All eyes on the Fed ahead of May Day meet­ing

Financial Mail - Investors Monthly - - Economy Watch -

“When the Re­serve Bank’s mon­e­tary pol­icy com­mit­tee meets from May 22-24, it is likely to keep in­ter­est rates on hold — and do so for the rest of the year

The re­ac­tion of emerg­ing-mar­ket cen­tral bankers will be un­der scru­tiny as the world awaits signs of fur­ther mon­e­tary pol­icy tight­en­ing from the US Fed­eral Re­serve at the start of May.

The US fed­eral open mar­ket com­mit­tee took a hawk­ish tone un­der new chair­man Jerome Pow­ell in March, when it hiked rates. Now it is thought that de­lib­er­a­tions on May 1-2 may yield a sim­i­lar out­come, adding pres­sure to emerg­ing mar­kets.

SA In­sti­tute of Race Re­la­tions chief econ­o­mist Ian Cruick­shanks says: “What’s more im­por­tant is that mar­ket watch­ers are watch­ing the tone of the an­nounce­ment as much as the im­pact on in­ter­est rates them­selves.”

The mar­ket’s an­tic­i­pa­tion of a more ag­gres­sive path has started to re­flect in the US 10year trea­sury bond yield, which was 2.8% at the time of writ­ing, from 2% in re­cent months. “It’s a slow move, but it is a move,” says Cruick­shanks.

Mar­ket ex­pec­ta­tions are for up to four hikes this year, in­clud­ing the in­crease in the fund rate in March. Cruick­shanks has pen­cilled in two.

Europe is ex­pected to con­tinue with plans to aban­don looser mon­e­tary pol­icy. And the green­back may also be af­fected if geopo­lit­i­cal ten­sions be­tween the US and China spi­ral into a trade war.

Such an even­tu­al­ity would suit a stance long held by US pres­i­dent Don­ald Trump, who “wants a weaker dol­lar to sup­port [US] ex­porters”, says Cruick­shanks. “If that hap­pens, it could be ac­com­pa­nied sooner rather than later by an­other rate hike, but it will be small.”

For­eign port­fo­lio flows into SA — about R25bn since the start of year — are at risk. “Let’s say [the flow] stops or slows. It means less liq­uid­ity in the SA en­vi­ron­ment. What is that go­ing to do to the po­ten­tial for (an­other) in­ter­est rate cut?” he asks.

When the Re­serve Bank’s mon­e­tary pol­icy com­mit­tee meets from May 22-24, it is likely to keep in­ter­est rates on hold — and do so for the rest of the year.

“There will be space for fur­ther mod­est loos­en­ing in 2019,” Lon­don-based Cap­i­tal Eco­nomics says in a re­port.

Be­nign do­mes­tic in­fla­tion has re­mained within the cen­tral bank’s 3%-6% tar­get range over the past year. While the April Vat hike is likely to weigh on in­fla­tion, the con­tin­ued dis­si­pa­tion of the ef­fects of the drought will help keep the head­line rate within lim­its.

A de­te­ri­o­ra­tion of in­fla­tion would re­quire the Bank to take ac­tion, which would dampen spend­ing at a time when trea­sury ex­pects the econ­omy to grow by 1.5% — the first time in three years that the econ­omy would ex­pand more than 1%.

Says Cap­i­tal Eco­nomics: “We ex­pect that the re­cov­ery will gain strength in 2018. We doubt, how­ever, that growth will con­tinue to ac­cel­er­ate in 2019 and 2020.”

How­ever, the im­ple­men­ta­tion of struc­tural re­forms re­mains a nec­es­sary pre­cur­sor to higher growth. “With­out sig­nif­i­cant re­forms, trend growth will re­main about 1.5%. Progress on ad­dress­ing press­ing so­cial is­sues — in­clud­ing el­e­vated un­em­ploy­ment — will be very slow,” the re­search con­sul­tancy says.

Cruick­shanks says the rand has been over­val­ued in the wake of the “Ramapho­ria” that

“Gwede Man­tashe in­di­cated in April that he would not ap­peal a high court rul­ing that min­ing com­pa­nies could not be pe­nalised if their em­pow­er­ment cre­den­tials dropped be­low 26%

ac­com­pa­nied Cyril Ramaphosa’s elec­tion as pres­i­dent.

He says traders “prob­a­bly be­lieve that the path to growth is not go­ing to be just a three­month hol­i­day be­cause of the Ramaphosa im­pact. It’s go­ing to be a lot more than that”.

