Inside Insights 23 November 2009

Investment Intelligence|Inside Insights

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

Added on 23 November 2009 @ 10:13 AM

No early Christmas present from MPC

As expected, the monetary policy committee of the South African Reserve Bank (the MPC), kept the repo rate unchanged at 7%. Gill Marcus, chairing her first MPC meeting, emphasised that there are signs that the economy would continue to recover, but that domestic consumption would remain weak due to high debt levels and rising unemployment, creating a favourable environment for low demand-pull inflation. The main risk to the inflation outlook came from cost-push factors such as electricity tariff increases; Eskom applied for 45% per year for the next three years, but of course no one knows yet whether Nersa will accede to this request (the decision will only be announced in February). Marcus also announced that the next MPC meeting will only be in January, and every second month thereafter. Finally, Marcus emphasised that SARB would let the market set the level of the exchange rate, but that the Bank would continue to build forex reserves. Purchasing forex when the rand is strong (by selling rands) will prevent the rand from strengthening much further in the short term.

StatsSA released disappointing retail sales data on Wednesday. Real retail sales fell by 5.1% year-on-year in September, after August's revised -6.5%. The market expected -4.4%. Retail sales growth has been negative in inflation-adjusted terms every month since February this year, reflecting how weak consumer demand has been. Sales of durable goods were particularly weak. In nominal terms when the impact of inflation is included, sales growth has been positive. But as inflation has fallen, so have the nominal sales numbers. While there is not much of an upward trend in real sales growth (as can be seen on the graph), at least the pace of the decline has slowed down.

Clearly, the impact of the 500 basis points reduction in the repo rate since December has not been fully felt, but as we've said before, movements in the interest rate affect the real economy with a lag of 12 to 18 months. Thus a recovery in consumer demand and hence the retail sector will probably only occur in the first half of 2010, while rates will probably remain on hold until sufficient time has elapsed for the MPC to assess the impact of its actions.

Broad-based recovery thus far on the JSE

Emerging markets have outperformed most developed international markets since the beginning of the year. As emerging markets were sheltered from the worst of the global financial crisis, demand for these riskier assets have been increasing. The JSE's performance has not being as exuberant compared to the Brazilian BOVESPA or China's Shanghai Composite Index, but nonetheless has had a good run thus far. If one considers some of the main sectors on the JSE - Resources 20, Financials 15, and Industrials 25 - then the rally on the local market has clearly been broad-based with each of these indices contributing relatively well to the overall performance of the JSE. For the year to date, the Resources 20 index is up 24%, the Industrial 25 has added 26%, and the Financial 15 has gained 22%. Since the lows of early March, the rally in each of the sectors has been even stronger. Resources have been the most volatile sector, given its dependence on both the exchange rate and the commodity price movements.

The dollar price of gold continued to rise during the week due to strong investment demand on the back of a declining US dollar. The greenback fell to 15-month lows against a basket of major currencies. Last week saw the spot of price of gold rise to new record intra-day high of $1152.75/oz. Inflation fears increased this week when new data showed that October US core CPI (i.e. CPI excluding volatile items such as food and petroleum prices) rose 1.7% year-on-year after a 1.5% year-on-year increase in September, surprising analysts. Headline inflation in the US remains negative though. Major equity indices fell on Friday, consolidating previous days' gains, due to profit taking globally. The JSE's All Share index, which managed to break above the 27,000 points level for the first time this year during the week, closed at 26929 points. The rand also fell on diminished risk appetite, ending the week at R7.57/$.

The Week Ahead

It will be a busy week in terms of local data releases. First up will be SARB's September leading indicator.

StatsSA will release the gross domestic product (GDP) growth numbers for the third quarter of 2009, on Tuesday. Quarter-on-quarter GDP growth has been negative for the past three quarters. The most recent available data shows that the manufacturing sector had a positive third quarter, while retail, mining and vehicle sales had a negative quarter. Overall, most economists believe the South African economy will emerge out of recession in the third quarter, but the consensus expectation according to I-Net is for a marginal 0.7% quarter-on-quarter (seasonally adjusted and annualised) growth rate. Two of the economists surveyed believed the growth rate could be as low as 0.0%, while the highest forecast figure was 2.0%.

The UK, US, Japan and Germany will also release Q3 GDP numbers this week.

The Thanksgiving long-weekend in America means that trading volumes are likely to be thin globally this week.

StatsSA will release consumer price index (CPI) numbers for October on Wednesday. The Reserve Bank's inflation target is to maintain annual growth in CPI within a 3%-6% range and CPI inflation in September slowed to 6.1% - just outside this range. It is expected to have moved into this range in October, falling to 5.9% year-on-year. The low statistical base formed in November and December 2008 means that CPI inflation will probably increase again into the new year, before moving back into the target range on a more sustainable basis in the second quarter of 2010.

StatsSA will also release producer inflation numbers (as measured by annual growth in the producer price index, PPI) this week. PPI growth has been negative for several months, with the September figure coming in at -3.7% year-on-year. The I-Net consensus expectation is for October PPI to have declined at a slower pace by 3.1%.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights