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									                                             FAIRBAIRN CAPITAL INVESTMENT INTELLIGENCE
                                             Inside Insights
                                             23 March 2010

                                        Easing up on Quantitative Easing
Forward Rate Agreements and             The announcement on Tuesday that the US central bank, the Federal Reserve, would continue to keep
the Repo rate
                                        interest rates at near zero levels “for an extended period” supported risk appetite on global markets. In
   11                                   the process, the JSE All Share index came close to breaking through 29,000 points, while the rand
                                        strengthened to R7.32/$, close to its long-term support line. Renewed concerns over EU support for
                                        Greece, and the possibility of IMF intervention, boosted the rand below R10/€ for the first time since
   10                                   January 2008. The Fed also confirmed that it intended to wind up its $1.25 trillion mortgage-backed

  9.5                                   securities purchase programme at the end of March. The programme was initiated to drive down long-
                                        term mortgage rates (American mortgage rates are typically linked to long-term bond rates, rather than
                                        the official policy rate, as is the case in South Africa). Some economists fear that ending the program
  8.5                                   could lead to mortgage rates rising, which would hamper the fragile recovery in the housing market. But
                                        the Fed pointed out that it had been gradually winding down the purchase program without major effects
                                        thus far. The decision should thus be seen as a sign of confidence, even if the economy is still weak. The
  7.5                                   Fed’s stance was also confirmed by US inflation data showing that CPI rose by 2.1% year-on-year in
                                        February. Core CPI, which excludes volatile food and fuel prices, rose by only 1.3% year-on-year,
                                        remaining below the Fed’s annual target of 2% due to weak domestic demand. The Bank of England also
  6.5                                   voted to end its ‘quantitative easing’ programme of buying £200 billion of assets, mostly government
                                        bonds. The Bank also decided to keep the official bank interest rate unchanged at 0.5%.
      Mar-09   Aug-09   Jan-10          Which brings us to local monetary policy. The Reserve Bank’s Monetary Policy Committee (MPC) meets this
                                        week to decide on interest rates, with an announcement expected on Thursday afternoon. With the rand
               3x6 FRA %                as strong as it is and inflation having surprised on the downside the last few months, the possibility of a
               Repo Rate %              rate cut exists. But looking at the forward rate agreement (FRA) market shown on the graph, it is clear
                                        that such a move is not expected (it is also interesting to note how the market was way ahead of the MPC
                  Source: RMB, FCII.
                                        in predicting cuts between March and August last year). The consensus view is that the MPC has done
                                        enough to stimulate the economy, and that the risks to inflation, from electricity tariffs and other sources
                                        ,are material. The MPC will have hot-off-the press inflation numbers available on Wednesday and
                                        Thursday to aid – or complicate – their decision.
                                        Consumers more confident
Quarterly Business and Consumer         Confidence among local consumers increased at the fastest pace in five years according to the latest
Confidence Indices
                                        quarterly consumer confidence index (CCI) from the Bureau of Economic research, sponsored by FNB. The
 90                              25     CCI shot up by 9 index points to 15 in Q1 2010, having hit a low point of –4 during Q4 2008. Participants in

 80                              20     the CCI survey are asked questions relating to the expected performance of the economy, the expected
                                        financial position of their household, and whether the present is an appropriate time to buy durable
 70                              15
                                        goods. The latter showed the best improvement, although a majority of respondents still believe that now
 60                              10     is not a good time to splash out on durables (which are non-essential goods). Thus, while consumer
                                        confidence has improved considerably from the depths of the recession, consumers remain cautious.
 50                              5
                                        The improvement in confidence showed up in real retail sales data for December, which fell by only -1.7%
 40                              0      year-on-year. While still negative, retail sales growth showed a clear improvement from the –3.8%

