Markets WRAP: Rand closes at R13.96/$

The rand closed at R13.96 to the greenback on Wednesday afternoon.

The day's range was between R13.92 to R14.05.

SA's CPI year-on-year came out at 4.5% vs 4.6% earlier. The rand remained steady on the news.

"(This) keeps us of the opinion that the SA Reserve Bank won't look at changing interest rates in the next few MPC meetings," TreasuryONE said in a statement earlier.

Call it the nostalgia factor: PepsiCo is getting a boost from some of its classic brands. The snack and beverage giant posted quarterly results that beat estimates, sending shares higher in early trading.

The company’s sales growth was boosted by its key Frito-Lay operation and North American beverage unit, with its Pepsi soda line and Lay’s chips fueling the surge, according to Chief Financial Officer Hugh Johnston.

“We’re seeing an improvement in how we’re competing,” Johnston said in an interview, noting that Lay’s was up 4% in North America, marking its best performance in a few quarters. “We have strong balanced growth across the portfolio.”

With fierce competition from rival Coca-Cola and other companies, PepsiCo has boosted marketing in a bid to keep its brands top of mind with consumers. And while consumers cutting back on high-calorie soda has hampered some of the sugary brands, the company managed to post 3% growth for its overall Pepsi family in the US, fueled by a 29% surge in Pepsi Zero Sugar sales.

The company is also getting a bump from Bubly, a sparking water it released last year that’s taking share from established brands like LaCroix and Perrier. PepsiCo rose as much as 2.6% in early trading in New York. The stock had gained 11% through Tuesday’s close, outpacing the 0.8% decline for Coke.

Slowdown Ahead

Still, there are some challenges on the horizon. After the first-quarter snacks growth, which Johnston called “extraordinary,” it will be hard to maintain that momentum. Shares briefly pared gains when executives said on the conference call that Frito-Lay growth will slow during the remainder of 2019.

The company also hasn’t been able to sustain volume expansion in its North American beverages, which has only logged growth in two of the last 10 quarters. Even as high prices fueled revenue gains, volumes slipped 2% in the quarter. The company held its full-year forecast unchanged. For the quarter, the company posted organic revenue growth of 5.2%, its best top line performance in more than three years, according to Johnston. Profit of 97 cents a share was little changed year on year.

New Chief

Chief Executive Officer Ramon Laguarta, who took over in October, has started to put his stamp on PepsiCo. He expanded a cost-cutting program and promoted Laxman Narasimhan to the new role of chief commercial officer in March, giving him a top deputy as the company grapples with global economic uncertainty and shifting eating habits in the US. The company has also added additional truck drivers in North America to bring more of its drinks and snacks to the market. PepsiCo said heading into the quarter it would increase marketing to try to sustain growth in the key North American beverage unit, which faces pressure from rivals that have flooded grocery aisles with less-sugary options to traditional soda.

Pepsi Zero Sugar benefited from an ad push, as did Bubly, which ran a spot during the Super Bowl.

“The Super Bowl is the best awareness-creating vehicle on the planet,” Johnston said. - Bloomberg

The dollar looks poised to wreak some havoc

There’s been a lot of talk lately about how the global currency market has become stuck in a tight range, with volatility collapsing and no clear trends emerging. Judging by the performance of the dollar, this is no time to be complacent.

The Bloomberg Dollar Spot Index rallied on Tuesday despite a disappointing report from the Federal Reserve on March industrial production and capacity utilization. And that’s the point: the dollar has shown remarkable resilience in recent weeks, holding its value even as incoming data has fallen short of expectations by the greatest degree since mid-2017, as measured by Citigroup Inc.’s economic surprise indexes.

High on the list of President Donald Trump’s priorities as he tries to close a trade deal with counterpart Xi Jinping is making sure China faces consequences if it doesn’t live up to its promises.

Yet in pursuing that goal Trump may also be giving China a new cudgel to use on American companies and striking another blow to the international rule of law. Treasury Secretary Steven Mnuchin has said the US has made its own commitments to China and agreed that both sides will be subject to an enforcement mechanism.

“This will be a two-way agreement in enforcement,’’ Mnuchin said Monday, after saying over the weekend that the US would be open to “certain repercussions”.

Details of the US commitments and how the enforcement mechanism will operate remain scant. But Mnuchin’s comments have caused plenty of raised eyebrows from legal scholars to the business community and Congress. If the US allows China reciprocal enforcement powers, it would make China “judge, jury and executioner as to whether we have honored our obligations,’’ said Daniel Price, who served as a senior economic adviser to President George W. Bush and is now at Rock Creek Global Advisors in Washington.

“I don’t think the US business community is sufficiently alert to the risk of constantly being exposed to unilateral enforcement action by China.”

The Trump administration wants to have a mechanism that would allow it to quickly punish any foot-dragging by Chinese officials by imposing tariffs or other sanctions without having to go through the World Trade Organisation or other adjudicators that they argue have been ineffective in the past. But any reciprocal deal would give Chinese leaders another way to quickly apply their own pressure on American companies. The mechanism being contemplated, US officials have said, would require consultations between US and Chinese officials over disputes but ultimately allow either side to impose trade sanctions unilaterally.

