Nedbank Weekly Economic Monitor

24 Jan.

Nedbank Weekly Economic Monitor: Review of 16 to 20 and preview of 23 to 27 January 2012.

• Equity markets were firmer on positive earnings reports and increased optimism about the Eurozone.
• Chinese economic growth slowed in the fourth quarter, tempering worries about a possible hard landing for the world’s second largest economy.
• The rand remained firmer on low risk aversion.
• The MPC kept the repo rate unchanged at 5,5%
• Consumer inflation was steady at 6,1% in December 2011.

Domestic

The rand remained firm last week, supported by lower risk aversion, a firmer euro as well as the South African Reserve Bank Monetary Policy Committee (MPC’s) decision to keep interest rates unchanged, with the governor indicating that the committee did not discuss cutting rates. For the first time since mid November 2011, the local unit breached the R7 level against the US dollar on Wednesday and ended the week at R7,94, up from R8,12 at the previous week’s close. The unit also strengthened to R10,27 and R12,37 against the euro and the British pound respectively from R10,30 and R12,45 over the week.

Bonds consolidated further, with yields on the benchmark R157 2015 and R186 2025 easing to 6,70% and 8,34% respectively on Friday from 6,79% and 8,55% a week earlier, and the 3-, 5- and 10-year BESA actuaries fell to 6,42%, 7,14% and 8,03% from 6,45%, 7,22% and 8,20%.

Money market rates were generally steady, with the 3- and 6-month JIBAR closing at 5,53% and 5,79% respectively on Friday, unchanged from the previous week’s closes, while the 9- and 12-month JIBAR edged up only slightly to 5,97% and 6,15% from 5,96% and 6,13%.

Local equities were boosted by firmer global markets and lessened worries about global growth. The FTSE-JSE all-share index closed at a record high of 33 703,4 on Friday, up by 2,4% from the previous week’s close, with industrials, financials and basic materials up by 1,8%, 3,1% and 2,3% respectively to end at 35 243,1, 23 654,7 and 30 218,4.

As expected, the Reserve Bank’s MPC has left the repo rate unchanged at 5,5% on Thursday, adding that the current monetary policy stance is “accommodative and supportive of the real economy”. Growth prospects have weakened, the outlook for inflation has deteriorated since the last MPC meeting and risks to the domestic economy are evenly balanced. The Governor spoke at length about the uncertain outlook, with the risk of higher inflation counterbalanced by less favourable domestic growth prospects. While the global economy poses significant risks to local growth, the MPC is concerned that a persistent upward trend and a prolonged breach of the inflation target band could raise inflation expectations, reinforcing the rising inflation dynamics. Inflation has breached the 6% level and the Bank now expects it to peak at a higher rate and remain outside the target band for longer. Inflation forecasts were driven higher by the expected weaker rand exchange rate trajectory. CPI inflation is projected to peak at 6,6% in the second quarter of this year (previously 6,3% in the first quarter) and remain outside the 3% to 6% target band for the whole of 2012, returning to below 6% only in the first quarter of 2013 (previously the fourth quarter of 2012). …

See the full monitor at Weekly Economic Monitor