The flattening ties into the fading of expectations for some kind of fiscal push this year,” Caron said Monday . “This is the broader representation of a resetting of expectations, in the United States at least, and the expectation for maybe slower growth than what we expected just after the election.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

 

Today’s FOREX Trades

EUR/USD Intraday: towards 1.1280.
Pivot: 1.1210

Our preference: long positions above 1.1210 with targets at 1.1265 & 1.1280 in extension.

Alternative scenario: below 1.1210 look for further downside with 1.1170 & 1.1145 as targets.

Comment: the RSI is bullish and calls for further upside.

USD/JPY Intraday: supported by a rising trend line.
Pivot: 111.45

Our preference: long positions above 111.45 with targets at 111.90 & 112.20 in extension.

Alternative scenario: below 111.45 look for further downside with 111.10 & 110.80 as targets.

Comment: the RSI is bullish and calls for further upside.

GBP/USD Intraday: continuation of the rebound.
Pivot: 1.2960

Our preference: long positions above 1.2960 with targets at 1.3005 & 1.3020 in extension.

Alternative scenario: below 1.2960 look for further downside with 1.2925 & 1.2900 as targets.

Comment: the RSI is mixed with a bullish bias.

 

As well as these current currency plays we remain bullish on both gold and silver.

 

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

Forex Trading Update

We ended up last week with softer than expected April US retail sales and consumer prices. As a result, the US Dollar, which had had a very good week, gave back almost half of its gains of the week.

By the time you are reading this, our week of trading will have already started. Retail sales q/q for New Zealand was out late last night and beat the forecasted figure by 0.4%. Retails sales rose 1.5% against estimate of 1.1% on Q1. China Industrial Production was out at 3am as well and that was y/y release.

Today should be a typical Monday with no news. Traders coming back to their desks and assessing what happened over the weekend and preparing their week ahead. We should experience thin liquidity thanks to no important Fundamental Events happening throughout the day. We only have Theresa May who is Due to participate in Facebook’s Live Q&A hosted by ITV News, via satellite;

Due to Brexit talks which are going not so well at the moment plus a General Election in the UK on June 8th, this speech should affect the British Pound in the morning as investors will have their eyes and ears plugged on any clues the UK Prime minister may give on her plans for Brexit negotiations and the future of the country.

The British Pound is one of the Major currencies which should be most affected this week with CPI Y/Y on Tuesday, Average Earnings Index3m/y on Wednesday and Retail Sales m/m on Thursday. All being released @ 9:30 GMT on their respective days.

France has now its new president Emannuel Macron who was sworn as President yesterday with the difficult task of transforming electoral success into political strength in a society tormented by unemployment and divided by anger.

There is not much to say in terms of fundamentals as the bigger picture haven’t changed much in the past few weeks and the market is quite indecisive at the moment. It looks like the summer doldrums may be starting to have its effects . For the time being the biggest mover is the USD/JPY and that could easily be a “buy the rumours sell the news” run fuelled by the idea that the FED will hike next month at its next meeting.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

FOREX Friday

Friday May 12th will see the release of a set of crucial US data for April at 13:30 BST; retail sales, retail sales excluding autos, CPI and core CPI. Please be aware that it will likely affect USD and USD crosses along with commodities.

The dollar index has rebounded over the past four trading sessions after hitting a low 6-month low of 98.40. Gold prices saw a rebound on Thursday, and has now touched a three-day high of $1228.98 on Friday during early European session.

US retail sales (MoM) saw a downtrend over the past three months mainly caused by the decline in auto and petroleum sales. The consensus for the April figure is an optimistic forecast of 0.6%. However, sales in April for the two automobile tycoons, Ford and GM, saw a further falling of 7.1% and 5.8% respectively. The declines will likely weigh on the upcoming data. US retail sales outlook seems to be a bit gloomy before auto sales see a recovery.

Retail sales excluding autos also saw a downtrend over the past three months with the reading for March falling into zero growth, not seen since August 2016.

US CPI (YoY) has seen a healthy upswing since August 2015; staying above the Fed’s 2% target since December 2016. Core CPI has been oscillating steadily in the range between 2.1% – 2.3% since January 2016.

