Sasfin : Forex Daily Market - German manufacturing orders remained positive

Today's Talking Point

GE Factory orders y/y: Oct

Expected: 4.8%

Prior: 9.7%

Analysis: Despite coming in slightly lower than the 11.3% y/y expected in September, German manufacturing orders remained in positive growth territory following the effects of last year's stricter lockdown and COVID-19 containment measures. However, as economic normalisation continues, it is expected that base effects will continue to fade and be the main contributor to slowing growth. Although now quite dated, this is likely to be the effect in the October figures, while supply bottlenecks and material shortages have dampened momentum in recent months. Looking ahead, should manufacturing constraints persist for longer than expected, Germany's growth outlook will likely take a hit, with the recovery being pushed further out into 2022.

Rand Update

Last week's US data painted a picture of an economy that continues to improve and a tightening labour market. Another drop in the unemployment rate against a backdrop of solid corroborating labour data last week gave the USD a lift and assisted the USD-ZAR higher. However, as strong as the USD reaction was, it was not sustained, and this morning the USD-ZAR finds itself on the defensive, with SA receiving some good news of its own.

According to official government sources and the health minister Joe Phaahla, Covid 19 (Omicron), infections may be dominant and spreading rapidly, but the illness so far has been mild, and hospitalisations have not risen as they did in previous waves. This is excellent news as the authorities have no reason to impose harsh restrictions on infections alone. The logic previously was always to protect the healthcare system as much as possible. This is unnecessary for now and implies that the festive season might still unfold with domestic tourism demand still largely intact.

There have also been countless research notes written describing how this may also signal the beginning or the end of the pandemic. If the virulence of the virus has subsided to the point where the population can co-exist, it becomes endemic and no longer a pandemic. It implies that normal social behaviour can resume and that global economic recovery can be allowed to unfold whether the world is fully vaccinated or not.

This week, SA scientists will release their in-vitro study on Omicron, and it may prove to be a catalyst for a significant improvement in risk appetite if it builds the argument that the pandemic may be winding down. EM currencies will enjoy improved conditions if that is the case and the ZAR, along with other currencies, hold the potential to stage a recovery. Of some significance this week will be the SARB's quarterly bulletin and the release of the latest current account data on Thu. Prior to that, it will be the more usual economic data releases.

Bond Update

The week ahead will be a relatively heavy data week domestically, with NT to release official bond ownership statistics at some point while other major institutions have a host of macroeconomic data lined up. GDP, business confidence, retail sales, mining, and manufacturing. The Q3 GDP (and current account) figures will be of particular interest in testing the SARB's theory that the economy had rebounded in the context of the relaxation of lockdown restrictions. Yet, with Q3 significantly affected by riots, load-shedding, lockdown restrictions and flagging consumer demand, there is some reason to think that the productive industries could have suffered.

The data will also include the current account and the balance of payments, informing currently observed levels of foreign demand for SA assets. October retail sales figures will offer guidance on how the sector has performed into Q4. Given a host of structural constraints, the outlook remains bearish, with various factors suggesting that SA could be in line for a GDP contraction in Q4. The knock-on effects from Omicron could further suppress consumption demand. Q3 FDI levels could hold some interest in this regard, with JSE equity flows data suggesting foreigners remain far from bullish the outlook for SA assets.

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