Inside Insight 21 December 2009

Investment Intelligence|Inside Insights

A weekly, in-depth yet concise report on the most important recent market movements and economic developments.

Added on 21 December 2009 @ 9:51 AM

Dollar finally gets a break

With only three weeks before year-end, there was no shortage of events to keep market players busy. On Monday, the crude price of oil fell for the ninth consecutive day, with US prices (though not the Brent price we normally follow) easing below $70 a barrel, due to high stock levels in the US and a stronger dollar (although by Friday, cold weather in the Northern Hemisphere lifted oil demand). The dollar, having recently traded above $1.50/euro, it strengthened to as much as $1.43/euro. The gold price is also well off its recent highs of nearly $1230/oz due to the stronger greenback, and the rand followed the euro weaker, with limited liquidity also playing a role.

So why did the dollar have such a good week? Comments made on Wednesday by Ben Bernanke, chairman of the Federal Reserve (and Time's Person of the Year) pointed to an increasing sense of confidence in the recovery by saying that most of the Fed's crisis support measures would be wound down early next year. However, the Fed insisted interest rates would remain low. The dollar also reacted to US producer inflation data released on Wednesday, which came in at 1.8% in November, almost double analyst expectations, meaning that firms have regained a measure of pricing power, suggesting an improvement in demand.Citigroup's plans to repay the governement's bail-out money by issuing shares was met with a muted reaction, and this dampened sentiment on equity markets, until technology shares were lifted by decent third quarter relults from the sector. Bond markets had to contend with the news that a second major ratings agency, Standard & Poor's, downgraded Greece's government debt rating.

On the positive side, Germany's Ifo business confidence index reached its highest level since July 2008. This boosted European equities somewhat, although bank shares were down due to regulatory concerns. The Ifo data also helped the euro recover some of the week's losses. However, global equities remain below their recent peaks, and have been rangebound for the past four weeks. With trading volumes very low, volatility is expected this time of year; a sustained break out of this range (either up or down), however, will probably have to wait for 2010.

Inflation news fails to surprise

On the local front, annual growth in the consumer price index (CPI) fell to 5.8% in November, from October's 5.9%, broadly in line with analyst expectations. Of particular interest to consumers will be the fact that food price inflation declined to 4% from double-digit levels a few months ago. Once again, CPI for services rose far quicker, by 7.4%, than goods CPI, which rose by 4.4% year-on-year. CPI for durable goods rose by only 2%, reflecting the ongoing weakness in consumer confidence. Petrol inflation was 0% month-on-month, but -14.8% year-on-year, helping to keep overall inflation in check. However, most economists expect CPI to tick up again over the next few months due to the low statistical base formed when oil prices plummeted 12-months ago. CPI is expected to move into the Reserve Bank's target range on a sustained basis in the second quarter of next year.

On the production side, annual PPI growth was negative for the sixth month in a row in November, coming in at -1.2% from -3.3% in October. Again, the sharp year-on-year decline in fuel prices was a key contributer to the negative number, but the base effect is already wearing off, with PPI for petroluem and coal rising to -15.8% in November from -26.2% in October. PPI for basic metals remained sharply negative at -12.5% year-on-year in November from -13.4% in October. The PPI numbers confirm that there are virtually no inflation drivers on the production side. If inflation is to be a problem next year, it will come from electricity tariff hikes, and not because firms are increasing their prices. There is also very little in these latest inflation numbers to suggest that the Reserve Bank's current monetary policy stance will change when its Monetary Policy Committee meets in January.

The Week Ahead

For those analysts still stuck at work there are two notable pieces of local data to keep an eye on over the next two weeks.

On Wednesday, the 30th of December, SARS releases trade balance data for November. The trade balance number is normally very volatile from month to month, but according to I-Net the consensus expectation is for a R2.3bn deficit. This would be better than October's R6.7bn deficit.

On Thursday, 31 December, the South African Reserve Bank will release money supply (M3) and private sector credit extension (PSCE) growth numbers for November. PSCE is expected to have fallen further to -1.4% year-on-year, from October's -0.42%. October's number was the lowest since 1966, indicative of tight lending conditions and the lack of demand for credit due to high levels of indebtedness and depressed economic conditions. M3 growth, the broad measure of money supply, is expected to have slowed further in November, to 0.5% year-on-year from 2.7% in October.

Fairbairn Capital | Old Mutual

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