A weak economy and
a weaker Rand.
Two important points to
unpack this week.
First of all, the revised GDP,
the very negative GDP forecast
from our research team,
the revised figures.
Secondly, obviously,
the weakness in the
financial markets,
particularly the Rand.
Let's start with those
GDP figures.
Our research team has revised
down the 2023 GDP growth
forecast to -0.8%.
In other words, forecasting
a substantial recession.
The main issue there is
obviously load shedding.
Implicit in the forecast is an
expectation of stage eight.
But it's not just load shedding
a weak global economy,
declining commodity prices,
the interest rate increases and
weak business and consumer
sentiment all weigh in.
For 2024, the forecast shows
a decent recovery to 0.9%.
So recession this year,
recovering in 2024.
If compared the RMB forecast
against the market consensus,
you can see our figure for this
year is substantially more
bearish than the most other
bearish forecasts out there,
and even more so relative to
the consensus, which still
sees marginally positive
rates of growth.
Even for 2024, our forecast
growth of 0.9% is in line
with the other most
bearish forecast.
Now, it's not just our GDP
forecasts that have changed.
There's also been some minor
revisions to inflation and the
interest rate view.
On inflation you can see we
now look for 6.1% inflation
average this year.
So above the upper end of
the target band.
On that basis, and given the
weak GDP, our team sticks
with their forecast of a final
25 basis point hike, but have
taken out some of the rate
cuts for next year.
You can see 50 basis point
cuts next year and then 50
in the year after.
These numbers were of course
generated prior to this recent
blow out in the Rand.
As we'll get to in a moment,
the market expects
significantly more rate hikes
than reflected in this view.
And so I think there are risks
around this view that
has been published.
The second big theme is
the weakness in the
financial markets.
Most of you listening to
this will care primarily
around the Rand.
The Rand making new all-time
intraday and closing record
highs against all the
major crosses.
So USD/ZAR got through
the previous high of 19.33.
EUR/ZAR is also higher,
GBP/ZAR higher as well.
The difference, well, we've
seen significant Rand
underperformance this year.
I've spoken about it
repeatedly on this channel.
EM currency is gaining.
EM currency still trading
around a USD/ZAR
equivalent of 16.50.
But what is really happened
last week, just negative
sentiment.
USD/ZAR got through that
18.50 level and then we got
the news about the US
ambassador allegations
around SA providing arms
to Russia and then the
market just ran.
What is different, however,
in this bout of Rand weakness,
is it's not just the Rand
that's weakening.
Earlier this year we have that
paradox where the Rand was
under significant pressure.
We could understand that
because of load shedding, etc.
But our other markets,
the bonds, etc., sovereign risk,
were not really showing
substantial pressure.
This time around, however,
just have a look at the
R186 yield.
You can see that spiking
as well.
Even our CDS, the reflection
of the sovereign risk, has also
increased meaningfully.
So this time around it's really
South African risk, everything
weakening quite substantially.
For our clients, we did hold a
detailed webinar on the outlook
on the Rand, how to hedge
these risks.
So for more on the Rand and
our outlook, please reach out
to an FNB/RMB representative.
The replay of that webinar
is still available.
Now coming back to the
arms issue, I just want to
show you a tweet from
Clayson Monyela.
He represents the diplomatic
arm of the government.
Two very important statements
that he made.
He made these on Friday
and then again on Saturday.
First of all, his first point there,
he says that the US ambassador
has apologised for the comments
he made.
The second very important point
is the South African government
is stating that they did not
approve any arms sales
to Russia.
So to the extent that actually
arms or ammunition left in
the Lady R, that ship, then this
was done by the private
sector illegally, presumably.
Before we get to the week
ahead, just a final issue around
the interest rate market.
Well, with the Rand
weakening substantially,
what we've seen is, as noted
in the bonds, substantial
weakness, but even in the
swaps and the FRAs.
So just have a look there
in the FRAs, the FRAs
have blown out.
The market is now pricing,
fully pricing, a 50 basis point
hike from the Reserve Bank at
the end of May and another
100 in total over the next
six months.
So the market is saying the
Reserve Bank is going to
have to hike to contain one,
the fallout, the inflation
fallout from the weak Rand
and two, arguably to protect
the level of the Rand.
