Executive Summary

  • Policymakers from the Fed to the ECB believe that a key risk to the global economy is the uncertain trade conditions being stoked by the US and China. The Fed has come under increasing criticism from President Trump to ease policy as fast as his DM peers, while the ECB is grappling with a weak inflation outlook, fuelling calls for further QE. The BoE remains stuck in limbo as it forecasts higher policy rates over the medium term but has conceded that it may need to reduce interest rates if a ‘no-deal’ Brexit becomes a reality.
  • SA GDP posted a recovery in Q2, with real GDP growth rising to 3.1% q/q in Q2, from -3.1% in Q2 (revised from -3.2%), ahead of consensus of +2.5%. On an annualised basis, GDP rose 0.9% y/y, from no growth in Q1, better than consensus of +0.7%. The main reason for the surge in growth is due to the low base effect in Q1, and not necessarily any significant improvement in the economy. While the Q2 recovery is welcome, confidence levels remain weak, and if it wasn’t for dangerously low inventory levels, the secondary industry would have remained in the doldrums as well. We have seen sales of minerals and manufactured items start to slow down recently, and so the inventory rebuild comes at a time when both domestic and international demand is under pressure. This implies that growth in the last two quarters of the year will need to be driven by services, utilities and agriculture because output from the secondary industry may falter – we have already seen this in the PMI slump in August. Hence the potential for a disappointment is high, given recent downsizing taking place in the tertiary sector.
  • SA’s CPI fell sharply to 4.0% y/y in July, from 4.5% in June, well below estimates of 4.3%. The Fed reiterated its willingness to support the US economy in the event of deterioration in economic data, warranting further reductions to the US Fed funds rate. The fact that central banks are currently dovish globally has resulted in the SA FRA curve pricing in a 39% probability of a 25bps reduction in the repo rate at the SARB’s MPC meeting later this month. The FRA market is also pricing in an 83% probability of a 25bps cut at the SARB’s November MPC meeting. We still believe there will be room for a further repo rate cut if inflation and inflation expectations remain anchored, if growth surprises to the downside and the Fed eases the Fed funds rate further this year.
  • The USDZAR weakened 7.2% in August, with the bulk of this move coming after the Fed’s interest rate decision, which was viewed as neutral and strengthened the dollar.Local headwinds also added pressure on the currency, as political infighting persisted, policy uncertainty remained high, after a NT white paper on growth did not garner much support from politicians, and the fiscal outlook continued to worsen. Against the crosses, the rand depreciated 6.7% against the GBP and 5.8% against the EUR in August – here again, the bulk of the weakness came shortly after the Fed’s policy meeting, with the crosses effectively remaining unchanged since early August. The trade-weighted rand weakened 5.5% in August.