MARKET MATTERS
13 September - 19 September 2013
No tapering yet
The most eagerly anticipated monetary policy announcement of recent
times managed to deliver some fireworks when the US Federal Reserve
(the Fed) surprised the market by keeping its $85 billion monthly bond
purchase programme (widely known as quantitative easing) in place.
The consensus among economists was that the Fed would reduce (taper)
its monthly purchases by $10 billion per month. Markets immediately
reacted to the unexpected announcement. Equities and bonds rallied,
and gold showed signs of life for the first time in a while. Along with
other emerging market currencies, the rand also gained (but remains
significantly weaker compared to a year ago when the Fed commenced
the current round of quantitative easing).
Though the downside risks to US growth had eased, the Fed felt it
needed more evidence that the economic recovery was sustainable
enough to warrant a reduction in bond–buying. While the unemployment
rate had fallen quite a bit to 7.3% from a cyclical peak of 10%, some
of this improvement was due to discouraged job-seekers giving up
altogether. The job market has also lost some of its positive momentum
recently.
The tightening in financial markets, in anticipation of tapering, has
itself contributed to the decision to delay tapering. Ten-year Treasury
yields have risen by more than 100 basis points since May when tapering
became a possibility, and mortgage rates have risen by more than
130 basis points (unlike in South Africa, mortgage rates in the US are
linked to market interest rates of long term-government bonds). This
has resulted in concerns that the improvement in the key US housing
market could be derailed.
The Fed also noted with concern that the Federal government was still
cutting back spending, which was a drag on the economy, and that a
repeat of the 2011 debt ceiling debacle could occur later this year.
QE will be subject to the same conditions as outlined before, namely
a substantial improvement in the labour market and inflation remaining
subdued. Given the outlook of only gradual improvement on the jobs
front and subdued inflation, the Fed expects to continue buying bonds
until mid-2014. But in the press conference following the announcement,
Chairman Ben Bernanke was at pains to stress that nothing was cast in
stone, and that tapering before the end of the year was by no means
a certainty. It will all depend on what story the data tells about the
state of the US economy, by far the world’s largest.
The Fed’s other, more conventional tool is the Fed funds rate, and
guidance as to the future path of the Fed funds rate. In this regard,
the Fed expects to keep this key policy rate at near-zero levels until
mid-2015, and to have risen to only 2% by end 2016. The era of
extraordinary monetary policy will remain with us for quite some time
still.
Rates on hold as inflation rises
Unlike its American peer, the local central bank – the South African
Reserve Bank (SARB) – did not spring any surprises. The SARB’s Monetary
Policy Committee (MPC) left the repo rate unchanged at 5%.This was
despite new data showing that consumer inflation rose to 6.4% in August.
Inflation is measured as the year-on-year change in the consumer price
index (CPI). It rose slightly from 6.3% in July and was in line with the
market’s expectation. CPI excluding food, petrol and energy – in other
words, stripping out the most volatile items in the basket – grew by
5.1% year-on-year, suggesting underlying price pressures remain more
or less in check.
The biggest contributors to the August inflation number were transport
(1.4 percentage points), housing and utilities (1.3 percentage points)
and food and non-alcoholic beverages (1.1 percentage points). The
fastest-growing items in the CPI basket were petrol (23% year-on-year),
vegetables (13.4% year-on-year), education (9%), bread and cereals
(8.6%) and insurance (8.4%).
The Reserve Bank noted that the August breach of its inflation target
was in line with its projections, but its projections for 2014 have
worsened, with inflation expected to average 5.8% next year, instead
of 5.5%.
Commenting on the Fed’s decision not to taper, the SARB warned that
“respite could prove to be temporary, as speculation regarding the
timing of future tapering is likely to continue whenever positive data
emerges from the US.”
In terms of the growth outlook, the SARB noted that prospects were
improving in developed markets, while fears of a sharp slowdown in
China appear to have abated. The main concern is around emerging
markets with current account deficits, in light of the fact that the Fed
will at some stage take the foot off the pedal. Nonetheless, the SARB’s
forecast of local economic growth is unchanged: it still expects growth
to average 2% this year, and 3.3% next year, below the economy’s 3.5%
long-term average growth rate. If growth surprises, it is likely to be to
the downside. With this in mind, the SARB is right to remain accommodative
with its interest rate stance.
Chart 1: Rand and local bonds react to taper talk
10.5
10.2
Chart 2: South African interest rates and inflation
14
9%
Rand-dollar exhange rate
SA 10-year Government Bond Yeild % (RHS)
12
Real Repo
Consumer Inflation (CPI y/y%)
Repo Rate
10
9.9
8
8%
%
9.6
6
4
9.3
7%
2
0
9.0
-2
8.7
Mar 2013
6%
Apr 2013
May 2013
Jun 2013
Jul 2013
Aug 2013
Sep 2013
Source: I-Net
Manager Movements
There were no manager movements over the past week.
