Good day,
Herewith the latest edition of the Monthly Insights. We trust that this will contribute to a broad overview of the interest rate, currency and financial markets.

Executive Summary

  • The South African economy fared better in the second quarter and, after shrinking by 1.2% in the first quarter, grew by a stronger than expected 3.3% q-o-q (seasonally adjusted and annualised). The quarterly growth rate was heavily inflated by the very low base established in the first quarter, with the main boost coming from stronger growth in manufacturing, a rebound in mining, and slightly faster growth in finance, real estate and business services.  Because we expect the economy to drift along at a sluggish pace, based on fragile domestic confidence, moderate global growth and a very gradual recovery in international commodity prices, we have left our GDP growth forecasts unchanged at around 0.2% for 2016 and 1% for 2017.
  • Consumer inflation drifted into the Reserve Bank’s inflation target range in August, registering 5.9% from 6% in July. Lower fuel prices offset the impact of further increases in food prices. We have adjusted our inflation forecast to reflect the much softer picture. In the short term, inflation, which has been hurt by food inflation and some rand weakness, is forecast to edge higher off last year’s low base. We see it peaking towards 6.2% around October/November and to end the year at around 6%, averaging 6.2% over 2016 as a whole. Inflation is then forecast to fall below 6% early in 2017, before hovering just within the Reserve Bank’s target range for the rest of the year. The rand remains the key risk to our outlook. At this stage, a slightly weaker rand is forecast for 2017 but the resulting inflationary consequences will be offset by lower food prices as the drought recedes, subdued domestic demand and base considerations.
  • Under these circumstances, it seems premature to rule out the possibility of more rate hikes during the remainder of this year and early in 2017. We still expect one more hike of 25 basis points in January 2017.  The rand’s near-term course will be the deciding factor.
  • While global monetary policies remained skewed towards a loose stance, the US is contemplating a rate hike, which will be very much data-dependent until the New Year. The UK is contemplating a rate cut which will be dependent on the economic data before their November policy meeting. Japan and the Eurozone are likely to keep monetary policies ultra-loose and expand their stimulus offerings in the New Year. Local interest rates are close to their peak in this hiking cycle, with the debate now being on whether or not the SARB will initiate one last hike and, if so, whether it will materialise this year or early next year.
  • In September, the rand appreciated by 5.9% against the trade-weighted basket of currencies and this took the rand’s appreciation for the year to date to a significant 13.5%. Based on our estimates of purchasing power parity,, the rand is currently undervalued by about 7.5%. However, the outlook for the rand remains highly uncertain. Over next few months the rand may benefit from foreign inflows as a result of a major M&A transaction and the willingness of global investors to take risks despite the global environment of negative yields on low-risk assets. This outlook correlates with our technical analysis which suggests that we may see a slight extension of rand gains in the short term.

The global outlook remains clouded by overarching central bank action as well as by geopolitical risks which are even harder to quantify. EM equities have been kept upbeat by risk-on demand which is likely to wane should the Fed initiate a rate hike this year. DM equities may remain relatively downbeat on the back of divergent monetary policies and the political risks evident in the US and UK. The trajectory of the dollar is also a determining factor for dollar-based equity market performances globally of which EM equities have been key outperformers this year.