rentekoersbarometersept2015
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Nedbank se Rentekoers-barometer vir September 2015 sit uiteen waarom rentekoerse moet styg, daal of onveranderd bly wanneer die Reserwebank op 23 September daaroor besluit.TRANSCRIPT
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G L O B A L
M A R K E T S
M a
r k e t C o m m e n t a r y | S o u t h A f r i c a
Interest Rate Barometer
Executive Summary The interest rate barometer considers the factors influencing the decision
of the SARB’s Monetary Policy Committee in the statement accompanying
the previous meeting’s interest rate decision (23/07/2015) as well as
developments since the previous meeting which could influence
Wednesday’s MPC rate decision. The factors are rated on a stand-alone
basis 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, 6 support expectations for an unchanged
policy, while 4 factors favour a hike and 3 factors favour a cut (see Table 2).
Using the weightings, there is a 43% bias for rates to be unchanged , a 37%
bias for a hike, and a 20% bias for rates to be cut. Of the 6 “hold” factors, 4
are at risk of being “hike” factors at subsequent meetings. The inverse to
this is that global factors have softened marginally indicating a higher ‘cut’
bias than previous meetings. These counterbalance each other to
emphasize a ‘hold’ stance in aggregate.
Our view is for the repo rate to remain on hold at this meeting. The July
hike of 25bps was against our expectations, but given the US Federal
Reserve holding back on a hike at this stage, the SARB would have some
scope, considering the earlier SARB hike, to stay on hold for now.
Domestic demand and supply data have continued to deteriorate while
exogenous factors will likely continue to push domestic inflation higher into
the end of the year, effectively entrenching the stagflation dilemma.
Disinflationary pressures in the developed world remain a contentious
issue with policy makers viewing it as transient, but still hesitant to hike
rates globally. 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.
Table 1
Factors SARB outlook at the July policy meeting Recent developments Rateimpact
GLOBAL
ECONOMY
(20%)
Growth “Global economic growth has been revised downwards
recently, mainly due to the weak first quarter outcome in
the US. While the recovery in the US still appears to be on
track, growth this year is expected to be closer to the 2 per
cent level, compared with expectations of around 3 per
cent earlier in the year. The st eady, but slow improvement
in the euro area has continued, following a better-than-
expected first quarter outcome. The Chinese economy
grew at a year-on-year rate of 7,0 per cent in the second
quarter, but some moderation is expected in the coming
quarters. The prospects for a number of other larger
emerging market economies, particularly Russia and Brazil,
remain weak.”
Since the last MPC, GDP data out of most advanced countries
have disappointed, apart from the US. Japanese GDP
contracted by a large margin in Q2, Chinese GDP came in line
with the PBOC expectations, while growth in other EM
countries disappointed, including SA.
Early data for Q3 have indicated a continuation of this trend,
which points to another quarter of downbeat economic
momentum, albeit off a low base.
CUT
Inflation and
interest rates
“Global inflation pressures, particularly in the a dvanced
economies remain benign, reinforced by declining
commodity prices, including oil. Against this backdrop, the
monetary policy stances in most advanced and emerging
market economies have either remained unchanged or
become more accommodative since the previous MPC
meeting, with the exception of Brazil where interest rates
were increased further. Monetary policies in the advanced
economies are likely to remain asynchronous .”
Since the July MPC meeting, global inflation indicators have
also remained low. US CPI is marginally above deflation, UK
CPI is at 0%, while that of the Eurozone is 1%. The BOE has
reduced its CPI forecast, as well as the Fed most recently,
given the slump in energy prices. However, most global
central bankers see the decline in inflation as transient with
an uptick in the latter part of 2015 and early 2016.
HOLD
21 September 2015
Nedbank CIB Strategic Research
Mohammed Yaseen Nalla, CFA
+27 11 295 5430
Reezwana Sumad
+27 11 294 1753
https://www.nedbankcapitalresearch.co.za
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Nedbank CIB
Interest rate barometer | 21 September 2015 Page 2 of 4
Table 1 (continued)
Factors SARB outlook at the July policy meeting Recent developments Rate
impact
GLOBAL
ECONOMY
(20%)
(Contd)
Oil price “International oil prices have been somewhat weaker since the p revious
meeting of the MPC, following higher output by Saudi Arabia, and the
prospects of a resumption of oil exports by Iran. Since early July, spot
prices have traded below US$60 per barrel, while futures prices are
currently trading at around US$58 per barrel for December delivery.”
