SAMPLE OF ECO-GILTS |
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Analysis of the past week The bond market obtained direction from the weaker Rand and the firmer oil price on Monday with yields rising in accordance with the higher inflationary implications thereof. The Rand’s renewed weakness came swiftly in the wake of Sunday’s retaliatory attacks on Afghanistan as participants once again sought the perceived safe havens of gold and harder currencies. The lingering wage disputes between public service unions and government did not help the Rand’s plight either. More specifically, the government threatened to institute a unilateral wage increase of 5% and R850 per worker if the public service unions failed to accept the proposed salary increases of between 6.5% and 8% by Wednesday. On Tuesday the National Treasury announced its intention to implement bond strips as of next year in order to create greater depth within the bond market and to meet an obvious demand for a facility that is common practice in Europe and the States. Tuesday also saw the commencement of the redrafting of the controversial Telecom bill in parliament, while OPEC announced that it would wait at least two more days to see if a cut in production was necessary, given the recent slump in the oil price. Bond yields continued to decline on Wednesday on the back of some positive privatisation statement, a stable Rand and a further narrowing of the EMBI+ spread. Indeed, Finance Minister Manuel expressed his confidence that this year’s privatisation flows of R18bn would be realised in this financial year and although the Rand’s recent weakness was concerning from an inflation point of view, the softer local unit was buoying the country’s export sector amid the current global slowdown. Wednesday also saw Reserve Bank Governor T. Mboweni clarify statements that were made in the Gauteng Legislature last Friday, when he said that currency intervention was one of the tools at the disposal of a central bank. Mboweni emphasised that his comments were taken out of context and it would be foolhardy to intervene to boost the Rand without the support of a major player. The Governor also mentioned that methods were being investigated to curb currency speculation by using a liquidity strategy that would make it difficult for them to borrow Rands to short the currency. The Rand remained stable versus the Dollar on Thursday for most of the day, but did enjoy a late afternoon rally after firming against most of the country’s main trading partner currencies throughout the session. This resulted in a 1% trade-weighted appreciation on the day. The Rand’s strength was ascribed to further assurances by the Public Enterprises Ministry that the privatisation process was on track, along with assurances that government would not renege on its social responsibilities of job creation. Additionally, government’s decision to reverse a former prohibition of FDI within the country’s security industry as well as the firm stance adopted against the public sector unions, after they failed to reach the Wednesday deadline, also contributed to the Rand’s strength. Indeed, the decision to unilaterally limit public sector wage increases suggested that the government was strongly committed to fiscal discipline and investor friendly policies. Reports that 30% of Eskom would be sold as opposed to the previously mentioned 10% represented further encouraging news on the privatisation front. Bonds firmed on the back of these privatisation statements, the Rand’s strength as well as the fact that no bond auction will taken place next Tuesday, as is normally the case. This bond bullishness, which saw yields reaching their week lows (R150:9.95% R153:10.58% ), came amidst confirmation by OPEC that it would indeed cut production if the oil price did not remain within their $22-28/barrel target range. Although Friday’s trade was characterised by range trade, bond yields did rise slightly on the back of a marginally softer Rand. Indeed not even the announcement by public sector unions that they would meet next week to decide on when to engage in strike activity drew much reaction from domestic markets. Although yields did conclude the week below last week’s closing levels, they were outperformed by their emerging market counterparts. The substantial narrowing of the EMBI+ was ascribed to reduced international risk aversion following the Afghanistan air strikes. Considering that the downtick in yields was proportionately larger than the rise in money market rates, the overall shape of the yield curve flattened on the week. On the international front, Tuesday’s US wholesale trade sales (actual:0.6% expected:0.4% previous:0.7%) for August came in marginally better than expected but declined from the previous month. EMU 2nd Qtr GDP review y-o-y (actual:1.7% expected:1.7% previous:2.4%) and q-o-q (actual:0.1% expected:0.1% previous:0.5%) came out exactly in line with expectations on Thursday, but reiterated that EMU growth is marginal. Nevertheless, the ECB left rates unchanged at 3.75% and this saw the Euro lose 1c as a consequence, later that same day. Friday’s slump in September US retail sales (actual:-2.4% expected:-0.6% previous:0.4%) (ex-auto actual:-1.6% expected:-0.4% previous:0.6%) gave some evidence as to the extent to which US consumer confidence was dented as a result of the September the 11th attacks but fears in this regard were somewhat neutralised later by the improvement in the Michigan sentiment index (actual:83.4 expected:77.0 previous:81.8) for October, which is more up-to-date than September retail data. US headline PPI (actual:0.4% expected:0.2% previous:0.4%) for September came in above market expectations but grew at the same rate as that of August. However, core US PPI (actual ex-food:0.3% expected:0.1% previous:-0.1%) was moderately firm. KEY INTEREST RATES
KEY EXCHANGE RATES And gold *Brackets refer to previous week and (N/C) to no change
*Arrows refer to appreciation (á ) or depreciation (â ) of Rand against the relevant currency compared to previous week’s levels STATISTICAL SUMMARY *Brackets refer to previous month
