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The two big events to look out for in May — other than the pos­si­bil­ity that Moody’s could join Fitch and S&P in down­grad­ing SA’s credit rat­ing — are the US Fed­eral Re­serve’s May meet­ing, fol­lowed at the end of the month by SA’s third mone­tary pol­icy com­mit­tee (MPC) meet­ing of the year.

First up will be the fed­eral open mar­ket com­mit­tee (FOMC) meet­ing on May 2-3.

In March the Fed raised rates by a fur­ther 25 bps, tak­ing the tar­get range to 0.75%-1%. It was only the third time since the 2008/2009 re­ces­sion that the Fed had raised rates.

Most Fed of­fi­cials ex­pect the cen­tral bank to raise rates at least two more times this year.

At the time of writ­ing in mid-April, the Fed fund fu­tures mar­ket was pric­ing in only a 13% chance that the FOMC would hike its pol­icy rate in May. The odds of a June Fed hike were al­most 70%, with the like­li­hood of two or more hikes by the year-end at 53%.

Fed chair Janet Yellen said at the Univer­sity of Michi­gan’s Ford School of Pub­lic Pol­icy in April that, with the econ­omy look­ing “healthy” and ex­pected to con­tinue grow­ing at a mod­er­ate pace, it is time for the Fed to ease off the pedal.

“Whereas be­fore we had our foot pressed down on the gas pedal try­ing to give the econ­omy all the oomph we pos­si­bly could, now al­low­ing the econ­omy to kind of coast and re­main on an even keel — to give it some gas but not so much that we are press­ing down hard on the ac­cel­er­a­tor — that’s a bet­ter stance of mone­tary pol­icy,” she said. “We want to be ahead of the curve and not be­hind it.”

The most re­cent US eco­nomic data sug­gests there has been some im­prove­ment in US eco­nomic ac­tiv­ity, in­clud­ing in em­ploy­ment and busi­ness con­fi­dence.

At just 4.5%, US un­em­ploy­ment is at its low­est level since mid-2007. The econ­omy has cre­ated more than 15m jobs since the fi­nan­cial cri­sis ended. On the other hand, non­farm pay­rolls rose by just 98,000 jobs in March against mar­ket ex­pec­ta­tions of a gain of about 180,000. Job gains have av­er­aged 178,000/month over the past quar­ter.

There has also been some in­crease in US in­fla­tion, with core in­fla­tion up at 2.2% y/y and head­line in­fla­tion at 2.7% y/y in March, against the Fed’s goal of 2%. All of this sug­gests the Fed is likely to hike rates at least two more times this year, ac­cord­ing to Stan­lib chief econ­o­mist Kevin Lings.

As im­por­tant as whether the Fed hikes rates in May will be the evo­lu­tion of its “dot plot graph” (the in­ter­est rate fore­casts of in­di­vid­ual FOMC mem­bers, which are plot­ted as dots on a graph).

BNP Paribas Se­cu­ri­ties’ Jeff Schultz be­lieves the fact that the me­dian dots re­mained al­most un­changed at the March FOMC meet­ing ex­plained fi­nan­cial mar­kets’ dovish re­ac­tion to the rate hike.

How­ever, the fact that the March dot plots in­di­cated a lit­tle less dis­agree­ment about the ap­pro­pri­ate pol­icy stance that should be adopted this year could sig­nal that con­fi­dence in the Fed’s base­line fore­cast is firm­ing. If this is the case, then Schultz ex­pects the me­dian dots to shift in May from in­di­cat­ing the prob­a­bil­ity of two rate hikes this year to three.

A more ag­gres­sive rate-hik­ing cy­cle would de­pend on Pres­i­dent Don­ald Trump pro­vid­ing sig­nif­i­cant fur­ther stim­u­lus to the US econ­omy and in­fla­tion sur­pris­ing on the up­side, adds Lings. “If this were to oc­cur it would quickly raise con­cerns that the US econ­omy is start­ing to over­heat. This is cer­tainly not the case at the mo­ment.”

If any­thing, Trump’s in­abil­ity to re­peal Oba­macare could cre­ate some un­cer­tainty within the com­mit­tee as to the ex­tent and pace of fis­cal ex­pan­sion he will be able to ef­fect this year.

On May 23-25, the SA Re­serve Bank’s MPC will meet.

At its pre­vi­ous meet­ing, Bank gov­er­nor Le­setja Kganya-

go noted that the in­fla­tion outlook had im­proved, due mainly to the fur­ther ap­pre­ci­a­tion of the rand.

The sig­nif­i­cant nar­row­ing of SA’s cur­rent ac­count deficit had also helped, while the more pos­i­tive growth outlook in ad­vanced economies had con­trib­uted to a more favourable en­vi­ron­ment for emerg­ing mar­kets as a whole.

