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. Please feel free to address any questions or comment on the contents to the undersigned.

Executive Summary

  • High-frequency statistics suggest that the economy probably grew at an annualised rate of around 2% in 2Q17, with positive contributions expected from agriculture, mining, manufacturing, electricity generation and broad retail sales. The economic outlook remains highly uncertain. Confidence will probably remain very fragile, given the adverse policy and political environments and the threat of further credit rating downgrades. The slump in fixed investment is forecast to continue in the quarters ahead, but consumer spending should improve modestly as inflation moderates and interest rates ease. Exports are also forecast to pick up as the world economy gathers pace and commodity prices drift higher. Our growth forecast therefore remains unchanged at 0.6% for 2017, 1.3% for 2018 and 1.9% for 2019.
  • Yield curve steepness intensified in August with the 30v10 spread remaining elevated at 122bps (vs 71bps at the start of the year) after a further switch auction which swapped the R203 bonds for longer-dated tenors. Higher yields on SAGBs and a steeper curve has inevitably meant higher borrowing costs for the government.
  • The economy remains vulnerable and weak in our opinion, but at least returned to growth (albeit pedestrian) in 2Q17. Headline inflation has yet again surprised on the downside, dipping below 5% in July 2017 for the first time since November 2015. Given these trends we are forecasting another cut of 25bps at the September 2017 MPC meeting. Thereafter, much depends on the rand, which is still vulnerable to further ratings downgrades (which are likely to be determined by the outcome of October’s Medium Term Budget Policy Statement (MTBPS) and the ANC elective conference in December). Over this uncertain period we believe the MPC will opt to leave interest rates on hold. If more political and ratings shocks are avoided, further monetary easing is expected in early 2018.
  • Most other central banks eased rates in August 2017. So far this year, of the 93 most watched central banks, 29 eased monetary policy while 24 tightened (the rest held rates steady). A key dilemma faced by the Fed is the fact that the labour market at full employment has not translated into wage inflation and upside inflationary pressures. We maintain the consensus view that balance sheet normalisation will begin this month, with a further rate hike in December 2017 if economic data holds up well.