Inside Insights 9 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 09 November 2009 @ 10:06 AM

Markets doing a bit better

Renewed recovery hopes kept international markets afloat last week and uncertainty on the market, as shown by the VIX, has retreated following the recent spike. A slew of strong US economic data increased global risk appetite at the start of the week. US pending home sales unexpectedly rose to its highest levels in 3 years in September, while the US ISM manufacturing PMI (see below) revealed a third consecutive month of expansion for October. Productivity grew at its fastest pace in six years during the third quarter. Jobless claims fell to a 10-month low, suggesting that the US labour market maybe bottoming out. However, on Friday official US unemployment data showed the number of Americans without jobs rose to 10.2%, and that 190,000 jobs were lost in October.

With most of the week's data releases better than expected, investor demand for more riskier assets increased, causing further declines in the US dollar. This was further supported by the Fed announcing that interest rates will continue to remain low ‘for an extended period of time' (with similar statements from the ECB and Bank of England). The weaker dollar, along with the Indian Reserve Bank's purchase of 200 tons of gold from the IMF pushed the spot price of gold to a record intra-day high of $1097/oz. Stronger commodities prices supported the JSE, although the All Share index failed to close the week above 26 000 points.

Despite the retreating dollar and buoyant gold price, the rand struggled at the beginning of week, as concerns over government intervention and the threat of rising Eskom tariffs held the local currency back to levels around R7.80/$. However, when the Reserve Bank confirmed later in the week that there would be no intervention in foreign exchange markets to force the rand weaker (although they would continue to build up foreign exchange reserves due to current conducive conditions), the local currency made up ground and moved back to levels below R7.50/$.

PMIs still rising

The first week of the month is when the world's purchasing managers' indices (PMI) are released. PMI's are indicators of economic activity in the manufacturing sector (although some countries have non-manufacturing PMIs), and also have a forward-looking component. They are relatively easy to interpret, with an index level above 50 pointing to expansion and below 50 a contraction. The local PMI, sponsored by Kagiso, rose to 47.6 in October from a revised 45.9 in September (the September number was changed from the previously reported 48 due to the annual revision of the seasonal factors used to calculate the index). The local PMI has now increased for three consecutive months, which suggests that the sector has bottomed out. However, it has been below the 50 points level for 18 months now, indicating the severity of the manufacturing recession. The business activity (48.4 from 48.0 in September) and new sales orders (48.9 from 46.6) sub-indices - which together make up 55% of the total PMI index, advanced to the highest levels since April 2008.

The local PMI continues to lag its counterparts elsewhere, though. The US manufacturing index (ISM) rose to 55.7 in October from 52.6 in September. However, the US services ISM fell slightly from 50.9 to 50.6, which is concerning given that services make up 80% of the American economy. Europe's manufacturing PMI is finally above 50, having risen to 50.7 from 49.3. The Chinese index remains above 50 - up to 55.4 from 55 - but the rate of expansion has slowed down, perhaps not unexpectedly given the previous strength.

ndustry body NAAMSA's vehicle sales statistics for October 2009 showed a 16,9% year-on-year decline, an improvement from September's -22.4%. Passenger car sales improved for the second month in row, suggesting that the plunge in consumer confidence may have bottomed out. However, the decline in sales of commercial vehicles accelerated to -27.9% year-on-year, with heavyweight and extra heavyweight segments down (-44% and -49% respectively), pointing to depressed private sector fixed investment activity.

The Week Ahead

Following the release of positive PMI numbers last week, this week sees the release of manufacturing production data for September. Year-on-year change in manufacturing production has been negative every month since October 2008, with August's number coming in at -15% following July's -13%. Nonetheless, the pace of decline in manufacturing has eased from the rapid contraction of the second quarter, and going into the fourth quarter, we might see positive growth. While the strong rand has hurt exporting and import-competing businesses, manufacturers will have benefited from lower input costs (with producer price inflation in negative territory). Recovery in the economies of South Africa's main trading partners also bodes well.

The South African Chamber of Commerce and Industry releases its monthly business confidence index (BCI) for October this week. The BCI is a composite index of a number of indicators that impact on business confidence, including the rand/dollar exchange rate, inflation, interest rates, trade , and sales and production numbers.

StatsSA also releases mining production data this week, on Thursday. Mining production fell from 4.8% year-on-year in July to -11.5% in August. It has difficult to discern a clear trend in mining production this week, as the figures have been very volatile from month to month. The sector has not been helped by the stronger rand, even though commodity prices have improved during the course of the year.

Fairbairn Capital | Old Mutual

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