Inside Insights 1 March 2010

Investment Intelligence|Inside Insights

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

Added on 01 March 2010 @ 10:24 AM

Lots of data, mostly positive

A very busy week of local data releases kicked off with Q4 2009 real gross domestic product (GDP) data, which showed that the economy grew by a healthy 3.2% quarter-on-quarter (seasonally adjusted and annualised). This followed Q3's tentative 0.9% quarter-on quarter recovery, and contained the economic contraction in 2009 as a whole to -1.8%. While the Q4 growth rate was better than expected, it still reflected a very uneven recovery across the various economic sectors. Manufacturing grew strongly off a low base, expanding by 10% over the quarter on the global inventory rebound, and adding 1.5% to GDP growth. Expansive fiscal policy saw general government growing by 7%, while the mining sector expanded 4.6%. However, those sectors focused on domestic demand struggled. Finance only grew by 1.1%, while trade posted -0.7%. Construction growth has also slowed down to 3.6%, as the work related to the FIFA World Cup winds down. The volatile agriculture sector contracted by 7.6%.

Next up was surprisingly benign inflation data. Year-on-year growth in CPI fell to 6.2% in January from 6.3% in December. The market expected 6.4%. Food inflation continued to slow to 1.6%, while services inflation also moderated to 6.8%. January PPI accelerated to 2.4% year-on-year from 0.7% in December, but remains low. Agricultural product prices fell 8.8%, with lower prices for grains, fruits and vegetables, signifying further potential food disinflation on the consumer side.

On Wednesday, Nersa granted Eskom tariff increases over the next three years of 24.8%, 25.8% and 25.9% respectively (effective 1 April). This was less than the 35% p.a. Eskom applied for, and the electricity giant will now have to improve efficiencies in its current operations and its R385bn expansion plans. Electricity costs will effectively double over the next three years, reducing household disposable income and corporate profitability. There will also be inflationary impacts, but the increases were in line with the Reserve Bank's forecast, meaning they are unlikely to impact interest rates negatively. Instead, we now have the small possibility that the MPC might cut the repo rate at its next meeting if inflation keeps surprising on the downside. Certainly Friday's credit data points that way: credit extension fell 1.12% year-on-year in January, the fourth consecutive negative month. Some commentators have ruled out further cuts due to the strong GDP numbers, but the manufacturing recovery could be temporary, while growth in many sectors remains sluggish (or negative). At least we know that interest rates should remain low for the remainder of the year, thus gradually tempting consumers out of debt-induced hibernation.

Bernanke clears the air

Following the announcement the previous week that the Fed's discount rate (the rate at which banks access emergency loans) would be raised, Fed Chairman Bernanke was at pains to stress in his testimony to Congress last week that interest rates would remain low for "an extended period" and that unemployment, not inflation, was the US economy's biggest threat. In fact, he said the Fed would evaluate whether additional monetary stimulus would be needed. Interest rates close to zero in the US throughout 2010 (at least) should be dollar-negative, but the euro has had its own set of problems lately (with Greece's credit rating downgraded again during the week, and violent protests erupting in Athens) so forex markets have reason to be confused.

The rand has been pulled along in this tug-of-war between the dollar and euro, as have emerging market securities and commodity prices. The rand hit a worst level of R7.89/$ on Thursday, but bounced back to end the week to R7.73/$. But all things considered, the rand fared reasonably well again, especially given that local data now contains the hint of further rate cuts (which would diminish the attractiveness of the rand in the carry trade). Bernanke is right to be worried about the state of the US economy (despite rosy Q4 GDP numbers). Consumer confidence fell sharply, according to the latest data from the Conference Board, which has been partly blamed on the really bad weather experienced in the north, but also on the ongoing weakness in the jobs market. Sales of new single-family home sales fell to a record low, down 77.7% from the peak of July 2005. The world's largest economy is on the road on recovery, but it is clearly uneven, bumpy and strewn with potholes.

The Week Ahead

The retail price of petrol increases by 6c/l on Wednesday, largely due to a weaker average rand/US dollar exchange rate during the measurement period (R 7.69 compared to R7.47). Of course the petrol price will rise again in April due to the increased fuel levies announced in the Budget (unless of course the rand strengthens substantially, or the oil price falls sharply), extracting more cash from motorists' wallets.

The Kagiso purchasing managers' index (PMI) for February will be released on Monday. Global purchasing managers' indices will also be released during the week.

Industry body NAAMSA releases new vehicle sales data for February on Tuesday.

The Reserve Bank of Australia and Bank of Canada announce interest rate decisions this week.

The US Federal Reserve releases its closely-watched ‘Beige Book' - a summary of economic conditions in the US - on Wednesday.

The local earnings season continues this week, with Bidvest, KAP International, Tongaat-Hulett, Merafe, Metorex, Group Five and Standard Bank reporting.

The South African Reserve Bank releases international reserves data for February on Friday.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights