All eyes on the Fed ahead of May Day meeting

“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.