ANALYSIS OF ECONOMIC INDICATORS MINING PRODUCTION: TOTAL AUGUST GROWTH -0.6% (JULY -2.3%); GOLD PRODUCTION AUGUST GROWTH -12.1% ; NON GOLD PRODUCTION AUGUST GROWTH 5.9% (JULY -3.5%): Gold production continued to decline sharply in August, recording its most negative growth this year. Industrial action during the month in some of the gold mining industry is partly to blame, but it still does not detract from concerns regarding the underlying pace of decline in the industry. Fortunately, production of non gold minerals accelerated, enabling total gold production to record only marginally negative growth. Nevertheless, this negative growth in mining production is likely to act as a drag on overall economic growth this year, pulling it down towards the 2.5% mark and thereby boosting pressure on the Reserve Bank to adopt a looser monetary policy than otherwise have been the case. ECONOMIC INDICATORS FOR THE COMING WEEK CPI INFLATION: (due Tues 16th Oct 1130): SEPTEMBER HEADLINE INFLATION 4.5% (AUGUST 4.6%); SEPTEMBER CPIX INFLATION 5.9% (AUGUST 6.0%); SEPTEMBER CORE INFLATION 6.5% (AUGUST 6.7%): There are unlikely to be major influences on CPI inflation for September except for the cut in petrol prices of 7 cents per litre. However, even this is such a small reduction that it will have a negligible impact on inflation for the month. Food inflation is likely to increase because of the low base figure for September 2000 and improved weather conditions, especially in respect of the prices of fruit and vegetables. However, the main focus is likely to be on the extent to which the depreciation of the Rand over August inspired price increases in September. In this regard one must remember that the really steep depreciation of the Rand in recent months took place towards the end of August and in early September. Therefore, it is questionable whether the inflationary effects of currency depreciation could have been substantial yet in August. Accordingly, it is unlikely that too much attention will be paid to these inflation figures specifically in such a way as to influence monetary policy either way. Instead future inflation figures will assume greater importance because by then the extent of the inflationary impact of the Rand's depreciation will become more evident. THE WEEK AHEAD Amazingly yet again the domestic bond market was an island of stability amidst the turbulence going on in currency and equity markets. The seemingly successful air attacks on Afghanistan contributed to improved confidence regarding the outlook for the world economy and helped the recovery on international equity markets to continue. The improvement in this mood in turn resulted in a slight diminution of investor risk aversion and, via this, to some recovery in emerging market currencies and bonds. The Rand and domestic bonds were beneficiaries. However, to the extent that bonds are seen as substitutes for equities as a target for investment, the continuing recovery in equities might have been expected to take some of the support away from bonds. This did not happen. Clearly institutions are continuing to rebalance their portfolios, raising their exposure to bonds and reducing their exposures to equities, not so much by selling the latter, but by gradually buying up the former. In the week ahead bonds should also continue benefiting from the important message of fiscal discipline drawn from the decision by the government to resist trade union demands for wage increases in excess of what the government had originally proposed. Government's decision to introduce a 5% wage increase unilaterally, instead of the 6.5% originally offered to unions, ought to result in a fiscal deficit for 2001/02 which is R 1.4 bn less than what was believed would be the case a couple of weeks ago. Furthermore, various government officials have tried to increase optimism regarding the outlook for privatisation as a means of bolstering the Rand. This does appear to have been helping and there is still hope for some further improvement in the currency in the week ahead. The danger lies in the Rand not recovering to the extent that one might hope. If the currency remains at more than R 9 to the Dollar for any length of time, this must undoubtedly ignite increased inflation and jeopardise government's ability to meet its inflation target. One of the reasons for the ongoing strength in bonds these days is the continuing belief by some that further monetary loosening abroad in months to come will pave the way for another interest rate cut domestically before year-end. We believe this is unlikely and accordingly would caution against undue optimism in the short-term prognosis for the bond market. It should be remembered that even though the Rand weakened in the first few months of this year, it recovered towards mid year. This is why there has been fairly subdued inflationary impact thus far. However, the really big depreciation of the Rand commenced at the beginning of July and built up momentum in September. There has therefore not been much impact yet on inflation, but it is clearly premature to be complacent on this front. Indeed, we believe that the attainment of government's inflation target for CPIX of less than 6% for next year is in jeopardy, especially if there is no significant recovery in the Rand in the short-term. At the same time, one questions whether the market will not be somewhat forgiving in the event of the inflation target not being met. In conclusion, one can comfortably see bond yields continuing to trade in a fairly tight range in the short-term, but with a cautionary note against undue optimism in the medium term. The forthcoming week’s international data begins with US business inventory inventories (expected:-0.3% previous:-0.4%) for Aug on Mon 15th Oct at 14:30, while US industrial production (expected:-0.7% previous:-0.8%) and capacity utilisation (expected:76.2% previous:75.6%) for Sep is due for release on Tue 16th Oct at 15:15. Both EMU industrial production (expected:-0.4% previous:-1.1%) for Aug and EMU CPI (expected:2.4% previous:2.7%) (ex-food expected:2.0% previous:2.0%) for Sept will be released on Wed 17th Oct at 12:00. The week’s data concludes with US CPI (expected:0.2% previous:0.1%) (ex-food expected:0.2% previous:0.2%) for Sep, US trade balance (expected:-$28.1bn previous:-$29.1bn) for Aug and US real earnings (expected:0.1% previous:0.3%) for Sep, all of which are scheduled for Fri 19th Oct at 14:30. A meeting between EMU Finance Ministers will take place on Mon 15th Oct in Luxembourg. Whilst all these data will be closely examined to ascertain some of the immediate effects of the 11th Sept terrorist attacks in the US, probably too little time has elapsed yet for the full effects to be manifested in economic data covering the month of September. |
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