But he adds that it is too soon to gauge the quan­tum of new fixed cap­i­tal in­vest­ment since Ramaphosa’s elec­tion.

An­other key in­di­ca­tor of con­fi­dence is the Absa pur­chas­ing man­agers’ in­dex. Its April re­sults will be pub­lished on May 1.

Af­ter re­cov­er­ing in the first two months of the year, the in­dex in March slipped be­low the neu­tral mark of 50 be­tween po­ten­tial ex­pan­sion and con­trac­tion in busi­ness ac­tiv­ity.

The com­pet­ing Stan­dard Bank/Markit pur­chas­ing man­agers’ in­dex will be re­leased on May 4.

The Stan­dard Bank in­dex reg­is­tered 51.1 in March, sig­nalling a mod­est im­prove­ment in busi­ness con­di­tions though the rate of growth eased, Stan­dard Bank says.

The Stan­dard Bank in­dex pro­vides a view of the over­all econ­omy, while Absa’s in­dex is lim­ited to the man­u­fac­tur­ing sec­tor.

The se­condary sec­tor of the econ­omy showed strain in Fe­bru­ary, record­ing muted growth.

NKC African Eco­nomics econ­o­mist El­ize Kruger says the re­sult was dis­ap­point­ing, given that the Absa in­dex had risen above 50 in Fe­bru­ary (though it re­gressed in March).

“The no­table ap­pre­ci­a­tion in the rand ex­change rate since Novem­ber 2017 seems to be im­pact­ing neg­a­tively on man­u­fac­tured ex­ports, while do­mes­tic de­mand re­mains medi­ocre in the light of the in­creased tax bur­den,” Kruger says.

On­go­ing pol­icy un­cer­tainty has also con­strained spend­ing, she says.

Man­u­fac­tur­ing could con­trib­ute neg­a­tively to first-quar­ter GDP growth in 2018 if the de­cline in the pace of growth has not been re­versed in March.

Ten­sions be­tween the US and China could also neg­a­tively af­fect the do­mes­tic man­u­fac­tur­ing sec­tor, says Kruger.

Data on man­u­fac­tur­ing pro­duc­tion and sales for March will be pub­lished on May 10. Min­ing out­put fig­ures will be re­leased on the same day.

In Fe­bru­ary, min­ing ex­panded by a bet­ter-than-ex­pected 3.1% year on year, but pol­icy chal­lenges re­main a stum­bling block to in­vest­ment.

Makwe Masilela, chief in­vest­ment of­fi­cer at Makwe Fund Man­agers, says: “The in­dus­try is bleed­ing. Not­ing that the last time we had a de­cent shaft sunk was in about 1987 — that tells you that the sec­tor has not had de­cent in­vest­ments other than in open-cast and shal­low min­ing.”

But the sit­u­a­tion seems set to im­prove un­der the di­rec­tion of new min­eral re­sources min­is­ter Gwede Man­tashe. Man­tashe in­di­cated in April that he would not ap­peal a high court rul­ing that min­ing com­pa­nies could not be pe­nalised if their em­pow­er­ment cre­den­tials dropped be­low 26%. It also ruled that firms are not com­pelled to launch a new sale of shares in a BEE sale if they have done so pre­vi­ously.

The min­istry says: “Our main fo­cus at the mo­ment is the fi­nal­i­sa­tion and gazetting of the [min­ing] char­ter and the MPRDA [Min­eral & Pe­tro­leum Re­sources De­vel­op­ment Act] so we can get back to the busi­ness of min­ing.”

Te­bello Cha­bana, Cham­ber of Mines se­nior ex­ec­u­tive for pub­lic af­fairs & trans­for­ma­tion, says lines of com­mu­ni­ca­tion be­tween the in­dus­try and min­istry re­main open. He says the cham­ber is in agree­ment with the min­is­ter’s be­lief that trans­for­ma­tion, com­pet­i­tive­ness and growth are “mu­tu­ally re­in­forc­ing goals”.

The min­is­ter has es­tab­lished two task teams to work con­cur­rently on is­sues in the min­ing sec­tor. One is fo­cused on trans­for­ma­tion; the other on com­pet­i­tive­ness and growth.

“It is still very early days, and the cham­ber re­mains of the view that a prac­ti­ca­ble and work­able out­come that all par­ties to the char­ter can ac­cept and de­fend is in the best in­ter­ests of the in­dus­try and all stake­hold­ers,” says Cha­bana.

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