Moody’s Stays Schtum
Commentary: 01 April 2019
The US yield curve, for the first time since 2007, has turned negative, the clearest warning yet of an impending recession in America. Yield curve inversion is typically considered an indicator of recession as it reflects investors’ belief in greater short- term risk (where short-term bonds have a higher yield than longer maturities), signalling that buyers think the economy is on a downward trajectory. The inversion comes amid reports of weakness in France and Germany and slowing American manufacturing data. The inversion might also indicate that the case for continuing to raise rates in the US has weakened, which would bode well for emerging market assets.
Another consequence of fears of an economic slowdown was a slightly weaker oil price last week. While OPEC is pushing for prices to surpass $70 a barrel, prices have settled around $67 around concerns of demand growth. Barclays Bank predicts however that oil prices are likely to move higher in the second quarter and average $70 for the year.
The ongoing Brexit saga is well, ongoing. Last week, MPs seized control of the process from a very weary Prime Minister and voted on a range of Brexit options (none of which produced an immediate way through the impasse). Nearly three years after Britain voted to leave the bloc, it remains unclear how, when or even if Brexit will take place. Whatever the outcome, Britain seems to be heading towards a general election before the end of this year. May’s support and authority have been seriously undermined by the Brexit process and even her offer to quit has failed to break the stalemate.
The SARB played it safe last week ahead of Moody’s review and kept rates on hold, but Governor Lesetja Kganyago’s interpretation of prevailing conditions were crucial, as they will set the tone for monetary policy over the next few months. The Reserve Bank kept a hawkish stance, despite falling inflation expectations, with the governor reiterating that the rate needs to be anchored closer to the midpoint of the 3-6% inflation target. Moreover, the Monetary Policy Committee (MPC) members made it clear that they believe the current challenges facing the economy are structural in nature and as such, are not of the view that rate cuts will substantially boost economic activity. Forecasts for GDP growth were, as expected, revised downwards to 1.3%, 1.8% and 2% in 2019, 2020 and 2021 from 1.7%, 2% and 2.2% previously. These lower growth expectations are broadly reflective of declines in business and consumer confidence, intermittent load shedding as well as the expected slowdown in global growth. The next Reserve Bank meeting is scheduled for May and it is hoped that at this point, a number of uncertainties weighing on the MPC will have been resolved, most notably around Moody’s decision, the outcome of the elections and further clarity on the turnaround plan at Eskom.
The appointment of Edward Kieswetter as SARS commissioner was a welcome move. Kieswetter has high-quality experience, in both the private sector as CEO of Alexander Forbes and as deputy SARS commissioner under Pravin Gordhan between 2004 and 2009. His expertise in turning around large, complex organisations is also reflected in his board appointment to Transnet.
After much debate and analysis, Moody’s chose not to issue an assessment of SA’s sovereign rating last Friday. A formal review will most likely be issued after the elections, which implies that the 8th May elections will be a defining moment for the country. To date, the agency has been extremely forgiving of our shortcomings, allowing time for structural reforms to gain traction. This latest move is to a certain extent, a vote of confidence in SA. It does however leave us in limbo. Expect additional volatility in our rand and equity markets until Moody’s decision is released or elections roll around, whichever comes sooner.
By Bridget Kelly, Santam
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