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G LOBAL M ARKETS
23 March 2015
MohammedN@Nedbankcapital.co.za
Reezwana Sumad
+27 11 294 1753
ReezwanaS@Nedbank.co.za
https://www.nedbankcapitalresearch.co.za
The interest rate barometer considers the factors influencing the decision
of the SARBs Monetary Policy Committee in the statement accompanying
the previous meetings interest rate decision (29/01/2015) as well as
developments since the previous meeting which could influence Thursdays
MPC rate decision. The factors are rated as a likely hike, hold or cut and are
weighted into 3 broad categories: global economy (20%), domestic
economy (40%) and major inflation drivers (40%) as per Table 1.
Of the 13 factors analysed above, 8 support expectations for an unchanged
policy, while 2 factors favour a cut and 3 favour a hike (see Table 2). Using
the weightings, there is a 57% bias for rates to be unchanged, a 30% bias
for a hike, and a 13% bias for rates to be cut.
Our view is for rates to remain on hold for an unchanged repo rate at this
meeting. Domestic inflationary pressures have increased since our last
Barometer and MPC. As such, the probability of a hike later in 2015 has
increased.
The current disinflationary pressures in the developed world continued. Oil
prices have moderated after recent gains. These gains are usually transient
as inflation remains a rate of change and as such, once worked into the
base price, the impact on the inflation rate should ease. These have been
offset by a weaker rand over the last month.
Our expectation for the global interest rate trajectory to remain flatter for
longer remains in play. We have long said that the debate around the
timing of the Fed hike is less important than the profile of such a hiking
cycle. We are of the opinion that the profile will be a lot flatter than
currently priced into FX markets.
Table 1
GLOBAL
Factors
Recent developments
Rate
impact
Growth
The IMF revised its global GDP growth forecast for 2015 down
to 3.5% from the 3.8% previously and that for 2016 down to
3.7% from 4% previously. The World Bank is more cautious,
reducing its global growth forecast to 3% in 2015 from 3.4% last
year.
HOLD
The key change since the last MPC meeting has been the US
experiencing disinflation, and disinflationary pressures
becoming more entrenched in the UK and Asia as a result of the
falling energy price. Inflation remains below central bank targets
in the developed economies, which will likely keep monetary
policy loose until the middle of 2015, when the Fed may hike
their interest rate marginally the Fed has communicated their
tolerance of inflation below their target, and view the current
disinflationary trend as transitory.
ECONOMY
(20%)
Inflation and
interest rates
Both the IMF and the World Bank are more upbeat about the
prospects for the US economy. The IMF also reduced its forecast
for China significantly.
IMF revised its growth forecast for sub-Saharan Africa down to
4.9% from 5.8% in 2015, and SA's growth has been reduced to
2.1% from a previous 2.3%.
HOLD
Nedbank Capital
Table 1 (continued)
GLOBAL
Factors
Recent developments
Rate
impact
Oil price
Oil prices have risen by 10.5% since the last MPC meeting in January, and
traded within a wide $49 - $63/bbl range. Supplies still remain elevated,
which will likely keep the price range-bound. The recent uptick however, will
likely result in a higher fuel price (in addition to the higher fuel ley), with
inflation likely to creep higher in the coming months. On an annualised basis,
the oil price is still 49.17% lower, providing impetus for a cut in the near
term.
CUT
SARBs GDP
forecast
GDP growth accelerated by much more than the market expected in the
final quarter of 2014, growing by 4.1% SAAR q/q, up from 2.1% and 0.5% in
the third and second quarters respectively. Real value added by mining and
manufacturing rose strongly, mainly reflecting some normalization in
production levels after the long strikes in the first three quarters of the year.
HOLD
Domestic
supply
The mining sector, which expanded output by 6.2% on a threemonth-to-three-month basis in November, is expected to
contribute positively to fourth quarter growth. The outlook for the
manufacturing sector, which contracted for three consecutive
quarters, is looking more positive following the resolution of the
strikes in the sector, with a three-month-to-three-month increase
in November of 4.1%. However, output declined by 2.1% on a
month-to-month basis due to electricity supply disruptions.
CUT
Domestic
demand
More positively, new vehicle sales rose by 1.1% m/m in February, from a
1.2% contraction in January. Domestic sales were led by light commercial
vehicles and passenger vehicles, while the 35.6% surge in exports was led by
passenger vehicles and extra-heavy commercial vehicles.
HOLD
Monetary
conditions
Annual private sector credit extension growth was 9.2% in January from
8.6% came in ahead of consensus expectations of 7.9%, with growth in
credit extended to households remaining almost unchanged at 3.5% y/y
(3.4% previously) and that to companies increasing to 14.3% from 13.5%.
Credit growth remains modest for this point of the business cycle and is
likely to remain so given weak household finances, reduced mortgage
finance availability and the generally poor economic environment.
HOLD
Forecast of
inflation
HOLD
Market
expectations
HOLD
Food prices
The recent uptick in local grain prices are likely to filter through towards
food inflation and the headline figure in the coming months. The FAO
international food price index has declined for the past 11 consecutive
months (currently -14% y/y in $-terms), as global wheat and corn prices
remains contained on the back of positive harvest conditions. This trend is
expected to persist in the coming months, supported by better growing
conditions. However local grain prices are expected to tick higher, with
imports of grains rising, and the weak rand raising these import prices.
HOLD
Rand
exchange
rate
The rand weakened by 4.5% against the USD (and 1.6% on a tradeweighted basis) since the last MPC meeting, mainly on the back of
the risk aversion prevalent in the financial markets due to global
central bank uncertainty. The rand is expected to remain
downbeat in the medium term, premised on the expectations for a
strong dollar.
The rand weakened by around 5% against the USD (and 2.5% on a tradeweighted basis) since the last MPC meeting, and 11.5% y/y (flat on a trade
weighted basis). The market is increasingly pricing in the possibility of earlier
rate hikes by the Fed, due to upbeat labour market data from the region.
This has resulted in significant FX volatility, and a very upbeat and
overbought USD.
HIKE
Administered
prices
Administered prices fell into deflation in January and February (currently 4.5% y/y in Feb). This is because of low transport inflation, with the fuel
price still low on a y/y basis. The petrol price however, has risen by 96 cents
in March, and is essentially unchanged from the January MPC meeting. The
price is expected to rise further as a result of the current under-recovery,
and the fuel and transport levies overlaid onto the basic fuel price. Further,
Eskom will likely apply for a 25.3% tariff increase from NERSA, indicating that
price hikes will likely be high in 2015.
HIKE
The most recent Andrew Levy wage settlements data indicate that wage
settlements remain unsustainably high and in excess of inflation. This will
weigh on CPI in the medium term.
HIKE
ECONOMY
(20%)
(Contd)
DOMESTIC
ECONOMY
(40%)
INFLATION
DRIVERS
(40%)
Retail growth decelerated to 1.7% y/y in January from a revised 2.0% . Five
of the seven major categories of sales recorded annual growth, but the main
contributor to the headline figure was the 'textiles, clothing, footwear and
leather goods' category, which rose by 8.8%, adding 1.8%.
Page 2 of 5
Nedbank Capital
Table 2: Probability of outcomes
Impact
Global economy (20%)
Unweighted Probabilities
Weighted probabilities
Cut
33%
7%
Hold
67%
13%
Hike
0%
0%
Domestic (40%)
Cut
Hold
Hike
17%
83%
0%
7%
33%
0%
Cut
Hold
Hike
0%
25%
75%
0%
10%
30%
Final Result
Cut
15%
62%
23%
13%
57%
30%
Hold
Hike
Source: Nedbank
6.50
6.00
5.50
1
CURRENT
2014/07/02
2014/09/01
12
15
18
21
2015/01/15
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Nedbank Capital
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