GLOBAL MARKETS

CURRENT FED CHAIR JANET YELLEN’S SUCCESSOR IS SOURCE OF MARKET VOLATILITY. However, this
reached a pinnacle when US President Donald Trump revealed that he would be backing Jerome Powell to take over from Yellen. The aforementioned is still subject to congressional approval but the announcement had a muted impact on markets as the news was seemingly already priced in.

THE UNVEILING OF THE REPUBLICAN TAX PLAN ADVOCATED THE LARGEST OVERHAUL IN THE US TAX SYSTEM SINCE THE 1980’S. In the plan, whilst putting an end to various tax breaks, it proposes to significantly cut individual and corporate taxes in the US. Trump is hoping to sign this into law by Thanksgiving weekend later in the month. US markets were buoyed by the news with the Nasdaq, Dow Jones Industrial Average and the S&P 500 indices ending the week 0.94%, 0.45% and 0.26% higher respectively.

FED SQUARED WITH MARKET EXPECTATIONS AND KEPT INTEREST RATES ON HOLD AT FOMC MEETING.
They mentioned that inflation remains an issue on items other than food and energy but that the US labour market is improving and economic activity is rising. Additionally, they went on to state that a plan of gradually raising interest rates would be pursued, which increases the likelihood of a rate hike in December (92% probability).

THE BANK OF ENGLAND (BOE) INCREASED INTEREST RATES FROM 0.25% TO 0.50%. Although this was expected by markets to a large degree, it was the first time in ten years that interest rates rose in the UK. At the MPC meeting, concerns surrounding the impact of Brexit on the UK economy were raised. At the same time, the BOE’s GDP and inflation forecasts remained unchanged. Additionally, the meeting minutes revealed that the BOE are in no hurry to raise interest rates in the UK again and that future hikes would be limited. So, despite interest rates increasing, a dovish tone was set resulting in the pound ending the week at 1.31/USD and 1.13/EUR having depreciated 0.40% and 0.39% respectively on the back of the announcement. Similarly, the UK 10Y gilt lost 0.12% to trade at 1.30% as the week came to a close.

EMPLOYMENT DATA OUT OF THE US CONTINUED TO IMPRESS. US ADP employment for October showed
the private businesses in the US hired 235k more workers in October compared to 110k hired in September. Markets were expecting a figure closer to 200k and were pleasantly surprised. This was followed by the Non -Farm Payrolls for October, which showed that jobs in food services and drinking establishments rebounded strongly (reversal of previous hurricane effects) leading to 210k new jobs added over the month. The US unemployment rate improved slightly to 4.1% in October from 4.2% reported in September, which is exactly what the Fed was referring to in their minutes mentioned to above.

ECONOMIC NEWS OUT OF THE EU WAS MIXED. On the one hand, stubbornly low inflation remains a problem for the ECB as October’s inflation disappointed markets somewhat coming in at 1.4% y/y, which was both below September’s print as well as expectations of 1.5%. Interest rates in the EU are therefore likely to stay where they are for the time being even though quantitative easing is set to begin in 2018. On the other hand, GDP growth continued to steam roll ahead returning 2.5% y/y in Q3 2017. This beat market expectations of 2.1% and the print of 2.3% from Q2 2017. The EU unemployment rate in the meanwhile continued to fall in September as the labour market extended its recovery. The unemployment rate of 8.9% in September was the lowest rate of unemployment since 2009.

UK MANUFACTURING PMI FOR OCTOBER CAME IN STRONGER THAN EXPECTED. This indicates that the
UK manufacturing sector has been relatively well protected from the Brexit vote. Nonetheless, export orders came in slightly lower in October meaning the UK’s domestic economy made the largest contribution.

DOMESTIC MARKETS

IMF RELEASE THEIR REGIONAL ECONOMIC OUTLOOK FOR SUB-SAHARAN AFRICA LAST WEEK.
Accordingly, they see the region growing at 2.6% this year and 3.4% in 2018 with much of the growth in the region attributed to the recovery of Nigeria’s oil production and the end of the drought. They specifically mentioned that Nigeria and South Africa (two largest economies in the region) face policy uncertainty which could hinder growth. As such, the IMF sees growth increase to 4.4% this year and 5.1% in 2018 when omitting Nigeria and South Africa from the subset. Regarding South Africa specifically, they hinted that sovereign downgrade risks would probably weigh on investor confidence and adversely impact growth, which could have adverse regional spill-over effects.

IN THE WAKE OF THE GRIM MTBPS, FOCUS MOVES TO THE 24TH OF NOVEMBER WHEN S&P RATINGS AND MOODY’S WILL REVIEW SA’S CREDIT RATING. Worth remembering, Moody’s have South Africa on one notch above non-investment grade (for both domestic and foreign currency rating) whilst S&P Ratings have South Africa at one notch above non-investment grade for the domestic currency rating and non-investment grade for the foreign currency rating. If both agencies downgrade South Africa’s domestic currency rating further, forced
selling would most likely follow, as would a depreciation in the rand. However, further downgrades may be priced in to some extent.

THE RAND CLOSED THE WEEK AT 14.21/USD AND 16.51/EUR. This signals a depreciation of 0.85% and 1.13% respectively over the week. Similarly, foreigners have been net sellers of South African bonds (chart of the week for illustrative purposes). All of this stands to soften the blow in the event of actual downgrades.

PRIVATE SECTOR CREDIT EXTENSION FELL IN SEPTEMBER UPON DEPRESSED BUSINESS CONFIDENCE
AND WEAK ECONOMIC GROWTH DOMESTICALLY. Low business confidence as well as poor consumer
confidence pose significant challenges to the labour market. This was evident last week when the unemployment rate of 27.7% for Q3 2017 matched the rate for Q2 2017, which was the highest level of unemployment since the global financial crisis in Q1 2008.

NAAMSA VEHICLE SALES DISAPPOINTED AND FELL TO 4.6% IN OCTOBER FROM 7.0% IN SEPTEMBER.
Vehicle sales is seen as a leading indicator of the business cycle and thus the lack of confidence and the bleak fiscal outlook most likely means that vehicle sales will continue to struggle going forward.

ON A POSITIVE NOTE, BARCLAYS MANUFACTURING PMI FOR OCTOBER BEAT THE SEPTEMBER FIGURE AS NEW ORDERS CONTRIBUTED THE MOST. However, the print remains firmly below the 50pts benchmark level and therefore in contractionary territory.