Cape Town - The rand's recent trajectory could be disrupted in the coming months as the Budget speech, State of the Nation Address and a potential ratings downgrade loom.
In its weekly economic and market overview, OAM said the consensus forecast is that SARB would not change the repo rate on Thursday despite the surge in the rand over the past month.
"The outlook for the rand is critical in determining the path for interest rates," OAM said.
The rand has surged since the ANC national conference elected Cyril Ramaphosa as the new leader of the ANC, strengthening by 8.3% against the US dollar, appreciating from R/$13.47 to R/$12.35 over the past month.
South Africa economic review
• Total new vehicle sales contracted in December by 2.4% year-on-year marking the first decline in seven months. Passenger vehicle sales fell 6.4% after rising 16.3% in November. Export sales fell 7.1% following a 13.6% decline the previous month.
More encouragingly, light commercial and extra heavy vehicle sales increased by 7.0% and 13.4% respectively, showing a strong improvement from November’s figures. In the full year 2017, total vehicle sales increased 1.5%. In 2017, passenger vehicle sales increased 1.6% compared with a contraction of 12.4% in 2016. Sales were boosted by the car rental sector and significant sales incentives from manufacturers.
Total exports dropped in 2017 by 4.6% due to port disruptions in Durban and production shifts to new models. The vehicle sales outlook for 2018 should benefit from buoyant export demand and a normalization in export operating conditions.
Moreover, domestic demand will likely improve following the boost to business and consumer confidence post the ANC elective conference.
• Manufacturing production increased in November by a stronger than expected 1.7% year-on-year, well ahead of the 0.5% consensus forecast. On a month-on-month basis manufacturing production grew by a robust 0.9%. In the three months to end November compared with the three months before, manufacturing production grew by 0.5%, indicating a positive contribution to GDP growth in the fourth quarter.
Among the manufacturing categories “food and beverages”, which comprises 25.15% of the total, grew 6.0% on the year contributing the bulk (1.5 percentage points) of the total increase. “Basic iron and steel, non-ferrous metals, metal products and machinery” grew 4.6% on the year, contributing 0.8 percentage points of the total increase.
The outlook for manufacturing should improve as domestic consumer and business confidence show signs of recovery following the change in the ANC leadership. At the same time export demand is expected to maintain its upward momentum.
• Growth in private sector credit extension (PSCE) unexpectedly accelerated from 5.4% in October to 6.5% in November more than making up for the decline from 5.5% in September. On a month-on-month basis PSCE increased by a solid 1.1%. Encouragingly, credit growth improved across households and corporates.
Credit extension to companies improved on a year-on-year basis from 7.2% to 7.8% and to households from 3.5% to 3.7%. While credit growth is subdued there are early signs of recovery in the credit cycle. Credit growth is likely to recover during 2018, helped by a gradual pick-up in consumer and business confidence and the potential for further easing in monetary policy.
• The trade balance registered a surplus for the ninth consecutive month growing substantially from R4.3bn in October to R13.0bn in November. While imports increased by 3.3% year-on-year, exports increased by 11.5%. The growth in exports is due largely to the precious metals and stones category while the slight rise in imports is attributed to increased shipments of machinery and electronics.
In the 11 months to end November the trade surplus measured R64.7bn, up considerably from a trade deficit of R11.2bn in the equivalent period in 2016. While imports remain subdued by weak domestic demand, a buoyant global economy is lifting export demand across the board.
The World Trade Organisation lifted its growth forecast for world merchandise trade volumes in 2017 to 3.6% from a previous 2.4%. This compares with 1.3% growth in 2016. The positive trend in South Africa’s trade balance signals a narrowing in the country’s current account deficit and a reduced reliance on capital inflows.
• The South African Chamber of Commerce and Industry (SACCI) business confidence index increased in December for a second straight month rising from 95.1 in November to 96.4 in December. This compares with 92.9 in October and marks the highest reading since January 2017.
The improvement is attributed primarily to positive political developments. In its accompanying statement SACCI said: “The anticipation for more policy certainty and sustainable growth-oriented domestic economic policy, global economic growth, and a probable fresh approach towards business and investor challenges should further augment the business mood.”
However, SACCI cautioned that: “For the momentum in the business mood to continue, it should be met and augmented by urgent economic policy action.” Business confidence could slip back if no real changes are implemented by the new leadership of the ANC. There tends to be a two-quarter lag between a rise in business confidence and actual investment
• Following four straight months of improvement the ABSA purchasing managers’ index (PMI) fell sharply from 48.6 in November to 44.9 in December, well below the key 50-level which separates expansion from contraction. The decline was broad-based across the sub-indices with the business activity and new sales orders indices showing the biggest declines. In mitigation, the December PMI reading tends to be weak due to seasonal factors.
Moreover, there has been a poor correlation between the PMI readings and actual manufacturing data, which means that following strong manufacturing production figures in both October and November the sector is still likely to make a positive contribution to fourth quarter GDP growth.
