Inside Insights 16 November 2009

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

Added on 16 November 2009 @ 10:06 AM

Global policy response remains favourable

Policy makers and central bankers from the world's largest economies (the G20) met last week to discuss current economic conditions and their policy stance going forward. The G20 leaders concluded that even though certain countries are recovering - a view that was confirmed by new data showing the Eurozone had exited recession, growing by 0.4% in the third quarter - the recovery is "uneven and remains dependent on policy support." Hence they remained committed to their current stimulus efforts until there is clarity that the global economy and financial system had returned "to heath." In the meantime, they would also develop exit strategies for the withdrawal of support measures when the appropriate time comes. The US Federal Reserve, Bank of England and European Central Bank have expressed similar sentiments, announcing that they will leave interest rates unchanged until there are signs of significant economic improvement.

There are risks inherent in these positions, though. On the fiscal side, budget deficits are ballooning while on the monetary side, low interest rates might be fuelling asset bubbles elsewhere and contribute to inflation down line. But the biggest risk by far is withdrawing stimulus efforts too soon, which could lead to a double-dip recession.

In the meantime, America's low interest rates and double-digit budget deficit continues to weigh on the dollar, resulting in the dollar index (the trade-weighted dollar) falling to 15-month lows against major currencies. This pushed the spot price of gold to a new intra-day record of $1122.85/oz during the week, as investors look for an alternative to the greenback. Global equity markets were supported by policy makers' decisions to continue stimulus efforts, even though the six-day wining streak ended on Thursday as lower consumer confidence numbers and uncertainty led to profit-taking. Most developed country equity market indices (as well as the JSE's All Share index) remain below their recent peaks.

Mixed messages out of the local economy

There are signs of life in South Africa's manufacturing sector. Following on from the improving trend recorded in the PMI, manufacturing production increased by a seasonally adjusted 3% in September, according to StatsSA. Compared to September 2008, production is still down 11.4%, but the positive trajectory is certainly encouraging. Production rose 2.6% in the third quarter, suggesting that the economy's second biggest sector might have lifted South Africa out of recession, especially after electricity production data was also positive for the third quarter(we shall know next week, when GDP numbers are released). Positive contribution came from iron and steel producers and the motor vehicles, parts and accessories division (tying in with improved motor vehicle sales data from the previous week). The furniture and paper and printing sectors posted declines, confirming the ongoing weak consumer demand. Despite the increased production, the manufacturing sector still shed 150,000 jobs during the third quarter, which will impact on consumer demand going forward.

Mining production, on the other hand, fell 1.8% over the third quarter and is likely to make a negative contribution to GDP. On a year-on-year basis, mining output fell 15.9% in September, partly due to closures related to accidents and strike action in the platinum sector. Gold mining production continued to fall during the third quarter even as the gold price rose to record levels. A big reason is cost: most of our gold mines are old, and the higher quality ore has been mined out. To get to what is left - mostly lower grade ore - digging has to go deeper and deeper. This makes our gold mines much more electricity-intensive, for instance, than the open-cast mines found elsewhere in the world as shafts need to be constantly cooled and water pumped out. The proposed electricity tariff increases therefore bode ill for our gold mining sector, as a number of executives from the mining houses have pointed out recently. Another issue, of course, is that the surging gold price has coincided with (and contributed to) a strengthening rand, wiping out much of the gains of the higher dollar price of bullion.

The Week Ahead

Gil Marcus will lead her first meeting of the Monetary Policy Committee this week, with the interest rate decision expected on Tuesday afternoon. The market expects the repo rate to be kept unchanged at 7%, given that there are signs (though not unambiguous) of the local economy recovering, and that there are risks to the inflation outlook from above-inflation wage increases and the proposed electricity tariff hikes. Six out of nine economists polled by Inet expected no change, while three thought there could still be a 50 basis points cut in the current cycle. Over the weekend, the ANC-led tripartite alliance announced that a task team would be set up to review and possibly broaden the mandate of the Reserve Bank, which is currently to keep annual growth in CPI between 3% - 6%.

StatsSA releases retail sales numbers for September on Wednesday. Real retail sales plunged in August by 7% year-on-year, reflecting the very weak consumer demand situation, with rising unemployment and high levels of household debt offsetting the impact of lower interest rates and slowing inflation. Year-on-year retail sales growth has been negative 10 out of the last 13 months (with the three positive months reflecting negligible growth), with no discernable upward or downward trend. It could still be a month or two before positive growth is posted, suggesting a bleak Christmas for those behind the tills.

Fairbairn Capital | Old Mutual

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