Deteriorating growth outlook could spark SA rates cut

contracted to the lowest level in 39 months during September and China’s flash manufacturing purchasing managers index (PMI) remained depressed at a reading of 47.8, indicating ongoing contraction (any reading below 50).

Even in the US, where the outlook has been somewhat more positive, employment growth appears to be slowing down with the number of jobs created in August (+96 000) proving disappointing. The number of jobs created has steadily declined from a six-year high of 275 000 in January, when optimism of an imminent recovery was high.

The good news for markets was that both the ECB and the US Federal Reserve have indicated a firm intent to take decisive action to support economic activity where it is deemed appropriate. Following on from the ECB plan to buy sovereign bonds and reduce borrowing costs, the Fed announced a further quantitative easing programme (QE3).

The key difference between QE3 and previous QE programmes is that this one is open ended (unlimited) and effectively guarantees stimulus until the Fed is satisfied with the US unemployment level. Based on its own forecasts for employment, this QE could go on for at least 18 months and possibly more than two years.

The Fed also guided for interest rates to remain exceptionally low until at least mid-2015. In China the central bank has continued to conduct aggressive open market operations to inject further liquidity into the system. The tail risks of any kind of systemic default appear to be diminishing with these actions and the apparent increasing determination of central bankers to prevent any fall out from a relatively poor fiscal backdrop.

On the local front economic indicators were relatively steady. Retail sales moderated to 4.2 percent y/y in July from 8.6 percent in June, the RMB/BER Business Confidence Index rose six points to 47 in the third quarter of 2012 and private sector credit extension increased 8.3 percent y/y in July after an 8.7 percent rise in June.

The South African Reserve Bank (SARB) monetary policy committee decided to leave the repo rate unchanged at 5 percent.

The tone in this speech was more accommodative than we expected, with the central bank placing a clear focus on growth concerns while noting risks to its inflation forecast were “evenly balanced”.

While our base case is for interest rates to remain at current levels until early 2014, this is becoming an increasingly close call and we acknowledge the possibility of another rate cut in the event of a deteriorating growth outlook.

Our assessment of equity markets in general remains one of cautious optimism with uncertain economics being offset by a low interest rate and accommodative monetary environment.

Mark Appleton, chief investment officer of BJM Private Client Services, can be contacted at 031 581 1000 or e-mail mappleton@bjm.co.za