GLOBAL MARKETS
THREE INTEREST RATE HIKES EXPECTED IN THE USA

Inflation figures around the world have been rising. Although CPI numbers have being in line with expectations, the strong rises have certainly been a cause for concern, and speak to the warn-ings of some economists as to its being the necessary outcome of years of monetary easing by central banks. The European harmonised headline CPI estimate for February came in at 2.0%. This figure was as low as 0.5% in October. The US consumer price index currently stands at 2.5% y/y for urban consumers, and at 2.3% y/y for core consumer inflation. This is well above the Fed’s 2% target inflation rate, and has led to a hardening of the hawkish stance of various Fed governors as to interest rates increases in the US.

As a result the market is now pricing in three rate hikes from the Fed over the next twelve months as opposed to only two a few weeks ago, starting with the first hike in March. The theme continues in other parts of the world e.g. China, for which Morgan Stanley has just revised inflation to rise to 2.0% over the four quarters of both 2017 and 2018, up from their prior 1.9% forecast.

These increases in inflation could spill over to emerging markets like South Africa, and could frustrate the steady fall of inflation over the year to the expected 5.5% at year end. Higher devel-oped market inflation could also spill over to emerging markets in general.

Growth expectations also continue to rise around the world. Manufacturing purchasing manager’s indices (PMI’s) for February were released for many countries around the world this week. They showed an upward trend across both developing and emerging markets. The US and China’s PMI’s both surprised on the upside at 57.7 and 51.6 respectively. The figure for the European Union came in at 55.4, which was an improvement, led by Germany whose figure came in at 56.8. China’s February exports y/y rose 16.9% in Yuan while its imports rose 20%, up from 15.9% and 16.7% respectively in January. Thus clearly, the new glob-al protectionism is far from taking bite yet. This should help to underscore industrial metal prices.

Looking around the globe, there were many indicators that confirmed the higher growth path. The Japanese jobless rate fell to 3.0% from 3.1% in January. Eurozone y/y retail sales rose to 1.5% from 1.1% in January. Economic confidence in that region registered 108.1 versus 107.9 in January, and the business climate indicator rose from 0.77 to 0.79.

All in all, the data releases led to a good week on developed equity markets. The MSCI world index closed the week 0.44% higher in USD, with nota-ble performances from Europe (+3.0%). The MSCI emerging markets index in contrast fell (-1.32%). The yield on the bellwether US10y bond yield rose from 2.31% to 2.48%.

DOMESTIC MARKETS
IF TAX SHORTFALL CONTINUES, MORE HIKES TO COME IN 2018

The South African investing community settled down after digesting the previous week’s budg-et speech, in which taxes were raised to cover the greater tax take shortfall. In the cold light of day, particularly worrying for government finances is the sharp drop in tax buoyancy, which is the change of tax revenue growth relative to the change in GDP growth. This met-ric dropped from 1.45 in the previous two fiscal years to only 0.88 in this budget report. The reasons for this drop remain an enigma, but there might be slippage at SARS in terms of collection or it might be that taxpayers are arranging their tax affairs differently.

If this continues, we may even see higher taxes next year, even up to the extent of an increase in VAT despite its potential political unpopularity. Another concern is that of the additional R16.5bn extra personal income to be collected in the coming fiscal year, revenues through bracket creep (inflation drag) amount to R12.8bn, with R4.4bn coming from a new top marginal rate of 45% for those earning > R1.5m. The increases represent around 0.6% of total household spend and around 2% of discretionary household spend. This should have a negative impact on GDP and on retail counters in particular, especially those more reliant on discretionary spend.

Money supply figures for January were released, which showed that M3 grew at 6.00% y/y vs. 6.06% in January. Private credit extension beat January’s 5.3% growth y/y, coming in at 5.56%. However, this remains firmly below the inflation rate and does not indicate any robust willingness in the economy to access credit.

The trade balance, which is a volatile number but central to the current account balance, came in at -R10.8bn for January, much worse than the expected R-3.4bn expected by the market. The figure for December was a positive R12bn. Imports were disappointing and grew by only 2.3% y/y, whereas exports accelerated to 12.9% y/y from 6.4% y/y in December. The market needs to see more persistently positive trade balances for it to sustain a stronger ZAR.

Vehicle sales, after giving the market hope in January with a positive print of 3.7% y/y after a string of strongly negative figures, once again slipped into the red, actually declining by -0.1% y/y when the market expected growth of 2.1%. Clearly, what growth signs there are in the economy still remain subdued.

The JSE All Share index rose 0.21% in ZAR over the week, no thanks to the industrial board which fell (-0.52%) over the period.