 30                              -5     (revised) December number, and November’s –6.6%. It had been in negative territory every month since
                                        February 2009, and very weak since February 2008 as consumers faced the headwinds of high debt levels,
 20                              -10
                                        stricter bank lending criteria and reduced real disposable income. The latter was itself a consequence of
  Jun-06      Mar-08    Dec-09
           RMB/BER Business             high interest rates, inflation, reduced variable pay and rising unemployment. With unemployment having
           Confidence Index             stabilised in the fourth quarter, interest rates slashed and inflation trending downwards, the situation is
           FNB/BER Consumer             slowly reversing itself. However, due to high household debt levels – the debt to disposable ratio is 79%
           Confidence Index (rhs)       according to latest available data - the consumer recovery is expected to be far milder than previous
                   Source: BER, FCII.   cycles. Nonetheless, improved consumer confidence and spending will be vital in driving economic growth.
                        The Week Ahead
                                    StatsSA releases local inflation data for February this week. Consumer inflation is measured by year-on-year changes in
                                     the consumer price index (CPI), which will be released on Wednesday. CPI inflation declined in January to 6.2% from
                                     6.3% in December. As the base effect of very low fuel prices in early 2009 recedes, most economists expect the 2010
                                     inflation number to move back to the 3% - 6% target range within the next month or two, and remain there for the
                                     remainder of the year as food prices fall, and imported inflation is contained by the strong rand.
                                    Producer price index (PPI) data will be released on Thursday. Year-on-year growth in PPI jumped unexpectedly to 2.7%
                                     in January from 0.7% in December. PPI is of course much more sensitive to changes in fuel prices, while higher
                                     electricity input costs also played a role. PPI for agricultural products was in negative territory though, suggesting
                                     further easing on the food price front for consumers. The strong rand will also have a moderating impact on producer
                                    StatsSA releases the Quarterly Employment Statistics survey for the fourth quarter of 2009 this week.
                                    The local Monetary Policy Committee (MPC) meets this week to decide on interest rates.
                                    The Reserve Bank’s Quarterly Bulletin for the fourth quarter of 2009 will be released on Tuesday. Apart from a detailed
                                     overview of the state of the local and global economies, the Bulletin also contains important data that economists are
                                     keen to analyse every quarter. These include household debt-to-disposable income numbers, consumption expenditure
                                     data and detail on the current account. Expressed as a percentage of gross domestic product (GDP), the balance on the
                                     current account was in deficit to the tune of 3.2% in the third quarter, from 3.4% the previous quarter. The deficit had
                                     narrowed significantly from a peak of 8.5% of GDP due to falling imports and lower dividend payments to foreigners.
                                     With the country experiencing massive inflows of capital into bond and equity markets, there seem to be few concerns
                                     over this gap for the moment.

                        Key Indicators – Please visit our website for up-to-date indicators

                                                                                                      Closing Value @
                  Market                                    Index                                                                         % Change 1 week     % Change Year to Date
                  Currency                                  Rand/US$                                 R7.32/$                              +0.62%              +1.01%
                                                            Rand/GBP                                 R11.01/₤                             +1.74%              +7.29%
                                                            Rand/Euro                                R9.90/€                              +2.47%              +5.64%
                  JSE                                       All Share                                28544.15                             +1.00%              +3.17%
                                                            Top 40                                   25667.58                             +1.16%              +2.68%
                                                            Financial 15                             8109.81                              +1.99%              +9.86%
                                                            Resources 20                             49873.73                             -0.61%              -2.37%
                                                            Industrial 25                            22985.51                             +2.66%              +6.33%
                                                            SA Listed Property                       339.25                               +0.69%              +4.89%
                  Bonds                                     All Bond Index                           308.649                              +0.55%              +3.22%
                  US                                        S&P 500                                  1159.9                               +0.86%              +4.02%
                  Japan                                     Nikkei 225                               10824.72                             +0.68%              +1.59%
                  UK                                        FTSE 100                                 5650.12                              +0.43%              +4.38%
                  Emerging Markets                          MSCI                                     997.94                               +0.53%              +0.86%
                  Brent Crude Oil                           Spot $/barrel                            $80.01                               +2.09%              +3.76%
                  Gold                                      Spot $/oz                                $1107                                +0.44%              +0.94%
                  Platinum                                  Spot $/oz                                $1607                                -0.09%              +9.36%

                                                                                                                                                                         Source: I-Net.

Please note that while care has been taken to ensure that the information provided in this article is correct, it represents an overview of the topic under
discussion and as such does not constitute advice. We suggest that you contact your professional adviser before taking any decisions based on the
information herein. Fairbairn Capital is an elite service offering brought to you by Old Mutual Investment Services (Pty) Ltd and Old Mutual Life Assurance
Company (South Africa), Licensed Financial Services Providers.

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