Oil prices have fallen by 14.4% since the last MPC meeting in July, falling
from around $56/bbl. to around $48/bbl. OPEC has upgraded its demand
forecasts for 2016, while the EIA has cut its demand forecasts. The global
supply glut also continues to be a feature. On an annualised basis, the oil
price is 51% lower, with t he base effects likely to ease closer t owards
early 2016.
HOLD
DOMESTIC
ECONOMY
(40%)
SARB’s GDP
forecast “The Bank’s forecast for growth in each year of the forecast period has
been revised down marginally, to 2,0 per cent in 2015 and 2,1 per cent
in 2016, and rising to 2,6 per cent in 2017 when some easing of the
electricity supply constraint is assumed. However, the risks to growth
are still assessed to be moderately on the downside.”
Q2 GDP was a major disappointment, with a contraction of 1.3%,following growth of the same magnitude in Q1. Consensus forecasts have
been downwardly revised for 2015 on the back of this GDP slump. The
growth outlook remains subdued due to electricity shortages, high wage
demands, and low consumer demand both globally and locally and risks
to the outlook remain to the downside.
CUT
Domestic
supply
“The physical volume of manufacturing production has contracted on a
month-on-month basis in three of the first five months of this year, and
this sector is expected to record negative growth in the second quarter.
Although the PMI improved in May and June, it remains around the 50
index point level, consistent with a constrained outlook. The mining
sector, by contrast, has displayed some resilience, particularly in the
PGM sub-sector, although the weaker platinum and palladium prices are
expected to create further headwinds.”
SA mining production growth surged in July, exceeding expectations as a
result of low base effects coming through from last year.
SA manufacturing production also surprised to the upside in July, rising
by 5.6% y/y, from the 0.5% co ntraction in June, well ahead of forecasts of
1.4%. However, this data is a reflection of strong low base effects coming
through from 2014, as the monthly trend remains weak, while the PMI
indicator has also deteriorated further below 50.
HOLD
Domestic
demand
“…the outlook for consumption expenditure has deteriorated. This
negative outlook is reflected in slowing retail sales growth, declining
motor vehicle sales and the continued weak pace in credit extended to
households by the banking sector…Against this backdrop, the FNB/BER
consumer confidence index reached a 14-year low in t he second quarter
of 2015.”
NAAMSA new vehicle sales contracted by 8.2% y/y in August, from -6.1%
in July, much worse than forecasts of -4.1%. Sales of all categories of
vehicles contracted on an annualised basis. Not even the relatively
resilient ‘light commercial vehicles’ category posed any gains. SA retail
sales growth slowed to 3.3% y/y in July, from 3.8% in June, but beat
forecasts of 2.5%. Monthly growth was a more muted 0.1%, from 0.4% inJune, below forecasts of 0.2%.
Indications from the Quarterly Bulletin are that domestic demand has
slumped in Q2, particularly private sector consumption, gross fixed
capital formation and inventories. This trend will likely persist as
consumers and businesses face rising cost pressures, among other
headwinds
CUT
Monetary
conditions
“Tighter affordability criteria as well as proposals to cap interest charges
on unsecured loans are likely to c onstrain bank credit extension to
households further. This is in c ontrast to the continued buoyant growth
in credit extension to the corporate sector. ”
Private sector credit extension rose by 1 %m/m in July, which pushed the
annual growth rate to 8.4 %, against the consensus forecast of
unchanged 8% growth.
Credit growth was pushed higher by a rise in loans to companies, which
increased by 1.6% m/m and 11.4% y/y, while households credit remained
weak at 0.5% m/m and 3.6% y/y.
HIKE
Forecast of
inflation
“The inflation forecast of the Bank has changed marginally since the
previous meeting of the MPC, with headline inflation now expected to
average 5,0 per cent in 2015, up from 4,9 per cent previously. The
forecast for the first two quarters of next year has also been revised up
by 0,1 percentage point to 6,9 per cent and 6,1 per cent respectively,
with a return to within the target range by the third quarter. However,
the forecast average inflation for both 2016 and 2017 is unchanged at
6,1 per cent and 5,7 per cent.”
Nedbank forecasts inflation to average 4.7% in 2015 (revised lower) and
6.3% in 2016 (revised higher), differing from SARB’s forecasts of 5% for
2015 and 6.1% for 2016.
SA CPI rose to 5% y/y in July, in line with expectations Core inflation
remains sticky at close to the upper end of the 3-6% range, but eased to
5.4% y/y in July, from 5.5% in June.
