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Cape Town - The appreciation in the rand over the past year has eased inflationary pressures, according to Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.
Over the past 12 months the rand has strengthened versus the US dollar, euro and pound sterling by 19.52%, 24.02% and 37.84% respectively.
OAM said in trade-weighted terms the rand has appreciated by 18% over the same period.
"The rand is likely to maintain its strengthening bias amid increasing commodity prices and rising global financial risk appetite."
South Africa economic review
• Consumer price inflation (CPI) eased more than expected from 6.8% year-on-year in December to 6.6% in January, below the 6.7% consensus forecast. Core CPI, excluding food and energy prices which tend to be volatile, decelerated sharply from 5.9% to 5.5% well below the consensus forecast for no change.
The dip in headline CPI is attributed to an easing in food price inflation from a peak of 11.7% in December to 11.4%. Food price inflation is expected to fall to as low as 1% by the end of this year due to last year’s high base levels and improving crop yields. The advent of a mild La Nina weather pattern is expected to bring above average rainfalls and increased crop yields.
In its most recent estimate the South Africa Crop Estimate Committee forecasts an increase in this season’s wheat harvest of up to 31%. (See Bottom Line for further analysis).
• Retail sales growth contracted in December by 2.3% month-on-month almost reversing November’s downwardly revised 3.0% growth. However, monthly retail sales tend to be volatile and some payback had been expected following buoyant Black Friday sales.
On a year-to-date basis retail sales growth moderated from 3.1% to 0.9% but sales increased in the fourth quarter (Q4) by 1.1% quarter-on-quarter following a 0.1% contraction in Q2.
Amid a generally subdued retail environment, the “textiles, clothing, footwear and leather goods” category increased sales by 10.5% on the year, contributing 2.3 percentage points to the headline figure. The outlook for retail sales should gradually improve during 2017, assisted by the prospect of lower interest rates and the boost to consumer confidence from stronger economic growth.
• The unemployment rate fell from 27.1% in the third quarter (Q3) to 26.5% in Q4 although higher than last year’s rate of 24.5%. A net 155 000 new jobs were created during the quarter although this may reflect the seasonal rise in temporary jobs during the festive season.
Despite improving commodity prices the mining sector shed 17 000 jobs while the manufacturing sector grew its workforce by 44 000 and the agricultural sector by 38 000 amid improving weather conditions. The biggest contributor was the community and social services sector, which mainly comprises government jobs, with an increase of 73 000.
The transport sector increased its jobs count by 46 000. Employment growth is expected to improve during 2017 in line with the gradual recovery in economic growth, stemming from rising global trade, firmer commodity prices and normalisation in agricultural output. On the demand side, rising consumer confidence should also bolster jobs growth in the services, retail and wholesaling sectors.
• In the past week foreign investors bought a net R3.5bn of domestic bonds, taking the total for the month-to-date to R2.9bn. However, for the year-to-date foreigners have been net sellers of domestic bonds to the tune of R0.5bn.
Foreign investors have maintained their trend of divesting from South African listed equities, selling a net R1.8bn in the past week, R5.bn for the month-to-date and R18.5bn in the year so far. Total net inflows amount for the month and year-to-date stand at -R2.2bnn and -R19bn.
The week ahead
• SA Reserve Bank Leading Economic Indicator: Due Tuesday 21st February. The leading economic indicator (LEI), a forward-looking data point, has increased for four straight months between July and November. December’s LEI is expected to remain firm helped by the recovery in both mining and agricultural sectors, and prospects for lower interest rates.
• State Budget: Due Wednesday 22nd February. Finance Minister Pravin Gordhan will present the State Budget, which is expected to contain a combination of tax increases and expenditure cuts to shore-up the rising budget deficit.
Due to the weak economy the budget deficit is likely to rise from the original 3.2% target set in February 2016 to 3.4% as projected in October’s Medium-Term Budget Policy Statement.
