Executive Summary

·        After sounding increasingly hawkish since its September meeting, the US Fed has come to the realisation that it may need to reassess its policy tools, and its tightening strategy. While domestic macroeconomic data remain upbeat, cracks have started to emerge in the form of a slowdown in business capex spending, tighter global financial conditions and rising geopolitical tensions. The Fed is also concerned that it may overshoot its targeted neutral rate at a time when the effects of loose fiscal policy starts to fade in 2019.

·        Locally, high frequency data prints for Q3 show a mixed but slightly positive outlook for growth in the quarter. The mining and manufacturing industries switched fortunes in Q3 relative to Q2 – manufacturing production ended the quarter up 1.7% q/q, and is likely to contribute positively towards Q3 growth, after the 0.3% contraction in Q2. The manufacturing industry makes up 13% of GDP, and is likely to drive trade and transport activity over the quarter. An inventory rebuild in the industry is likely to have driven growth in production. Inventories are therefore set to contribute positively towards Q3 GDE, after the substantial draw down in Q2. In contrast, mining production declined by 2.2% q/q in Q3, after posting 4.9% growth in the Q2 GDP print. Mining production has come under pressure as a result of the recent weakness in global demand and production stoppages as a result of strikes.

·        In line with our expectations, the SARB raised the repo rate by 25bps to 6.75% (see our MPC Preview note of 16 November 2018). We had expected a dovish hike, and indeed the statement produced enough evidence to warrant this dovishness, as well as the hike. Just as market consensus was split down the middle, so too was the MPC, with three members voting for a hike, while three members voted for a hold.

·        The USDZAR has finally broken below the long term declining channel from 2016, after struggling to make a clean break since early August 2018. It is currently testing the one standard deviation level above the long run average and is likely to break lower, heading towards R13.18/$. In the interim, the R13.60/$ mark remains a key rand resistance level.

·        Higher and rising real interest rates may support investor risk sentiment and as a result remain supportive of the local unit over the near term, in the absence of external shocks. However, Nedbank maintains its view that the rand will probably depreciate gradually over the medium term as a result of external risks.