As stated, our view is only for
a final 25 basis point hike.
But I suspect the risks are
higher than that, given this
recent bout of Rand weakness.
Also just to zoom in on
the swap yields, to protect
yourself against further
interest rate hikes.
Our swap yields have
actually risen to their highest
since 2008.
Not very attractive levels
in our opinion.
And we continue to look for
other ways of hedging your
interest rate risk.
And obviously the risks
have now increased.
Just one point around the
inflationary impact of
the weak Rand.
This relates to the fuel price.
On the screen there you see the
fuel price metrics as published
by the government.
This came out on Friday morning.
So relates to where the Rand
closed on Thursday.
You see there at the bottom
that was using an exchange
rate of 18.90.
But very importantly, if you
look at the two circles there,
there is still an over recovery
on fuel at the moment.
In other words, even with the
Rand at 18.90, we are still due
for fuel price cuts at the end
of this month.
Now, obviously, USD/ZAR has
shifted a bit higher, but on
petrol there on the left
hand column, R0.92 under
recovery on the day on
Thursday, average R1.18.
Even USD/ZAR up at 19.30
even 19.50 is not going to
take this away.
We are still due for a
meaningful petrol price
and diesel price cut at the
end of the month.
Essentially, the global fuel
prices have fallen more
than the Rand.
So this rand weakness has
been more than offset.
Just to turn to the
week ahead, SA markets are
going to be sentiment driven.
In terms of the news
we're looking for.
Well, the primary news is
going to be about the
allegations of shipping arms
and ammunition to Russia.
I suspect there is a
probability we'll get a
statement from the US.
The US ambassador
clarifying his position.
Again, going back to
that apology.
But more importantly, the
South African Foreign Affairs
Minister and the US Secretary
of State are meeting
telephonically, a telephonic
meeting on Friday afternoon.
We don't know the time.
As our diplomat's tweet
made clear, both sides are
presumably wanting to
resolve the issues, reduce
the stress between them.
And that will be an important
meeting where hopefully
they'll come to some sort
of agreement.
So some of the risk hopefully
coming off in the early part of
the week and then again towards
the end of the week.
This may take some pressure
off the Rand.
The Rand, nevertheless,
is very fragile.
Sentiment is poor.
Risk, so obviously to the top
side of the rand and any
negative South African news
is just going to send
our markets running.
Obviously, looking at load
shedding, any other issues
coming out of South Africa.
Now in terms of the data,
the global data and events
calendar, it's actually
remarkably light.
That's normal for this type
of a month.
However, two things
really worth noting.
So first of all, Powell speaks
on Friday afternoon,
late Friday afternoon.
I think eleven other Fed
speakers also through
this week, particularly Tuesday,
Thursday and Friday as well.
Markets are looking for
confirmation from the Fed
that they have peaked and
that the next move is going
to be a cut.
While we did get relatively
decent US inflation figures
last week, it's probably way
too early to expect Powell & Co
to confirm that.
US retail sales top tier,
second tier data release.
We are expecting a sharp
bounce in US retail sales after
the very poor April figures.
Just a few other things
to touch on.
Debt ceiling.
So D-day's early June as we get
close to there, markets will
get more and more nervous and
no negotiations that I know are
scheduled for this week.
So it will still be talking
about negotiations rather
than actual negotiations.
China's a little bit interesting.
We get the monthly data
set out on Tuesday.
So retail sales, industrial
production, etcetera.
There the year on year figures
will blow the lights out.
They look extremely good.
The reason for that is Shanghai
was closed in April last year.
On a year on year basis,
the figures will be bolstered.
Bloomberg Economics is
forecasting that the Chinese
central bank will cut
rates on Monday.
That's an out of
consensus view.
Most people think they'll
keep it on hold.
But over the past few months,
more and more talk about
the Chinese moving to
cutting rates.
So it does seem like
a small risk.
Overall, a weak economy.
RMB research team is expecting
a recession this year and
a weaker currency.
USD/ZAR, EUR/ZAR, GBP/ZAR
have all broken to new
record highs.
A very weak Rand and market
sentiment is very fragile.
What we're doing this week is
watching for any news around
South Africa, particularly
around those allegations of
arms shipments.
Good luck for the week ahead.