The deal may also see both sides agree to forego their right to retaliate or challenge any enforcement action by the other at the WTO. Business groups have declined to comment publicly about Mnuchin’s statements, saying the model of the enforcement system isn’t clear yet. Lobbyists nevertheless complain they’re not being consulted by the administration and fret that once a deal is announced American companies will be forced to accept it as a fait accompli.

Robert Lighthizer, the US trade representative who previously indicated the US would insist on unilateral enforcement powers, has said he’s not planning to seek approval from Congress for a China deal. The administration is already facing disquiet in Congress over the impact of tariffs, its authority to impose them and the perception by lawmakers that they’ve been largely left in the dark during the deal-making process. Congressional aides say concerns about Trump’s trade policies are only likely to grow on Capitol Hill if a deal gives China power to strike American exports as it wishes. At its extreme such a construction would also be a blow to the WTO as the independent arbiter of global trade rules.

The Trump administration is already attacking the WTO’s dispute settlement system by blocking the appointment of new appellate judges. A US-China deal that sets up a parallel system for the world’s two largest economies would take things a step further.

WTO Powerhouses

Jennifer Hillman, a former WTO judge who teaches at Georgetown University, said while trade pacts often include dispute mechanisms the brewing US-China pact would be unique if it didn’t have a role for third-party arbitrators. It also could see much of the WTO case load go away with the US and China historically two of the biggest users of the dispute system.

“When it is the two biggest countries that have brought the majority of cases at the WTO, it is a big blow to the system,’’ Hillman said. Administration officials argue that Trump has a more pragmatic approach to trade than previous presidents, one that views prior US commitments such as to the WTO and its rules through the lens of self-interest.

The WTO has failed to restrain China’s rise, they argue, and its dispute system is too slow, which is why they want a nimbler enforcement mechanism in a deal with China. But escaping the grasp of the WTO may still be difficult.

The US and China both have major cases pending at the WTO, said Chad Bown of the Peterson Institute for International Economics. Moreover, the US has shown that it’s willing to use the WTO when it aligns with its interests, such as in the long-running Boeing-Airbus dispute, which triggered Trump’s threat this month to impose tariffs on $11 billion in imports from the EU.

Moreover, other WTO members are likely to have their own complaints with a US-China deal and to use the WTO to challenge it, said Jim Bacchus, a former chief judge of the WTO’s appellate body. “The United States and China are not the only two countries in the global trading system,” he said. - Bloomberg

South Africa's CPI year-on-year prints at 4.5% vs the expected 4.6%.

TreasuryONE said in a snap comment, "This was still in the middle of the inflation target band, which keeps us of the opinion that SARB won't look at changing interest rates in the next few MPC meetings.

"USDZAR undeterred by this as it is still trading stronger on the back of good Chinese data this morning, currently at R13.97."

Peregrine Treasury Solutions's Bianca Botes said in a morning note to clients that the rand remained range-bound on Wednesday morning.

By 08:57, the rand was changing hands at R13.98/$.

"The rand remains range bound with good support. Continued dovish views coming from the ECB indicate that the economic woes of Europe are far from over, while slightly more upbeat data from China is currently supporting emerging markets.

"Local and EU CPI are due for release today, followed by local retail figures.

"China released GDP figures in the early hours of this morning, indicating growth of 6.4% year-on-year in Q1 2019.

She said the rand was trading in a relatively tight technical range of R13.90 to R14.12.

Stocks trade mixed after China data; dollar slips

Adam Haigh, Bloomberg

Stocks in Asia fluctuated after positive data on China’s economy raised doubts over the possibility of additional stimulus. The 10-year Treasury yield ticked higher and the dollar retreated.

Japanese shares eked out modest gains, while those in Hong Kong and Shanghai swung between gains and losses.

Equities in Australia fell and were little changed in Korea. European futures signaled a muted open, while US futures edged higher.

China’s economic growth figures were above expectations, as was industrial production and retail sales data. The yield on China’s 10-year sovereign notes climbed to its highest level since November.

Earlier, the Nasdaq 100 closed within 0.1 percent of an all-time high, while gains fizzled late in the session to leave the S&P 500 Index little changed.

China’s economy unexpectedly held up in the first three months as policy makers boosted stimulus measures to sustain growth, and should ease concerns about a flagging global economy. The resilience suggests that pro-growth policies are taking effect, with tax cuts and supportive monetary policy supporting sentiment.

Traders are also busy digesting corporate earnings, where sentiment has been bullish, though volumes muted.

“Given the recent decent data flows, it makes sense for the Chinese central bank to refrain from additional easing measures for the time being and to wait and see whether the current policy is sufficient to stabilize the economy,” said Commerzbank AG Senior Emerging Markets Economist Hao Zhou.

“Further reductions in reserve requirement ratios are therefore unlikely for the time being.”

Elsewhere, oil climbed after a report showed a surprise drop in crude inventories. The New Zealand dollar tumbled after inflation slowed more than forecast, while the Australian dollar rose after the Chinese figures.