Inside Insights 11 August 2009

Investment Intelligence|Inside Insights

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

Added on 11 August 2009 @ 10:20 AM

Bumpy week on global equity markets ends on a high

Global equity markets had a good start to the week with a rally fuelled once again by better-than-expected corporate results and good economic data. Global automakers Toyota and Ford produced better than expected quarterly results, while US auto sales jumped to their highest level in 2009. June US consumer spending and existing home sales data also produced encouraging results. This boosted the S&P 500 above 1000 for the first time in nine months, while the NASDAQ rose above 2000 for the first time since October last year. The JSE also benefited from the increase in global risk appetite, with the All Share index surging past the 25000 level - a gain of 1000 points (3.3%) in one week.

There was a reduction in global risk appetite towards the end of the week following disappointing corporate results from CISCO Systems and Proctor & Gamble (amongst others) and concerns over persistent high unemployment rates in the US. The first batch of unemployment data was the ADP unemployment report, which showed that the private sector cut 371,000 jobs last month, less than the 463000 in June, but more than economists expected.

The mood improved on Friday, however, when official US data suggested that unemployment was stabilising, with the jobless rate easing to 9.4% in July, better than the forecast of 9.6% and lower than June's 9.5%. Non-farm payrolls, another key measurement of unemployment, also supported the notion that unemployment may be stabilising, showing that US employers cut 247,000 jobs in July, much better than the forecast of 320,000 and the least in any month since August last year. This caused US stocks to end more than 1% higher on Friday, with S&P 500 achieving its highest levels this year.

SA industry lagging behind

South Africa's purchasing managers' index (PMI) disappointed in July, falling to back to May's level of 37.3, from 37.9 in June. The PMI, which is constructed from survey data, has a neutral level of 50, meaning that a reading below 50 points indicates contraction in the manufacturing sector, the country's second largest. This contrasts with the monthly increases in PMIs in other major economies - China, US, UK, Eurozone - over the same period. The US PMI (called the ISM index there) hit a 11-month high in of 48.9 in July from 44.8 in June, above expectations of 46.2. China's PMI has been above the 50 level for 5 months already, suggesting its manufacturing sector is in expanding territory. The Eurozone, which is SA's most important trading partner, saw its PMI rise to 46.3 in July. This signals improvement in the Eurozone's industry, but not expansion yet, which is negative for our own manufacturing sector.

The UK's PMI rose above the 50 points level in July for the first time since March 2008. This improvement is partly due to the support provided to exporting manufacturing firms by a weak sterling. Even though the pound has strengthened against the dollar in 2009, it remains at weak levels last seen in 2004. South Africa's manufacturing sector is in dire need of support from a weaker rand, and this week's manufacturing production data is likely to support this view. For exporters, the weakening of the rand this week to below R8/$ will be welcome, but not necessarily enough. The rand fell back partly on fears of a strike at Eskom, but of course another electricity crisis will more than offset any benefit of a weak rand to the struggling manufacturing and mining sectors. Data released on Friday also showed that the Reserve Bank was not particularly active in buying foreign exchange during July, with only $11m in net purchases of forex. A more vigorous intervention might've kept the rand from strengthening too much, but SARB has traditionally avoided intervening in forex markets.

The Week Ahead

The Reserve Bank's Monetary Policy Committee meets this week, and will announce its interest rate decision on Thursday afternoon. The MPC is widely expected to keep the repo rate on hold at 7.5%. Even though inflation has come down (CPI was 6.9% in June), concerns remain around the future inflationary impact of electricity tariff increases and double-digit wage increases. The oil price has also doubled since its December 2008 lows, although rand strength will offset that impact somewhat. The MPC will probably also give itself enough time to see how well the cumulative 450 basis points cut in the repo rate works in stimulating the economy. However, should inflation continue to fall sharply and move into the 3%-6% target range, and should the real economy remain weak, the MPC could still reduce interest rates later in the year.

Manufacturing production data for June will be released on Tuesday, kicking off a busy week of local data releases. Year-on-year growth in manufacturing production has been negative every month since October 2008, as the credit crisis and global recession hit manufacturing sectors across the world. As discussed above, there is no sign yet of a strong rebound in the sector from the PMI yet. However, June's data might be better than the -21.8% recorded in April and May's -17.1%, especially if one considers the improvement in vehicle sales growth.

Retail sales data for June will be released on Wednesday. Year-on-year growth in real retail sales fell to the lowest level on record in April (-6.7%), partly due to the number of public holidays, and recovered somewhat in May (-4.2%). Lower inflation and lower interest rates should see the retail sales slump bottom out - and there is the once-off boost of the Lions tour and Confederations Cup - but negative growth is still expected for June. The recovery in retail sales towards the end of the year will probably also be muted given the high levels of debt and rising unemployment. Credit extension also remains weak.

StatsSA will release mining production data for June on Thursday. Mining production in May was worse than expected, coming in at -14.5% year-on-year. Higher dollar prices for most commodities should have encouraged a rebound in production, although the stronger rand would have offset this impact to an extent.

Fairbairn Capital | Old Mutual

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