Inside Insights 3 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 03 August 2009 @ 12:05 PM

Choppy week on markets ends well

After surging over the previous two weeks, conflicting US economic data sowed doubt on global equity markets once again, although profit-taking predictably also slowed things down. The Conference Board's US consumer sentiment index fell to 46.6 points in June, below analyst expectations for 49. The index achieved an eight-month peak of 54.8 in May. Rising unemployment was cited as the main reason for this decline by the compilers of the index. Durable goods orders fell 2.5% year-on-year in June, the largest drop in five years, and significantly worse than the expected -0.6%.

On the positive side, sales of new US homes jumped 11% month-on-month in June, but were 21.3% lower on a year-on-year basis. Similarly, the S&P/Case-Schiller index, which measures house prices in 20 of the biggest US cities, fell 17.1% year-on-year in May 2009, an improvement after April's 18.1% decline. In 13 of the 20 cities, prices increased from April to May. These two indicators add further evidence that the important US residential property sector is bottoming out, although it was not yet in recovery mode. Better-than-expected US jobless claims (fell by 8,250 to 559,000 - the lowest since late January) data on Thursday lead to a surge on global equity markets, with the previous three trading days being rather lacklustre. Oil also jumped close to $5 per barrel as market optimism of an end to the recession improved. The improvement in risk appetite also helped the rand to end the week at R7.83/$, after it lost ground earlier in the week.

Most major global equity markets have now broken out of their October to June trading ranges. The JSE All Share index, for instance, closed the week above 24259 points, having traded in a (roughly)17800 to 23 600 range. However, significant volatility can still be expected over the next few months as investors grapple with the issues affecting the world's economies, particularly rising unemployment and overcapacity in productive sectors, which will likely result in a muted recovery.

Inside Insights 3 August_ US consumer confidence and unemployment

Interest debate to hot up again?

Last week was a busy one from a local economic data point of view. Year-on-year growth in private sector credit extension (PSCE) slowed further in June, to a five-year low rate of 3.98%. This was after 5.7% growth in May, and below analysts' estimate for 4.55%, reflecting the ongoing weakness in the economy, as well as banks' tight lending criteria. This suggests that households and businesses are not making use of lower interest rates to borrow, but rather to consolidate debt. Money supply (M3) growth also slowed down faster than analysts expected, to 6.04% from 7.86% the month before.

Good news, however, came by way of consumer inflation finally slowing down faster than expected. June CPI grew by 6.9% year-on-year, down from 8% in May and below the 7.2% consensus economist expectation. Service inflation continues to be the main driver of higher prices. Producer inflation remained in negative territory in June. PPI fell 4.1% year-on-year, after May's -3%. PPI increased on a month-on-month basis, reflecting higher oil prices in June, but of course the year-on-year decline reflects the much lower commodity prices compared to June 2008.

Lastly, data out this week confirmed that South Africa's unemployment rate has increased slightly to 23.6% in the second quarter from 23.5% in the first. StatsSA revealed that 267000 jobs were lost in the quarter, and unemployment will probably continue to rise even as the economy recovers, placing a damper on the pace of recovery as in the US and elsewhere. If inflation continues to slow down faster over the coming months and moves into the 3%-6% target range, the rand remains strong and other economic data remains weak, the market will start looking for a further interest rate cut, although there is likely to be much debate on the issue over the next few months. Given that it will take time for the previous cuts to impact the economy, many will argue that the Reserve Bank should wait to assess this impact, before further cuts are made.

The Week Ahead

Kagiso Purchasing Managers' Index (PMI) for July will be released this week. The PMI is expected to continue to improve, although it will probably remain below 50 points. This signals that the manufacturing sector is still contracting, but that the pace of contraction is slowing. The June number was 37.9, up from 37.3 in May and 35.6 in April.

NAAMSA July new vehicle sales data will be released this week, and are expected to reflect the ongoing weakness in the economy, although the drop in sales will probably be lower than previous months. June's vehicle sales were -23.7% year-on-year, better than -34.7% in May and -43.1% in April. Demand from businesses and households is slow, and so is credit extension.

The South African Chamber of Commerce and Industry (SACCI) releases its Business Confidence Index this week.

The local corporate results season continues with interims from Absa, Old Mutual, Nedbank, Mondi, Liberty, Merafe Resources, Palabora Mining, and finals from Tongaat-Hullett and Gold Fields.

Fairbairn Capital | Old Mutual

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