• Producer price inflation: Due Thursday 23rd February. Producer price inflation (PPI) is expected to decelerate from 7.1% year-on-year in December to 6.6% in January according to consensus forecast. The expected decline in PPI is attributed to the high base level in last year’s comparative data.
Technical analysis
• While the rand has broken below key resistance levels versus the dollar at R/$ 14.20 and 13.80 the strengthening trend is not confirmed by momentum indicators, signalling that the currency is overbought.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Following the Brexit vote the British pound hit its weakest level against the US dollar since 1985. The key £/$1.30 level support level has been broken opening up a £/$1.20-1.24 target.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has broken back above the key support level of 2.0% endangering the multi-year bull trend in US bonds.
• The benchmark R186 SA Gilt yield is now testing the key support level of 9.0% endangering the mini-bull market in bonds which has been in place since the start of the year.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent crude price is well supported at $40 a barrel and having broken key resistance at $50 is targeting further gains to the next key level at $60. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5 000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• The JSE All Share index is testing an important resistance line but if this remains unbroken the index is likely to move back below the 24-month moving average at 50 900 in turn opening a downside target of 45 000. A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.
The bottom line
• Consumer price inflation (CPI) eased more than expected from 6.8% year-on-year in December to 6.6% in January, below the 6.7% consensus forecast. Core CPI, excluding food and energy prices which tend to be volatile, decelerated sharply from 5.9% to 5.5% well below the consensus forecast for no change.
• The dip in headline CPI is attributed to an easing in food price inflation from a peak of 11.7% in December to 11.4%. Food price inflation is expected to fall to as low as 1% by the end of this year due to last year’s high base levels and improving crop yields. The advent of a mild La Nina weather pattern is expected to bring above average rainfalls and increased crop yields.
In its most recent estimate the South Africa Crop Estimate Committee forecasts an increase in this season’s wheat harvest of up to 31%. Meanwhile, the land area planted under white maize is up 53% on last year. The futures prices of white and yellow maize are down by 22.5% and 15.0% since the start of the year, declining 40% and 26% from their peak levels in early 2016.
• The appreciation in the rand over the past year has eased inflationary pressures. Over the past 12 months the rand has strengthened versus the US dollar, euro and pound sterling by 19.52%, 24.02% and 37.84% respectively. In trade-weighted terms the rand has appreciated by 18% over the same period. The rand is likely to maintain its strengthening bias amid increasing commodity prices and rising global financial risk appetite.
• At current levels a $5 per barrel move in the oil price would add to or subtract around 0.25 percentage points from the level of headline CPI. The Brent Crude oil price has gained 60.86% over the past year boosted in November by OPEC’s decision to reduce daily oil production. However, higher oil prices are likely to bring price sensitive US unconventional fracking production back on stream, placing a cap on oil prices.
• Despite the upside risk of higher oil prices, CPI should ease in the months ahead, helped by declining food price inflation and a strengthening rand. Notwithstanding the risk of higher oil prices CPI should ease back to within the Reserve Bank’s 3-6% target in the second quarter (Q2). The SARB’s projection is more conservative, forecasting a return to the target range by Q4.
• Market expectations for an interest rate cut are likely to rise as CPI returns to within the Reserve Bank’s inflation target. The Reserve Bank has hiked the benchmark repo rate by an aggregate 200 basis points since it initiated its rate tightening cycle in January 2014 but for the past year has left rates on hold.
At its policy meeting in September last year the Reserve Bank said it may be approaching the end of its hiking cycle. According to a Reuters survey a third of analysts expect the repo rate to be cut by 25-50 basis points by the end of the year.
• Monetary easing would benefit economic growth by reducing the cost of investment and household spending. The equity market will rise as lower interest rates improve the outlook for economic growth and company earnings. Lower deposit rates and short-term money market rates will add to the relative attraction of equity yields, prompting a shift from savings accounts to equity investment portfolios.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
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