STRONG ECONOMIC INDICATORS IN US POINT TO RATE INCREASE
The oil price was volatile last week. Oil opened the week trading at USD46.9/bbl and closed the week 0.81% higher at USD47.11/bbl. Markets were speculating as to whether the OPEC meeting on the 30th of November would result in a deal on production cuts between member countries, causing a spike in volatility. Discussions between OPEC members have been on-going. When news broke that members were confident that a deal would be struck at next week’s meeting, the oil price rose. However, OPEC’s deal faces potential setbacks from Iran, which wants to increase its output to regain market share after previously being subject to sanctions, and Iraq, who said they need the additional funding from oil to fight Islamic militants. This put a dampener on the oil price and the jury is out as to whether a deal will be struck later this week.
A spate of strong US economic news was released last week, increasing the probability of a rate hike next month. Existing home sales increased 2% m/m in October (highest figure since February 2007), overshooting market expectations for a decline of -0.6% m/m. Home-buyers are seemingly taking advantage of the still low mortgage rates but if the Fed starts increasing interest rates, it could adverse-ly affect the housing market next year. However, the US labour market is near full employment, which should buffer the effect if mortgage rates increase. In the meanwhile, m/m durable goods orders, released by the US Census Bureau, also surprised on the upside returning 4.8% in October when markets were expecting 1.7%. US PMI increased to 53.9pts in November, also above market expectations of 53.4pts.
This was the highest reading in more than twelve months. Output growth and an acceleration in new orders were cited as reasons. It would therefore not be surprising if the US economy growth accelerates in Q4 2016. The University of Michigan’s consumer sentiment increased to 93.8pts in November (up from 87.2pts in October). Consumer expectations regarding their personal finances and the prospects of the US economy have therefore improved remarkably, despite Donald Trump’s election as the next US president.
In Europe, UK’s Brexit negotiators were told by the Eurozone Parliament that the UK should not expect cooperation from Europe in areas they value once they leave the EU. The UK will therefore not be able to enjoy the freedom of movement of goods, services and capital without accepting the freedom of movement of labour once Article 50 is triggered.
Japanese PMI for November dropped to 51.1pts from 51.4pts in October but was still in expansionary territory (above 50pts). The lower number resulted from a decline in new orders from October to November. Japanese inflation increased 0.1% y/y in October, up from a decline of -0.5% y/y in September. This was the first increase in eight months and was boosted by higher prices of fresh food.
The MSCI World index closed the week up 1.38%, matching the MSCI Emerging Market index, which closed the week up 1.33%.
INTEREST RATE UNCHANGED, CURRENCY VOLATILITY CONTINUES
The SA 10y treasury bond closed the week trading 10bps higher at 9.08%. Month-to-date, foreigners have been net sellers of SA bonds with ZAR17.7bn being sold. The rand meanwhile closed the week trading at 14.04/USD.
The Monetary Policy Committee (MPC) of the SARB kept the repo rate unchanged at 7%, squaring with market expectations. The decision to keep rates at 7% was unanimous and the stated reasons for this were the relatively weaker rand (since the previous SARB meeting), expectations that SA’s inflation is near its peak and weaker domestic demand. Gover-nor of the MPC, Lesetja Kganyango, warned that the rand could remain volatile and should be sensitive to US monetary policy as well as sovereign rating announcements.
In other economic news, Stats SA released employment data for Q3 2016. Markets were expecting the unemployment rate to have remained unchanged at 26.6% in Q3 2016. As it turned out, the eight year low was realised when the unemployment rate surprised to the downside at 27.1%. The number of unemployed people increased from 5.634 million in Q2 2016 to 5.873 million in Q3 2016. Formal employment increased owing to the largest q/q employment increases in construction, finance and trade sectors whilst informal employment decreased during the period. This does not bode well as labour stability is a key factor that global ratings agencies assess when deciding on SA’s credit worthiness.
Stats SA also released CPI data for October. Market consensus was for inflation to have increased to 6.3% y/y in October from 6.1% in September. However, it was reported as 6.4% y/y, higher than market expectations. Food inflation increased to 12% y/y in October from 11.6% in September and was the main contributor to the increase in CPI. Fuel inflation, on the other hand, came in flat, indicating that future increases in CPI could also be driv-en by the deflationary effects of the price of petrol.
Moody’s rating agency provided its assessment on SA’s credit rating. As expected, they kept their rating unchanged at Baa2 with a negative outlook. Attention will now be on the S&P rating agency when they release their assessment next week. The JSE All Share index closed the week up 0.18%. The resources board was the main contributor adding 5.03% whilst the industrial board fell 1.87%.