The world is changing fast and to keep up you need local knowledge with global context.
Fear the leader that shirks responsibility when times are tough, and be more fearful when that same leader accepts the accolades when things turn good. And it would take great leadership to shoulder the blame in South Africa given the recent flow of news events (Nkandla, Gupta, State-owned enterprises) and leadership is one of the elements missing in government. And in typical Cees Bruggemans fashion, he questions President Zuma’s claims that the responsibility of a failing government is now at the hands of the private sector. Ultimately Cees says it doesn’t really matter, as it’s out of his hands – the real story comes from overseas and focuses on inflation, oil, the United States, China and what this means for the Rand. – Stuart Lowman
by Cees Bruggemans*
President Zuma claiming the government is running the country (Bday) (into the ground?) in a way is terrifying, for he seemingly is no longer blaming the world for our condition, but is shifting this responsibility squarely onto our private sector’s shoulders, with the additional directive (plea) not to fire so many people. His electorate no doubt will hear and possibly even understand him.
The real story comes from overseas, and focuses on inflation (good), oil (was good, rapidly no good, but for how long?), China (not good) and the Rand (its goodness all depending on your interests).
America keeps scratching the head as to why its inflation stays so low (1%) with inflation expectations having downshifted as well (1.8%) even as unemployment has fallen so low (5.3%). Fed keeps saying (as it did at Jackson Hole last week) that once temporary influences fade, the underlying inflation will shine through and they don’t want to wait with liftoff until it reaches 2% because by then the horse will be well and truly bolted. And this story repeated twice more, by Carney at BoE & Constantin at ECB. That kind of firmly points at a September liftoff.
Fair enough, except the ‘temporary’ inflation depressants could be longer lasting than imagined (commodities), China can keep tempering global expectations, and after years of near zero inflation it is conceivable low inflation can become embedded in expectations, with globally hardly any capacity constraints but certainly supply surpluses, in goods produced, production capacities and labour, with geographic borders hardly relevant.
The US may be modestly trundling along at an average 2.5% ground speed, but that doesn’t mean the world is running out of capacity or competitiveness. If anything, trade ferocity is intensifying. It makes for global disinflation, in places (Japan) bordering on deflation.
That’s good for SA, for markets keep postponing their Fed liftoff further into the future, encouraged therein by some (week earlier) Fed language.
Market doesn’t even say December now. It discounts March next year. If Fed does lift off in September (two weeks from now) there would be quite a scramble for short yields to lift, giving the Dollar a kicker and the Rand a downer.
Even if it looks like some more Fed delay is in order and should keep global risk assets supported, the final word is to the Fed. And they are a committee (remember a horse designed by committee turned out to be a…..Camel-smoking camel).
The oil story has China central to its demand side (less strong than assumed), while Saudi, Iran and the frackers are central to the supply side. With sanctions presumably going, Iran will be coming back to market with exports. It is an important reason underlying Saudi rigidity in not cutting supply and seeking higher prices. It wants to keep starving frackers into submission (this will take time, given their resilience), but it also presumably wants to prevent too much of a cash flow to Iran and the regional mischief that could flow therefrom.
This is a good story, and applied for most of August, except during the last three trading sessions, when suddenly markets were hearing US oil data less robust than imagined (stabilizing) while rumours were twirling out of Vienna that Opec might just want to start tightening (however wild such thinking). Oil prices jumped (as shorts covered?), and Brent spot shot back above $50 and five-year futures touching $70.
What to believe?
Despite the bounce underway since late last week, there may still be a weaker bias to global oil and gas prices for the time being (awaiting Chinese demand and Saudi and fracker supply reality confirmation). If confirmed, that would not be good news for the many Africa stories relying on their energy exports, but good for a net oil and gas importer like SA (though our coal interests will suffer).
The main beneficiaries of late have been the broader business (transport) sector and household consumers after three big monthly petrol/diesel price cuts. Reminds of last summer. But will it be sustained or is this now being reversed, certainly by a still weakening Rand potential, but also Brent oil price revival (reminding much more of the 2Q15)?
China’s challenges are many. It isn’t short of promoters believing its 7% growth story. But its many detractors point to its falling electricity and cement output, strained exports and financial situation as pointers to loss of growth momentum.
Its equity markets may have fallen 40% since the June peak, but supposedly not enough consumers are affected for it to hit economic activity (except perhaps for products exposed to higher incomes).
The global audience cheered a rapidly expanding China for its growth gains, but there is growing unease about China managing its current challenges. That could invite defensiveness way beyond Chinese borders, and not only hit commodity demand (supply, prices) but much wider. With currencies of Emerging Markets and commodity producers in heavy retreat for a long while now, it has cut imports everywhere. There is more defensiveness in the air.
SA doesn’t have as large a percentage exposure to China as other commodity producers do have (Aussie for instance), but China exposure is still a significant bite of our export trade. Commodity prices are of course determined in global markets, and here it is the bigger demand/supply picture that rules.
Bottom line for us is steady forex income loss for key commodity exporters.
The weakened Rand, well below fair value now (which is closer to 10:$), is yet to stabilise against the Dollar as the latter continues with its global rerating higher. Even if on trade-weighted the Rand isn’t as badly affected, and the inflation pass-through consequently not terrifying, the exposure for those trading the Rand:$ leg is worrisome.
If the Dollar has further appreciation potential, as seems likely once Fed liftoff gets underway, the Rand can be expected to weaken still further. Currently 13.24:$ at time of writing (this is now a necessary qualifier, given all the wild volatility) but with further weaker potential over the next two to three years.
If this outpaces any oil price weakness (as happened over the past week as oil prices showed some recovery), the recent domestic petrol and diesel price falls can start being reversed once again.
It would spell the end of the consumer succour of recent months, and a return of tightening prospects, worsened by job losses, and tightness in flexible incomes (overtime, bonuses, commission).
A replay of the oil price bounce of 2Q15, which followed last summer’s oil price dive? Cyclically very volatile, our oil.
*Cees Bruggemans is consulting economist at Bruggemans & Associates
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