Nedbank Weekly Economic Monitor

27 Sep.

Nedbank Weekly Economic Monitor: Review of 19 to 23 and preview of 26 to 30 September 2011.

• Concerns about global growth and the worsening debt crisis in Europe, saw global equity markets fall sharply.
• The rand breached the critical R8 level against the US dollar last week, pressured by continued global risk aversion.
• As expected, the Reserve Bank’s MPC left the repo rate unchanged at 5,5%.
• Consumer inflation remained unchanged at 5,3% y-o-y in August.
• Retail sales for July come out better than expected at 2,8% y-o-y.
• The US Federal Open Market Committee reiterated that it will keep its target for the federal funds rate at 0% to 0,25% at least to the middle of 2013.
• Standard & Poor’s downgraded Italy’s sovereign credit rating to A from A+.

Domestic

The rand weakened sharply last week, breaching the psychologically important R8 level against the US dollar on continued global risk aversion and the South African Reserve Bank’s dovish MPC statement. The unit closed at R8,40 against the US dollar on Thursday, its weakest level since 18 May 2009, but recovered some ground on Friday, closing at R8,10, down from R7,45 at the previous week’s close. Against the euro and the British pound, the rand fell to R10,93 and R12,50 from R10,22 and R11,80 respectively.

Bonds weakened, with yields on the benchmark R157 2015 and R186 2025 rising to 7,13% and 8,66% at the end of the week from 6,77% and 8,19% at the previous week’s close. The 3-, 5- and 10-year BESA actuaries increased to 6,83%, 7,57% and 8,41% respectively from 6,49%, 7,19% and 8,01%.

In the money market, the 3-month JIBAR was steady 5,5%, while the 3-, 6-, 9- and 12- month JIBAR rose to 5,64%, 5,73% and 5,78% after dropping to 5,60%, 5,66% and 5,70% respectively last week.

Weaker global markets dragged local equities down over the week. The FTSE-JSE all share index lost 3,2% to end at 30 061,2 on Friday, with financials, industrials and basic materials falling by 3,9%, 3,6% and 2,3% respectively to end at 20 433,7, 3 1785,5 and 27 434,5.

In line with market expectations, the South African Reserve Bank’s Monetary Policy Committee (MPC) left the repo rate unchanged at 5,5%. The MPC highlighted the increased downside risks to the growth outlook, mainly due to uncertainties in the advanced economies. However, the risks to the inflation outlook have been compounded by the weakness of the rand. The Governor characterised the growth and inflation outlooks as “delicately balanced”. The Bank still projects inflation to breach the 6% level in the fourth quarter of this year, but now expects it to peak at 6,2% (previously 6,3%) in the first quarter of next year. CPI inflation is then expected to decline to within the target range in the second quarter of 2012 before easing gradually to 5,5% (previously 5,6%) in the fourth quarter of 2013. Core inflation – which excludes food, petrol and electricity and declined to 3,8% y-o-y in August from 3,9% in July – is projected to peak at 5,1% in the second and third quarters of 2013.

The Bank’s growth forecasts have been revised slightly downwards for this year and next year. Gdp growth is now projected at 3,2% (from 3,7% at the time of the July meeting) in 2011 and 3,6% (from 3,9%) in 2012, while the forecast for 2013 was unchanged at 4,4%. …

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