Standard and Poor’s (S&P) became the second ratings agency to adjust their local currency credit rating for South Africa to non-investment grade. However, Moody’s kept their rating unchanged at one notch above non-investment grade (Baa3) and placed South Africa under review for a downgrade, pending the outcome of February’s budget and the outcome of the ANC Elective Conference.
Fiscal deterioration and a lack of growth-inducing policies were cited as reasons for S&P’s downgrade, while Moody’s highlighted similar concerns in their report. Nonetheless, it was evident from the muted market reaction that a downgrade was largely priced in. The rand and government bond yields are now back at levels seen before the event. The benchmark 10-year government bond yield moved from 9.33% to 9.43% and then back to 9.34%, while the rand moved from R13.90/USD to R14.17 only to revert back to R13.90. This is not dissimilar to Russia, Turkey and Brazil when they saw a downgrade to sub-investment grade. Around the S&P downgrade, bond yields rose, but recovered relatively quickly. Currency also depreciates initially, followed by a strong recovery.
The latest statistics suggest the already modest economic recovery stalled somewhat in September 2017. Despite this, mining, manufacturing, retail sales and new car sales managed to grow over Q3’17, compared with the previous quarter. Inflation for October came in at 4.8% y/y, easing from 5.1% in September as prices slowed mostly for transport, food and miscellaneous goods and services. The market still expects GDP growth of just below 2% q/q in 3Q17. Market participants have largely left their GDP growth forecasts for 2017 unchanged at 0.8%, improving to 1.3% and 1.5% over the next two years.
The SARB left rates unchanged at 6.75% (prime of 10.25%) in line with market expectations. Policymakers said upside risks to the inflation outlook have increased mainly due to higher oil prices and a weaker rand, while the growth outlook remains subdued. The Bank has revised their inflation forecasts upward for 2018 and 2019 to 5.2% and 5.5%, from 5.1% and 5.4% previously.
Driven by retail sales, which increased 5.4% year-on-year in September (vs. 4.5% as expected) and a stronger rand, local equity markets ended the month in the green, driven by a rally in financials and retailers. Most notably Mr Price was up 19% after it delivered a good set of results for the 6-month period ending September.
The Eurozone Composite PMI came in at 57.5 in November, up from 56 in the previous month. This reading indicates that the private sector expanded at the fastest pace since April 2011, supported by inflows of new orders and the pace of job creation, which hit its highest level in 17 years. Furthermore, manufacturing output increased the most since April 2000. Looking at the data by country, output growth accelerated in France, Ireland, Germany, Italy and Spain.
Data out of the US surprised markets, as the economy expanded at the fastest pace since 2014 after it reported an annualized growth of 3.3% on quarter in Q3 compared to 3% in Q2. Personal consumption expenditure (PCE), which accounts for nearly 70% of GPD, rose 2.3% while fixed investment increased by 2.4%. Government spending increased 0.4%, compared to an initial estimate of a 0.1% fall. Against the backdrop of improving metrics and the decision not to hike rates in November, a rate hike in December is more likely than ever.
Oil rose to levels last seen in mid-2015 as data showed that OPEC nations are delivering on their promise to reduce oil supply. OPEC’s October output fell by 80 000 barrels per day (bpd) to 32.78 million bpd, putting adherence to its pledged supply curbs at 92%, up from September’s 86%. Brent Crude was up 3.6% in November, and up 11.9% year-to-date. For other commodities, iron ore, platinum and gold were up 5.1%, 2.8% and 0.5% respectively, driven by a weaker US Dollar and higher steel prices in China (iron ore).
Economic highlights for the month:
- ECB policymakers agreed to cut the asset purchase scheme to €30 billion at the start of 2018
- Euro Area economy expanded 2.5% year-on-year in Q3 versus 2.3% in the previous quarter
- US Fed Funds Rate left unchanged at 1% to 1.25% during its November meeting
- Composite PMI in the Euro Area increased to 57.50 in November, the highest yet
- UK Q3 GDP Annual Growth Confirmed at 4-1/2-Year Low of 1.5% year-on-year
- US PMI Composite PMI Output Index declined to 54.6 in November 2017 from 55.2
- SA Business Confidence decreased to 34 in the fourth quarter of 2017 from 35 previously
- The US economy expanded an annualized 3.3% on quarter in Q3
- Euro Area unemployment rate declined to 8.8%, the lowest rate since January of 2009