Keep an eye on retail sales data and rand

© Patryk KoÅ?mider – 123RF.com

The rand will also bear watching to see if it can hold onto its recent gains as US inflation and jobless claims data pose the greatest event risk of the week to the domestic currency.

Buoyed by a general rise in risk sentiment towards emerging markets, the rand surged from above R15/$ in mid-June to a high of R13.30/$ last week — a level SA last enjoyed in October 2015.

Emerging markets in general have rallied on a surge in risk appetite caused by the dovishness of the leading central banks. Local analysts agree that SA’s positive election outcome, as well as encouraging mining and manufacturing production data, helped bolster sentiment.

The production data suggest that SA did not sink into a technical recession in the second quarter but rather regained some small, positive momentum after having contracted 1.2% in the first quarter. Despite this, Rand Merchant Bank analyst Isaah Mhlanga noted that the rand weakened anew on Friday, possibly on comments by San Francisco Federal Reserve president John Williams that the Fed should raise interest rates in 2016 — something the markets had priced out to 2017.

This makes the release of US consumer inflation data on Tuesday and initial jobless claims on Friday potentially rand-moving in so far as they provide an indication of the pace of the American economic recovery.

Turning to domestic retail sales growth, Investec economist Kamilla Kaplan expects the release on Wednesday to show that growth moderated to 4% year on year in June, from 4.5% year on year previously.

The June data will round off the retail sector’s releases for the second quarter and will provide an indication of its potential contribution to second-quarter GDP. So far, the available data show that the sector will make only a small positive contribution.

"The consumer demand environment is constrained by barely positive growth in real disposable income with slower wage growth, increased living costs and interest rates," said Kaplan.

The ability for consumers to take on credit is constrained by high levels of indebtedness and relatively tight credit criteria applied to households. Furthermore, consumer confidence has remained entrenched below levels seen in the 2008-09 recession, while retail confidence fell to 15-year lows in the second quarter.

On a more positive note, weak rates of household consumption expenditure suggest that demand-led inflationary pressures should remain subdued. The recent strength of the rand and the lower oil price should contribute to an improved inflation profile.

The markets are currently not pricing in any interest rate cuts by the Reserve Bank, but the consensus expectation remains for one more 25 basis points hike.

Nomura economist Peter Attard Montalto thinks a number of hedge funds and local economists, whom he dubs "the Sandton consensus", now view cuts as highly likely.