Nedbank Weekly Economic Monitor

25 Jul.

Nedbank Weekly Economic Monitor: Review of 18 to 22 July and preview of 25 to 29 July 2011.

• The MPC left the repo rate unchanged in line with market consensus but presented a more hawkish statement.
• Consumer inflation rose to 5 % y-o-y in June, while retail sales fell over the month in April.
• Globally, news of another Greek debt package supported markets, but the US debt ceiling deadlock is expected to weigh on markets this week.
• European indicators suggested that the eurozone economic recovery is likely to lose momentum in the coming months.

Domestic
News that Eurozone officials have agreed on a second bailout package to solve the Greek debt crisis improved risk sentiment last week, helping the rand to close firmer at R6,77, R9,72 and R11,03 against the US dollar, the euro and the British pound respectively on Friday, up from R6,88, R9,73 and R11,11 a week earlier.

Bonds firmed in line with the rand, with yields on the benchmark R157 2015 and the R186 2025 falling to 7,37% and 8,47% from 7,48% and 8,60%, while those on the 3-, 5- and 10- year BESA actuaries declined to 6,99%, 7,65% and 8,25% respectively from 7,06%, 7,73% and 8,40%.

Money market rates were broadly steady at the end of the week, with the 6-month JIBAR unchanged from the previous week’s close of 5,79%, the 3- and 9-month JIBAR changing only slightly to 5,50% and 6,00% respectively from 5,52% and 5,99%, while the 12-month JIBAR fell to 6,20% from 6,24%.

Despite firmer international markets, local equities closed the week slightly lower, mainly on the back of weak industrial and financial stocks. The FTSE-JSE all share index lost 0,8% over the week, ending at 32 016,3 on Friday, with industrials and financials down by 1,7% and 1,1% respectively, to close at 33 378,7 and 21 543,1. However, basic materials increased marginally by 0,3% to close at 30 102,0.

As expected, the Reserve Bank’s Monetary Policy Committee (MPC) left the repo rate unchanged at 5,5% on Thursday. The MPC adopted a more hawkish tone, revising its inflation forecast slightly higher and projecting it to remain close to 6% for longer. The Governor reiterated that the recent trend towards high wage settlements posed a risk to the inflation outlook. The Governor said that the Committee is not complacent and will remain vigilant and continue to monitor closely any indications of second round effects on inflation emanating from cost pressures as well as the changing risk profile of the inflation outlook. The Bank still expects inflation to breach the 6% level in the fourth quarter of this year but now projects that it will remain higher for longer. CPI inflation is expected to reach a peak of 6,3% in the first quarter of 2012, then to ease to around the upper end of the target range over the next two quarters before declining further in the fourth quarter of next year. The Bank forecasts inflation of 5,6% in the fourth quarter of 2013. The Bank’s growth forecasts have remained unchanged since the last MPC meeting in May, with gdp growth projected at 3,7% in 2011 and 3,9% in 2012 before rising to 4,4% in 2013. …

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