Executive Summary

  • There has been a broad decline in inflation rates across the world, including a sharp downward surprise in our own (SA) inflation print for January. Lower energy prices, a decline in raw material and machinery costs, as well as falling demand-pull inflation have been key reasons for the falling inflation trajectory recently.
  • High-frequency data prints show a positive end to growth in 4Q18. The Nedbank Group Economic Unit forecasts growth of 1.1% q/q for 4Q18 and 0.7% for the year as a whole, although this is down from the 2.2% q/q growth rate achieved in 3Q18. 2019 got off to a negative start – high-frequency real economy indicators suggest a further deterioration in GDP growth in 1Q19. The manufacturing PMI dipped below 50 index points in January, while vehicle sales slumped by 7.4% y/y, their biggest decline in a year. The PMI eased further in February, reflecting a decline in global trade, weaker demand from key trading partners, and uncertainty in the local economy. The SACCI Business Confidence Index fell further in January as businesses remained concerned about load shedding, weak domestic demand, and policy uncertainty ahead of the elections. The Nedbank Group Economic Unit, therefore, revised it’s GDP growth estimate marginally lower, to 1,3% for 2019 and 1,8% for 2020.
  • In the 2019 Budget Speech, the National Treasury (NT) revised its real GDP growth forecast to 1.5% for 2019 from 1.7%. It made similar downward revisions to its growth estimates for the outer years to 2021. While growth is expected to recover to 2.1% by 2021 (NT), the risk of this not materialising is high. We anticipate similar downward revisions to the SARB’s own growth estimates later this month.
  • The FRA market is now showing a 26% probability of a 25bps cut in interest rates by the SARB by year-end. This is on the back of the CPI and PPI falling below consensus, while global central banks have also turned dovish. The FRA market has capitulated from expecting three hikes of 25bps each almost three months ago to now expecting a repo rate cut. We believe the FRA market has moved too dovish in the current environment.
  • The rand depreciated by 5.7% against the USD in February, giving back most of the gains made in January. Among the reasons for the decline were a resumption in load shedding by Eskom, a disappointing fiscal trajectory, and the broad-based sell-off in EM currencies in the past month. The rand was the second worst-performing currency in the world, after the Argentine peso, and followed by the Brazilian real. Our core view on the rand has not changed since the start of the year – we maintain a fair-value range for the USDZAR of 14.00-15.00/USD as our strategic view. Any break-out above or below this range is unlikely to be sustained, in our view. Tactically, we look for a break above the R14.20/USD mark to signal a further bout of rand weakness. As our FX strategists note, “global forces will likely trigger the next round of rand weakness. Fiscal problems would then fuel the unwinding of the rand carry trade.”