Inside Insights 19 October 2009

Investment Intelligence|Inside Insights

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

Added on 19 October 2009 @ 9:48 AM

Retail sales disappoint locally

US retail sales numbers for September were released last week, showing the second straight monthly increase. Excluding car sales, retail sales rose 0.5% month-on-month in September, against an expected 0.2%. As US consumer spending accounts for 70% of economic activity, this figure boosted investor sentiment. However, if car sales are included, the overall number is a more disappointing -1.5%, given that the US government's ‘Cash-for-Clunkers' programme came to an end in August, and vehicle sales accordingly plunged 10.4% in September. Also, on a year-on-year basis, US retail sales remain deep in negative territory (see graph) due to high unemployment and weak consumer confidence.

Locally, real (after inflation) retail sales plunged 7% year-on-year in August, disappointing analysts who expected -3.2% after July's revised -4.1%. This follows the disappointing data from the mining and manufacturing sectors last week. All the retail sub-sectors measured showed declines, except food and beverages, pharmacy and medical goods, which posted modest growth. Worst hit were sales of durable and semi-durable goods.

The numbers prove that demand in the local economy is still very weak, and that the full impact of interest rate cuts has not been felt yet. Even so, outgoing SARB governor Tito Mboweni was quoted by Reuters as saying last week "My feeling is there has been sufficient monetary accommodation and the fiscal investment has been good." This suggests that the bottom of the interest rate cutting cycle has been reached, but of course Mboweni leaves the Bank at the end of the month and his seat on the Monetary Policy Committee will be taken by Gil Marcus, who may or may not view things differently (we'll just have to wait and see). The MPC meets again this week, for the last time under Mboweni's leadership. The news that Eskom wants to increase electricity tariffs by 45% per year over the next three years, could well convince the MPC to keep rates on hold, even if the rand strengthens significantly. Mboweni also pointed out that the recession has been "relatively mild." This is certainly true compared to the main Western economies, and also compared to our previous, deep recession of the early 1990s. It will, however, be cold comfort to those who have lost their jobs, and had homes and cars repossessed.

Crossing key thresholds

Equity markets worldwide had a very good week, with a number of major indices touching 12-month highs. Investors' sentiment was boosted by better than expected US third quarter corporate results, with the likes of JP Morgan and Intel leading the way. Other large US banks such as Goldman Sachs, Citigroup and Bank of America also produced fair results, while internet search giant Google's results supported the technology-heavy Nasdaq. Apart from encouraging corporate results, the positive US retail sales data numbers helped the Dow Jones Industrial Index pass the 10 000 level for the first time this year.

Elsewhere, Britain's main index, the FTSE 100 also hit its best level in 12 months due to growing optimism, and is now 52% off its March low. Locally, the JSE's performance was in line with international markets, with the All Share Index crossing the 26000 points level for the first time since September last year. It closes marginally below 26000 on Friday. The All Share also received support from metals and other commodities, with the spot price of gold hitting a new record price of $1069/oz on continues fears of a US dollar slide against major currencies. The dollar was slightly firmer towards the end of the week, and as a result gold closed off its highest level. The rand has also been a major beneficiary of the increased global appetite for risk, and of the weaker dollar and rising metals prices. It closed at R7.33/$ on Friday, slightly off its best level of the week, R7.23/$. On a slightly more ominous note, the price of Brent crude oil has also climbed to $75/barrel, up 7% for the week.

Equities since the Lehman Brothers collapse

The Week Ahead

The South African Reserve Bank's Monetary Policy Committee (MPC) meets this week on 21 and 22 October. The MPC will have to consider a number of factors. Firstly, there are signs of recovery in the local economy, most notably from indicators such as the PMI and rising electricity production. These signs are not completely unambiguous though, and the latest round of data from the real economy - August mining, manufacturing and retail sales (see above) - paints a disappointing picture. Credit extension growth is still slowing down, though banks have indicated that they are beginning to relax lending criteria. From an economic recovery point of view, the MPC will probably adopt a wait-and-see attitude, and only cut rates again if the next round of data is consistently bad. On the inflation front, the trend in PPI and CPI is down and will continue to be supported by a strong rand. CPI is expected to move into the 3%-6% target range early next year. The MPC will take note of Eskom's application to hike electricity tariffs by 45% per annum, the rising oil price, as well as the recent round of above-inflation wage increases, and will probably argue for keeping rates on hold.

Global markets will be keeping a close look on the US, where the third quarter results reporting season will continue this week. In the absence of significant local data releases (apart from the interest rate announcement), the local market will probably follow events on Wall Street.

Fairbairn Capital | Old Mutual

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