RentekoersBarometerSept2015

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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

[email protected]

Reezwana Sumad

+27 11 294 1753

[email protected]

https://www.nedbankcapitalresearch.co.za



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



Nedbank CIB


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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RentekoersBarometerSept2015