The unexpectedly poor new jobs number for the US released on Friday 10 January, some 70 000 jobs added in December compared to about 200 000 expected, sent long term interest rates in the US sharply lower. The yields on the vanilla as well as the inflation linked varieties all fell on a revised view of the underlying strength of the US economy. Yesterday these yields remained at the lower levels.
SA interest rates predictably also fell, though the yield spread widened, namely the difference between long dated RSAs and US Treasuries marginally:
The news about the possibly diminished strength of the US economy suggested by the labour market surveys, implies that the extra cash injected into the US financial system through asset purchases by the US Fed (QE) will proceed at a slower rather than faster rate – hence more demand for US Bonds and lower long term interest rates.
This move in US rates provided relief for emerging market currencies and their equity markets. The rand behaved entirely consistently on Friday 10 January – moving in the opposite direction to the Emerging Market Index, as it had been doing for most of 2013. However late on Monday in New York the rand came under renewed pressure (also felt to a smaller degree by the Turkish lira) while some emerging market currencies, including the Indonesian ruppiah strengthened markedly. The rand perhaps attracted selling pressure on Monday evening after Amcu gave notice that it was proceeding with strike action at Impala Platinum. Emerging equity markets were holding up well as the S&P 500 fell away by more than 1%.
These developments confirm once more that the most important indicator for emerging market equities and currencies will be the direction of long term US interest rates. For now, good news about the US economy (that translates into higher long term interest rates and is treated as good news for US equities and the US dollar), is simultaneously bad news for emerging market equities and currencies, as interest rate increases spread. Also, as we saw on Friday, when interest rates fall in the US, emerging market currencies and equities gather strength.
The rand is mostly a play on emerging market equities – the rand benefits from foreign capital that flows in when the JSE appears offers to offer value. This it does when US interest rates fall. If the recent past is to be our guide to the future, higher US interest rates are a threat to the rand and lower US rates a benefit. This will be so until good news about the US economy spreads to emerging market economies and higher interest rates can be more easily tolerated.
For now, those concerned about the poor health of the SA economy must hope that the US economy does less well than previously expected, that long term US rates decline rather than increase and that emerging market equities rise rather than fall to support the rand. This would reduce the danger of more SA inflation and damagingly higher interest rates.