-4
Oct 07
Jul 08
Apr 09
Jan 10
Oct 10
Jul 11
Apr 12
Jan 13
Source: I-Net
MARKET MATTERS
13 September - 19 September 2013
INDICATORS
Equities - Global
Description
Global
United States
Europe
Britain
Germany
Japan
Emerging Markets
Brazil
China
India
South Africa
Index
MSCI World
S&P 500
MSCI Europe
FTSE 100
DAX
Nikkei 225
MSCI Emerging Markets
MSCI Brazil
MSCI China
MSCI India
MSCI South Africa
Currency
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
Index value
1,573.0
1,722.0
1,661.0
10,620.0
1,053.0
149.1
1,023.0
2,456.0
62.5
393.4
549.0
Week
2.61%
2.32%
3.17%
2.01%
3.95%
3.66%
3.33%
6.27%
1.08%
6.32%
4.17%
Month-to-date
6.79%
5.45%
8.70%
6.79%
9.23%
9.20%
10.00%
16.40%
7.70%
16.04%
12.73%
Year-to-date
17.48%
20.76%
14.87%
10.87%
18.58%
40.66%
-3.03%
-9.97%
-0.49%
-8.52%
-5.51%
1 Year
17.65%
18.03%
18.30%
11.45%
25.21%
28.71%
1.59%
-11.81%
13.92%
-4.05%
-0.90%
Equities - South Africa
Description
All Share (Capital Only)
All Share (Total Return)
Top 40/Large Caps
Mid Caps
Small Companies
Resources
Industrials
Financials
Listed Property
Index
All Share (Capital Index)
All Share (Total Return)
Top 40
Mid Cap
Small Cap
Resource 20
Industrial 25
Financial 15
SA Listed Property
Currency
Rand
Rand
Rand
Rand
Rand
Rand
Rand
Rand
Rand
Index value
44,303.0
5,563.0
4,992.0
10,741.0
13,721.0
2,766.5
8,914.0
5,506.0
1,376.0
Week
1.26%
1.44%
1.46%
1.35%
1.03%
-0.28%
2.33%
2.10%
1.96%
Month-to-date
4.91%
5.62%
5.67%
5.70%
3.86%
3.08%
6.64%
7.86%
6.26%
Year-to-date
12.87%
15.68%
16.96%
7.72%
18.87%
1.27%
29.19%
13.11%
6.92%
1 Year
21.56%
25.26%
27.12%
14.39%
28.07%
2.94%
45.27%
26.69%
7.92%
Fixed Interest - Global
Description
US
Index
JPM US Gov Bond Index
Currency
US$
Index value
-
Week
-
Month-to-date
-
Year-to-date
-
1 Year
-
Fixed Interest - South Africa
Description
Index
All Bond
BESA ALBI
Government Bonds
BESA GOVI
Corporate Bonds
SB JSE Credit Indices
Inflation Linked Bonds
BESA CILI
Cash
STEFI Composite
Currency
Rand
Rand
Rand
Rand
Rand
Index value
435.9
435.2
199.0
195.9
290.0
Week
1.43%
1.44%
-4.15%
1.45%
0.10%
Month-to-date
3.88%
3.86%
1.82%
2.47%
0.28%
Year-to-date
0.47%
0.28%
-0.28%
-1.97%
3.68%
1 Year
3.88%
3.61%
2.52%
4.35%
5.20%
Commodities
Description
Brent Crude Oil
Gold
Platinum
Index
Brent Crude ICE
Gold Spot
Platinum Spot
Currency
US$
US$
US$
Index value
109.1
1,366.0
1,462.0
Week
-3.21%
3.33%
1.60%
Month-to-date
-4.30%
-2.08%
-3.94%
Year-to-date
-1.71%
-18.40%
-5.00%
1 Year
-4.30%
-22.87%
-10.36%
Currencies
Description
ZAR/Dollar
ZAR/Pound
ZAR/Euro
Dollar/Euro
Dollar/Pound
Dollar/Yen
Index
ZAR/USD
ZAR/GBP
ZAR/EUR
USD/EUR
USD/GBP
USD/JPY
Currency
Rand
Rand
Rand
US$
US$
US$
Index value
9.68
15.56
13.10
1.35
1.60
0.01
Week
2.76%
1.09%
1.04%
-1.48%
-1.42%
-0.99%
Month-to-date
6.04%
2.25%
3.71%
-2.07%
-3.30%
0.99%
Year-to-date
-13.25%
-10.28%
-15.60%
-2.22%
1.07%
13.86%
1 Year
-15.52%
-14.59%
-18.50%
-3.70%
1.07%
25.74%
Please note, the US bond figures for the week are currently unavailable.
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accuracy or completeness of the information provided and disclaim all liability for any loss or expense, however caused, arising from any use of or reliance upon the information. Please note that there
are risks associated with investments in financial products and past performances are not necessarily indicative of future performances.