HOLD
Market
expectations
Forward rate agreements are pricing in a 61% probability of a 25bp rate
hike at this week’s MPC meeting, a 121% chance of a 25bp rate hike in 3
months’ time, and a 190% probability of a 25bp rate hike in 6 months’
time (greater than 100% implies larger or more frequent hikes). The
longer end expectations have softened marginally.
Forward rate agreements are pricing in a 25% probability of a 25bp rate
hike at this week’s MPC meeting, a 89% chance of a 25bp rate hike in 3
months’ time, and a 189% probability of a 25bp rate hike in 6 months’
time (greater than 100% implies larger or more frequent hikes).
However, the trajectory of the hiking cycle was revised lower by
Nedbank, given a subdued economy.
HOLD
INFLATION
DRIVERS
(40%)
Food prices “Food prices remain a concern to the MPC, despite the continued
moderation of food price inflation at the CPI level having measured 4,6
per cent in May and 4,3 per cent in June. However, the continuing
drought in parts of the country has contributed to the upside risk to the
outlook, despite benign global food price inflation. Maize and wheat
prices have increased significantly since the beginning of the year, and
we are yet to see the full impact on consumer prices.”
Maize prices have remained buoyant on import parity pricing. Since the
July MPC, the maize price has r isen by a further 5%. and on a y/y basis, is
up by a staggering 75%. A recent rally in US corn has exacerbated the
short term price action. Higher food prices will likely come through to
headline inflation from Q4 2015 onward. Food prices are expected to
peak in January 2016 as a result of rising protein and grain prices.
HIKE
Rand
exchange
rate
“The rand exchange rate has been relatively volatile and depreciated
significantly since the previous meeting of the MPC… Since the previous
meeting of the MPC, the rand traded in a wide band of between R11,82
and R12,58 against the US dollar. Over the period, the rand hasdepreciated by 5,0 per cent against the US dollar, by 3,6 per cent against
the euro and by 3,5 per cent on a trade-weighted basis.”
The rand weakened by around 7.5% against the U SD (and 6.3% on a
trade-weighted basis) since the last MPC meeting, but remains 20%
weaker y/y (-7.9% on a trade weighted basis). The rand has remained
highly volatile as a result of the volatile dollar, which is expected topersist until the US confirms a rate hike.
HIKE
Administered
prices
“…Although the current multi-year price determination allows for an 8
per cent increase from July next year, Eskom is expected to apply for a
claw-back on diesel usage, and this accounts for the additional 5
percentage point assumption in the model.”
Since the last MPC meeting, the petrol price is R1.20/l lower, as a result
of the lower international oil price. Given NERSA’s rejection of Eskom’s
application and notwithstanding Eskom’s intention to re -lodge, the near
term pressures of higher electricity prices has aba ted and will likely be
pushed out to the latter part of 2016 (if granted). However, the hike in
utilities prices in July has driven headline inflation higher.
HOLD
Wage
settlements
“Notwithstanding the recent moderation in nominal wage growth, the
pace of growth remains high and contributes to the persistence of
inflation at higher levels. Year-on-year growth in nominal salaries and
wages per worker moderated to 6,7 per cent i n the first quarter of 2015,
from 7,3 per cent in the previous quarter.”
Entrenched expectations and a still fractious labour market continue to
weigh on sentiment. Upside wage pressures in excess of inflation
remains a concern.
HIKE
Source: SARB, Nedbank
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Interest rate barometer | 21 September 2015 Page 3 of 4
Table 2: Probability of outcomes
Impact Unweighted Probabilities Weighted probabilities
Global economy (20%) Cut 33% 7%
Hold 67% 13%
Hike 0% 0%
Domestic (40%) Cut 33% 13%
Hold 50% 20%
Hike 17% 7%Inflation drivers (40%) Cut 0% 0%
Hold 25% 10%
Hike 75% 30%
Final Result Cut
23% 20%
Hold 46% 43%
Hike 31% 37%
Source: Nedbank
Flat Fed interest rate decision provides SARB with leeway
to delay
International crude price slump results in petrol price cut,
despite weak rand
Stagflation dilemma will likely worsen Manufacturing sector gives conflicting indicators, trend
remains weak
Maize prices reach import parity, pushes grain-mill prices
higher
Rand remains on long term weakening trend, despite
recent reprieve
Source: Bloomberg, SARB, Nedbank
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