The SPM Eco Week: Week of 12 November November 2018

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1 The SPM Eco Week: Week of 12 November November 2018 Economic indicators due this week: (Consensus estimates from Bloomberg) The Week Ahead Date ECO Release Period Consensus Previous 14 Nov Wed SA Retail Sales Sep 1.9% y/y 0.0% m/m 2.5% y/y 0.6% m/m US Core Inflation Rate Oct 2.2% y/y 0.2% m/m 2.3% y/y 0.1% m/m US Inflation Rate Oct 2.5% y/y 0.3% m/m 2.3% y/y 0.1% m/m China Retail Sales Oct 9.2% y/y - 9.2% y/y - China Industrial Production Oct 5.8% y/y - 5.8% y/y - 15 Nov Thu US Retail Sales Oct - 0.5% m/m 4.7% y/y 0.1% m/m Absa Research forecast: SA Sep Retail Sales -0,5% m/m and +1,2% y/y. Last week ECO Release Period Actual Consensus Previous Standard Bank PMI Oct 46.9 pts 46.9 pts 48.0 pts SA SACCI Business confidence Oct 95.8 pts pts Kenya CFC Stanbic Bank PMI Oct 54.0 pts pts SA Foreign Exchange Reserves Oct $50.2bn - - $50.5bn SA Mining Production Sep -1.8% y/y 1.2% m/m -3.4% y/y % y/y -1.2% m/m SA Gold Production Sep -19% y/y % y/y SA Manufacturing Production Sep 0.1% y/y -1.0% m/m 1.9% y/y -0.1% m/m 1.3% y/y 0.1% m/m US Fed Interest Rate Decision Upper/Lower 2.25% 2.00% 2.25% 2.00% 2.25% 2.00% US Core PPI Oct 2.6% y/y 0.5% m/m 2.3% y/y 0.2% m/m 2.5% y/y 0.2% m/m US PPI Oct 2.9% y/y 0.6% m/m 2.5% y/y 0.2% m/m 2.6% y/y 0.2% m/m Source: Bloomberg Discussion point 1: The Fed holds interest rates as expected but readies for a December hike The Federal Open Market Committee (FOMC) kept the target range for the federal funds rate steady at 2,00% - 2,25% last week as was widely expected. The FOMC statement noted the following: The labour market has continued to strengthen and economic activity has been rising at a strong rate. Job gains have been strong, the unemployment rate has declined, household spending has grown strongly and the rapid pace of business fixed investment has moderated. Inflation was near the target of 2,0% with little change to inflation expectations. Gradual increases in the target of the fed funds rate will be consistent with ongoing growth, a strong labour market and inflation close to the 2,0% target. The market still expects the FOMC to raise rates one more time in 2018 at the final meeting in December. The Fed s Dot Plot paints the same expectation for 2018 with another three rate hikes in 2019 and a final hike in This would take the upper bound of the target of the Fed Funds rate to 3,50%, above the FOMC s expected longer-term rate of around 3,00%. Absa Bank Limited Reg No 1986/004794/06 Authorised Financial Services Provider Registered Credit Provider Reg No NCRCP7

2 Tightening monetary policy (chart bottom right) and a growing US economy have supported the US dollar (chart bottom left) in an environment where European and Japanese interest rates have been held at zero and UK rates have only modestly been increased. For many years the dollar was the only game in town and current conditions would seemingly still support the greenback. The euro area asset buying programme ends at the end of next month and the prospect is for some very modest policy tightening in This just serves to widen the interest rate differential between the US and Europe which favours the US dollar. On Monday the US dollar index made a 17-month high while the Euro touched a 16-month low against the US dollar at the same time. The concerns around Italy persist with the budget impasse likely coming to a head this week. Either the Iltalians will revise their budget in line with EU requirements or the EU will apply its excessive deficit procedure and the associated sanctions. The dollar index is also benefitting from the drama around Brexit and with that process faltring, the pound has weakened to the benefit of the dollar (The euro has a 57,6% weighting in the dollar index and the pound has a 11,9% weighting). While all of this turmoil plays out against a fairly steady state US, the dollar should remain supported. US growth is expected to peak in 2018 and slow modestly into By the end of next year the Fed will have almost completed its tightening cycle (at least to a neutral level) and the market could start anticipating a weaker dollar. In the short-term though, it s all dollar. USD/EUR exchange rate: Target of the Fed Funds rate (upper bound): Discussion point 2: Ending the recession Manufacturing helps, Mining detracts but Retail Sales should be the kicker! Third quarter data on the production side of the economy was published last week and it s a mixed bag. Over the month of September mining production grew 1,2% but declined by 1,8% y/y. Comparing mining production in Q3 (Jun-Sep) against Q2 production (Apr-Jun), it s evident that the mining sector contracted over the past quarter. The table below reflects a 2,2% q/q decline in mining production indicating that mining will be a detractor in the calculation of the country s overall real GDP growth over the same period. Change in mining production over various periods ended 30 September 2018 The graphic overleaf reflects annual changes in mining production for the various mined commodities up to the end of September. The individual commodity production changes tell a story but the industry outcome is put in greater context when one considers the importance of each commodity to total mining production. The table below the graphic details the mining production index and the weighting of each commodity in the index. Gold (15,97%), iron ore (12,44%), coal (24,44%) and the platinum group metals (23,48%) make up 76,33% of the overall index and production in these commodities has a big influence on the total production outcome. The table overleaf reflects the quarterly change in production for each commodity and the contribution of each commodity to the overall mining production contraction of 2,2% in Q3. The 4,7% decline in gold production, the 13% q/q decline in iron ore production and the 7,4% q/q decline in PGM production where the major contributors to the poor mining quarter. 2

