After much anticipation, the global central banks had their say this week. The Bank of Japan kept rates on hold as expected. However, small changes were made to their quantitative easing program by removing the maturity target from the bonds that they will buy, which increases their flexibility.

They also affirmed that they aimed to achieve their 2% inflation target in the “earliest possible time”. Owing to this, Japanese banking shares rose sharp-ly, evidenced by the Topix banks index rising 8.56% in a short space of time. In economic news, Japan’s August trade balance disappointed at –JPY18.7bn when a surplus of JPY191.0bn was expected. This was attributed to imports contracting -17.3% y/y in August (expectations were for a contraction of -16.6% y/y) while exports contracted -9.6% y/y when expectations were -4.7% y/y. In the mean-while, Japanese preliminary manufacturing PMI for September came in at 50.3pts, up from 49.5pts in August and more importantly, above the bench-mark of 50pts indicating expansion for the first time since February.

In the US, the Fed also kept rates unchanged. The slew of disappointing economic data released recently and stubbornly low inflation (CPI at 0.2% m/m in August) no doubt had an impact on their decision which was confirmed when the committee said they believed that there was still scope for improvement in the US economy before taking action. However, at their FOMC meeting, three committee members dissented from the majority decision by voting for a rate hike.

The committee added that the case for hiking rates has strengthened and signaled that a rate hike this year is likely. On the whole, emerging market currencies appreciated on the back to the Fed’s decision to keep interest rates on hold (ZAR appreciated 3.66%), while their bond yields mostly fell (R186’s yield fell 11bps). In this risk-on environment, this could be viewed as a window of investing opportunity until the probable December rate hike.

The central bank of New Zealand also kept rates on hold but reiterated that further policy easing would be required to meet their inflation target.

In other news, S&P ratings agency upgraded Hungarian sovereign debt from junk status to investment grade (from BB+ to BBB-), leading to a sharp rally in Hungary’s 10y treasury bond, which traded 94bps higher for the week. The MSCI Emerging Markets index (3.62%) outperformed MSCI World index (1.97%) for the week.


The South African Reserve Bank (SARB) kept interest rates at 7% at their MPC meeting last week. They have kept rates on at their last two meetings and the SARB assessed that if their current forecasts transpire, the “tightening cycle” could be nearing an end. However, they were quick to caution that there are many favourable factors contributing to the improved outlook, which could change quickly and lead to a reassessment of their view.

The SARB also released inflation forecasts for Q3 2016, Q4 2016 and 2017 (6.2%, 6.7% and 5.8% y/y respectively). These were lower than previously forecast mainly due to weaker exchange rate pass through (% change in ZAR more than % change in price of imported goods) and downward revisions on water, electricity and petrol inflation.

In economic news, Stats SA released the CPI for August. Market consensus was for the print to have moderated from 6.0% y/y in July to 5.9% y/y in August. In the event, there were no surprises as CPI for August squared with expectations. Core CPI for August also came in as expected at 5.7% y/y.

The causes of price moderation included petrol prices falling further into deflation from -3.4% y/y in July to -7.2% in August, while alcoholic beverages (5.6% y/y in July to 5.3% in August) and personal care (6.1% y/y in July to 5.7% in August) also contributed to the lower print. Food inflation rose marginally from 11.5% y/y in July to 11.6% in August but is expected to peak at the end of the year.

The JSE All Share index returned 0.55% last week mainly influenced by the financial and resource boards (JSE Financial 15 +2.69% and JSE Resources 20 +3.78%) while the industrial board lost 1.33%. The South African 10Y treasury bond (R186) closed at 113.04, a drop of 12bps in yield, driven by foreigners hunting for yield in the risk-on environment. In the week ahead, focus will be on the releases of the PPI numbers and the trade balance.