Encouragingly, the expected business conditions index increased from 50 to 61.9, indicating a recovery in manufacturing activity towards mid-2018.
• Shares in Aspen tumbled on the January 9 by as much as 10% at one point following rumours that Viceroy Research was compiling a report on the company. Viceroy rose to prominence in South Africa after bringing out a hard-hitting report on Steinhoff on the day its shares tumbled following the announcement of accounting irregularities.
A selection of real estate investment trusts, including Resilient, Greenbay, NepiRockcastle and Fortress also suffered severe share price losses on the January 9 amid market perceptions that they could become victims of Viceroy research recommendations.
The week ahead
• Mining production: Due on Tuesday, January 16. According to consensus forecast mining production is expected to maintain its run of strong growth following on from October’s 5.1% year-on-year increase with a gain of 4.8% in November.
Commodity demand and prices are gaining in line with rising global growth momentum.
• Retail sales: Due on Wednesday January 17. Despite the weak labour market, tight credit conditions and poor consumer confidence retail sales are expected, according to consensus forecast, to follow-on from October’s 3.2% year-on-year growth with a slight acceleration to 3.8% in November, boosted by strong Black Friday sales.
• South African Reserve Bank monetary policy decision: Due on Thursday January 18. The South African Reserve Bank Monetary Policy Committee will conclude its first meeting of the year on Thursday.
The consensus forecast is that there will be no change in the repo rate despite the surge in the rand over the past month and the benefit the stronger currency has on inflation. The Reserve Bank made a start to its interest rate cutting cycle on July 20, but since then rates have been kept on hold. (See Bottom Line for further analysis).
• Having broken key resistance levels at R/$13.50 and R/$12.50, the rand has returned to its appreciating trend, targeting a break below R/$12.00 over coming months.
• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.
• The British pound has broken above key resistance at £/$1.35 promoting further near-term currency gains to a target range of £/$1.40-1.50.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has failed to break below key resistance at 2.0% raising the probability that the multi-year bull trend in US bonds is over.
• The benchmark R186 2025 SA Gilt yield has broken below key resistance at 9.0%, indicating the potential for a new target trading range of 8.0-8.5%.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has broken above key resistance at $60 and likely to remain in a trading range of $60-70 over the foreseeable future. Base metal prices are in a bull trend, confirmed by copper’s increase above key resistance at $7 000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• The break in the JSE All Share index above key resistance levels at 56 000 and 60 000 signal the early stages of a new bull market.
• The South African Reserve Bank Monetary Policy Committee will conclude its first meeting of the year on Thursday, January 18.
The consensus forecast is that there will be no change in the repo rate on Thursday despite the surge in the rand over the past month and the benefit the stronger currency has on inflation. The Reserve Bank made a start to its interest rate cutting cycle on 20th July but since then rates have been kept on hold.
• The outlook for the rand is critical in determining the path for interest rates. The level of the rand will affect consumer price inflation, which is the key factor guiding monetary policy.
• The rand has surged since the ANC national conference elected Cyril Ramaphosa as the new leader of the ruling party. The rand has strengthened by 8.3% against the US dollar over the past month, appreciating from R/$13.47 to R/$12.35 between December 14 and January 14.
• The global economy has also helped. Global synchronised growth and the resultant surge in commodity prices has been positive for the rand via a rapidly growing trade surplus and dramatically narrowed current account deficit.
• Given the recent strength in the rand the Reserve Bank is likely to lower its forecasts for consumer price inflation (CPI) from the current levels of 5.2% for 2018 and 5.5% for 2019. A stronger rand benefits inflation by reducing the cost of imported goods, enabling lower prices for consumers.
The appreciating rand has already helped counter the rise in international oil prices. Despite the oil price rising over the past month by almost 12% in US dollar terms, South Africa’s petrol and diesel prices have dropped since the start of the year by 34 cents and 22 cents per litre respectively.
Also helpful to the inflation outlook is the low electricity tariff increase of 5.23% awarded by Nersa in contrast to the 19.9% increase requested by Eskom.
• The economy badly needs lower interest rates. Third quarter GDP growth of 2.0% quarter-on-quarter annualised was down from 2.8% in the prior quarter and remains far too low to make any impact on the country’s 27% unemployment rate.
Economic surveys including purchasing managers’ indices, confidence measures and the Reserve Bank leading economic indicator, all point to lacklustre conditions.
• Despite economic weakness and tame inflation, the Reserve Bank is unlikely to cut the repo rate on Thursday. The surge in market optimism, which followed Rampahosa’s election as head of the ANC, has succumbed to a new realism over the past week. There is a growing realisation that Zuma is unlikely to be recalled as swiftly as initially expected.
• Furthermore, the Reserve Bank is likely to adopt a cautious outlook given the potential for rand reversals during the first quarter. In February, the Budget speech and State of the Nation Address and in March a potential credit rating downgrade from Moody’s, each have the potential to disrupt the rand’s recent trajectory.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
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