3 Year-on-year percentage change for the Mining Sector and the individual commodities Mining index constituents and weightings with quarterly percentage production changes Manufacturing production contracted by 1,0% over the month but increased by 0,1% y/y in September and by 1,7% q/q The largest positive contributions to the 0,1% y/y change were made by the following divisions: Food and beverages (2,7% y/y and contributing 0,7 of a percentage point (pp)); Basic iron & steel, non-ferrous metal products, metal products and machinery (3,3% y/y contributing 0,6 pp); Wood and wood products, paper, publishing and printing (3,4% y/y contributing 0,4 pp). The largest negative contributions in September 2018 were made by the following divisions: Petroleum, chemicals, rubber and plastic products (-3,2% y/y and contributing -0,7 pp); Motor vehicles, parts and accessories and other transport equipment (-4,9% y/y and contributing -0,4 pp); Radio, television and communication apparatus and professional equipment (-13,0% y/y and contributing -0,2 pp) Change in manufacturing production over various periods ended 30 September

4 Retail sales data are due to be published this week and with household spending coming under pressure in September from higher petrol prices, rising unemployment and restrained new borrowing, flat to lower spending is forecast for the month. Despite the weak monthly performance, year-on-year sales are expected 1,9% higher (Bloomberg consensus). Absa Research anticipates a decline of 0,5% over September with an increase of 1,2% y/y. More importantly, a quarterly increase of 6,1% is expected and that should contribute substantially to lifting Q3 GDP into the black. GDP data is due for release on 4 December (Q2: -0,7% q/q saar and +0,4% y/y). Discussion point 3: Oil prices where to OPEC? OPEC is of the view that 2019 is going to see an oversupplied oil market as oil production picks up around the world and demand hovers around current levels. The market equilibrium price has a big dependency on what the three biggest market players do (US, Russia and Saudi Arabia) and these countries have been increasing production. The oil price spike in reaction to the Iranian sanctions appears to have been premature and the prospect of increasing supply is having a greater impact on prices. The US granted eight countries a waiver to continue importing Iranian oil and so the sanctions had less of an impact on prices. In response to the recent declining prices Saudi Arabia is positioning a cut in production of 500k barrels per day in December and potentially more in The International Energy Agency (IEA) estimates global oil demand in Q at 100,3 mb/d versus global supply at 100,1 mb/d implying a drawdown of 0,2 mb/d versus a build of 0,5 mb/d for most of Q2 and Q3 (both demand and supply are close to historical highs). The IEA forecast global demand growth in 2018 and 2019 at 1,3 mb/d and 1,4 mb/d respectively with total non-opec supply up 2,2 mb/d in 2018 and 1,7 mb/d in In Q global oil demand was 99,8 mb/d with total supply at 100,3 mb/d (OPEC 39,5 mb/d and non-opec 60,8 mb/d). This makes the output from OPEC important when determining prices. OPEC meets next month in Vienna for their 175 th meeting and Saudi Arabia could potentially go it alone if its peers don t all agree to cut production. In September OPEC produced around 32,8 mb/d of crude oil with Saudi Arabia producing 10,5 mb/d almost equivalent to the combined total production of the next three highest producers in Iraq (4,65 mb/d), Iran (3,44 mb/d) and the UAE (3,00 mb/d). (Source: OPEC Monthly Oil Market Report 11 Oct 2018). We ll watch the December meeting closely as South Africa is dependent on oil imports and the price of oil has widespread implications for SA s trade balance, exchange rate, inflation rate and interest rates Brent crude oil price in USD per barrel: Final snippet: In the US mid-term elections the Democrats regained control of the House of Representatives while the Republicans took a greater majority in the Senate, winning three seats from the Democrats. With a Democrat-controlled House, the President s ability to simply enact whatever he likes is curtailed to some degree. The House can also question and demand answers of the Trump administration and can call to impeach the president this would require a two-thirds vote from the Senate which is unlikely given that the Republicans control the Senate. The Senate majority, however, does help Trump to get his chosen candidates into the cabinet and the judiciary. Craig Pheiffer Chief Investment Strategist: SPM Angela Ngcemu Junior Portfolio Manager 4

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