Executive Summary

·        SA GDP came out even worse than the worst estimate in the analyst poll in 1Q18. GDP contracted by 2.2% q/q SAAR, from 3.1% growth in the previous quarter, worse than consensus of -0.5%. This was the worst quarterly print since 1Q09. All industries, sectors and expenditure items deteriorated other than government and personal services. Nedbank Group has subsequently revised its growth estimate lower for 2018, to 1.5% for 2018, from 1.8% previously anticipated. Although still very early, high-frequency economic data for 2Q18 shows a decline in business confidence, a sharp contraction in retail sales, manufacturing and mining production in April, lower vehicle sales growth in May, while the leading index continues to fall. The trade balance however, improved in May as exports rose. Nonetheless, the extremely low base in 1Q18 may imply an overall better Q2 growth performance.

·        In June, the rand weakened by a further 8.3% against the dollar, which means that, at current levels, the rand is at its worst level since November 2017 when the sovereign was downgraded by S&P. This also implies that the rand has depreciated by 12% for the YTD and is the second worst performing currency in the world (on a one-month basis) after the Argentine Peso. The rand is expected to pull-back in the interim, but remain within a weak range for most of this year – our base case is now for the rand to trend between R13.00 to R14.00/$ over the next six months. One aspect that would warrant a blow-out above the R14.00 level is a continuation or deterioration in geopolitical tensions which would maintain a strong dollar, as the dollar behaves as a safe-haven asset during times of conflict.

·        SA CPI fell to 4.4% y/y in May, from 4.5% in April, better than consensus forecasts of 4.6%. Core inflation also fell to 4.4% y/y in May, indicating that underlying inflationary pressures remain subdued.  SA bond market has not been shielded from the global rout that deepened post the Fed interest rate hike in mid-June. Trade tensions between the US and China escalated resulting in an exodus of foreign capital flowing out of emerging markets and into safe haven assets like the US dollar and US treasuries.

·        The SARB has recently turned more hawkish, understandably so given a weak rand exchange rate and global trade and geopolitical uncertainty. We now believe that the chance of a further interest rate cut in 2018 has declined given that some of the more dovish members of the MPC have started to sound more hawkish (or less dovish) lately. This does not imply that we foresee hikes in the near future. We believe interest rates will likely be kept unchanged over the next year. While we previously called for a further interest rate cut by the SARB, we think that the chances of a further cut have been reduced by rising geopolitical uncertainty, a weaker rand exchange rate, and an exodus of capital flight from EMs.

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