The Bank of England (BoE) announced that; interest rates remain unchanged at 0.25% and the asset purchase programme also remains unchanged at £435 billion which are both in line with market expectations. The BoE sees inflation to be above their 2% target for the next three years due to weak GBP. Consumption will continue to experience a slowdown; however, this will be balanced by rising trade and investment. Wage growth is expected to be quicker in 2018.

The BoE forecasts interest rates are likely to remain at the current level until late 2019. However, monetary policy may need to be tightened more than the markets expect over the next three years. The BoE also predicts the Brexit process to be smooth.

The BoE holds a positive outlook on inflation and wage growth and overly optimistic about the Brexit negotiation process. The EU is unlikely to make the process easy for the UK, to avoid encouraging other member states leaving following Brexit.

GBP/USD fell from 1.2940 after the UK data was released, holding above the significant support line at 1.2900. This support level was breached following the BoE announcement with GBP/USD hitting a 1-week low of 1.2848.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

FOREX Friday

The dollar sold-off ahead of NFP release today (Non Farm Payroll) . The institutions gave us a market with currency pairs all at critical levels. Trying to trade today is definitely gambling. Just be disciplined and stay out of the carnage. Don’t forget that the second round of the French elections will take place this weekend. Have no pending orders left open over the weekend. The market has all the potential to open on Sunday night with another gap like 2 weeks ago.

Cancel all pending orders due to NFP today.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Feddy Steady

U.S. central bankers stuck to their outlook for gradual monetary-policy tightening after they left interest rates unchanged and showed no alarm over recent economic weakness.

Federal Reserve officials were unusually explicit in their statement, released Wednesday following a two-day meeting in Washington, indicating that a disappointing first quarter wouldn’t knock the committee off its path to raise rates two more times this year after a hike in March.

“The committee views the slowing in growth during the first quarter as likely to be transitory,” the Federal Open Market Committee said. “Near-term risks to the economic outlook appear roughly balanced.”

The widely expected decision contained no concrete commitment to the timing of the next rate increase. Even so, investors increased bets on a move in June after absorbing the Fed’s sanguine assessment of the outlook and its encouraging observations on inflation, following data showing first-quarter economic growth of 0.7 percent and monthly price declines in March.

“Nothing in the statement today, which was voted unanimously by the FOMC, leads me to believe that the Fed is even close to changing its mind on rates,” Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients. “Base case is for a couple more rate hikes this year — probably in June and September — and for the beginning of balance sheet shrinkage in December.”

The Fed didn’t signal any change to its balance sheet policy. It is discussing how to begin shrinking its $4.5 trillion in holdings, and officials have said they hope to release a plan this year. They may start unwinding by the end of 2017, though that hinges on economic conditions.

The jobless rate has fallen to a level officials see as consistent with their maximum-employment mandate, and inflation is near the Fed’s 2 percent goal, even if price gains slowed in March. A core measure that strips out food and fuel was 1.6 percent on an annual basis, based on Commerce Department data, and headline inflation stood at 1.8 percent.

“Inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective,” the Fed said. Household spending rose “only modestly” but the fundamentals underpinning consumption growth “remained solid.”

“The statement makes it very clear that the Fed does not take the reported slowdown in first-quarter growth seriously,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., wrote in an email to clients.

Fed-Speak Friday

The decision to leave the target federal funds rate unchanged in a range of 0.75 percent to 1 percent was unanimous and in line with forecasts. Fed Chair Janet Yellen did not have a press conference after this meeting. But she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully.

Employers continued to hire at the start of 2017, averaging 178,000 net new jobs a month in the first quarter, and signs of labor-market tightness suggest wage growth will pick up further. The unemployment rate was 4.5 percent in March, near or below most estimates for its longer-run sustainable level. April’s figures are due Friday from the Labor Department.

The Fed’s next meeting will take place June 13-14 in Washington. That decision will come alongside officials’ updated quarterly economic projections and will be followed by a press conference with Yellen.

Investors increased the likelihood of a move next month to around 65 percent, according to pricing in federal funds futures contracts, compared to 60 percent before the FOMC decision was announced.

“This glass-half-full statement leaves the door wide open to a June hike, provided, of course, that the recent data letdowns are indeed transitory,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note to clients. “We expect this will be the case.”

Cheerio.

The Pinstripe and Bowler club shares information with MF Solutions Ltd.