“How­ever, re­cent height­ened do­mes­tic po­lit­i­cal un­cer­tainty has re­versed some of these ex­change rate gains,” Kganyago warned. “The risk of fur­ther rand weak­en­ing over­shad­ows the in­fla­tion outlook.”

Fol­low­ing Pres­i­dent Ja­cob Zuma’s cab­i­net reshuf­fle in late March, S&P cut SA’s for­eign cur­rency rat­ing to junk sta­tus and its lo­cal debt to the last notch of in­vest­ment grade, with a neg­a­tive outlook.

Fitch fol­lowed within days, cut­ting both SA’s for­eign and lo­cal cur­rency ratings to junk.

Moody’s, which has both of SA’s ratings pegged two notches above junk, placed SA on a re­view for a down­grade, say­ing it would make a de­ci­sion within 90 days.

So far the rand and bond yields have proved re­mark­ably re­silient, but should S&P and Moody’s down­grade SA’s lo­cal cur­rency rat­ing to junk, the coun­try’s bonds would be dropped from the World Govern­ment Bond In­dex (WGBI), which could trig­ger US$8bn-$13bn (R100b­nR150bn) of forced sell­ing by for­eign in­vestors, ac­cord­ing to var­i­ous es­ti­mates.

The re­sul­tant cap­i­tal out­flow would likely force the rand to fresh lows, stok­ing in­fla­tion and invit­ing higher in­ter­est rates.

In March the MPC said SA might have reached the end of the tight­en­ing cy­cle, but it warned that this as­sess­ment could change if the risks to the in­fla­tion outlook in­creased or ac­tual in­fla­tion de­te­ri­o­rated.

The big­gest threat to in­fla­tion is the scope for fur­ther rand weak­ness. The Bank is clearly wor­ried, not­ing in its March MPC state­ment that “the rand is likely to re­act fur­ther to un­fold­ing de­vel­op­ments un­til a greater de­gree of cer­tainty and con­fi­dence is re­stored”.

It added that the pos­si­bil­ity of the rand “sig­nif­i­cantly over­shoot­ing” in the short run could not be ruled out.

The MPC also re­mains con­cerned about the stick­i­ness of in­fla­tion ex­pec­ta­tions, not­ing that longer-term ex­pec­ta­tions re­main an­chored “un­com­fort­ably” at the up­per end of the tar­get range. This — and the fact that fore­cast in­fla­tion is still set to re­main el­e­vated at above 5% for 2018 and 2019 — lim­its the scope for rate cuts.

Though there is a pos­si­bil­ity that oil and elec­tric­ity prices could come in un­der the Bank’s as­sump­tions, over­all the MPC as­sesses the risk to the in­fla­tion outlook to be mod­er­ately on the up­side.

Schultz thinks the Bank will be care­ful not to down­grade its do­mes­tic growth as­sump­tions

Re­cent height­ened do­mes­tic po­lit­i­cal un­cer­tainty has re­versed some of these ex­change rate gains

and re­vise its in­fla­tion fore­casts up too ag­gres­sively in May in re­sponse to SA’s re­cent sov­er­eign rat­ing down­grades.

The Bank’s most re­cent pro­jec­tion is for head­line in­fla­tion to av­er­age 5.9% in 2017 (pre­vi­ously 6.2%), fall­ing back within the tar­get range by the sec­ond quar­ter of this year (pre­vi­ously the fourth quar­ter). Af­ter that CPI is ex­pected to re­main be­low the up­per tar­get limit of 6% un­til the end of 2018.

“Un­doubt­edly the Bank is go­ing to high­light the neg­a­tive fi­nan­cial mar­ket im­pli­ca­tions of the re­cent credit ratings down­grade into subin­vest­ment grade by S&P and Fitch,” says Schultz. “It is, how­ever, un­likely to be too alarmist, not­ing that the cur­rency has been more re­silient than an­tic­i­pated, that SA’s el­i­gi­bil­ity for key world bond in­dices [like the WGBI] re­mains in­tact, and that fixed in­come flows into SA’s do­mes­tic bond mar­ket all re­main rel­a­tively well sup­ported for the mo­ment.”

The rand and in­fla­tion outlook have prob­a­bly not de­te­ri­o­rated enough for the Bank to warn that rate hikes are back on the ta­ble but, given SA’s fraught po­lit­i­cal sit­u­a­tion, it might well re­sus­ci­tate its pre­vi­ous warn­ing that “the bar for mone­tary eas­ing re­mains high”.

The March Reuters con­sen­sus fore­cast is for the repo rate to be held steady at 7% this year.

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