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Short Notes

Short Note                                                                              23 March 2016

Fed to turn less dovish?  

by Cees Bruggemans          words 630

The Fed is currently very dovish, having come into line with market sentiments regarding limited need for rate tightening, given subdued growth & inflation performances, reducing the expected number of rate hikes this year to two (from four), thereby undermining the Dollar, and giving lift to commodities, equities & risk currencies, with these in turn taking heart from supportive ECB & BoJ actions (and less threat seen from China following her equivalent of “whatever it takes”?).

But can this last? In an underlying sense America is steadily reviving as seen in its job growth. Once the energy depressant falls out of the price base, inflation can rise towards the 2% plus Fed target. With resource utilization steadily improving, the Fed will ultimately shift gears once again, especially if risks from the outside world lessen too. And a resurgent Fed will restart the rising Dollar engine, injecting new venom into the global system, weighing on risky assets anew. Perhaps as soon as 2H16 (even with Brexit & US election complications)? Does the Rand and other risky currencies find themselves thus in the eye of a hurricane, the next global stress test just months away, never mind what we do to ourselves politically, vying with Brazil for top billing in the farcical stakes?

Short Note                                                                              17 March 2016

SARB lifts rates  

by Cees Bruggemans          words 400

SARB raised rates by 0.25%, repo rate to 7%, prime rate to 10.5%. Personally, I don't understand why SARB keeps referring to a “dilemma” as if having to choose or trade off between worse inflation and worsening growth, for clearly its policy is of late firmly inflation forecast focused.

It helped to know that the committee vote was a tie, three for and three against an increase, after which the ayes had it. So not everyone is equally committed to higher rates. And this after bringing inflation forecasts down, too. Still, truth be told, my personal inflation experience is double the numbers trotted out by committee. This economy remains a cost-plus semi-indexed reality, which is what makes it so scary that big droughts, big political mistakes, and big Rand walkabouts give big inflation spikes, potentially destabilizing our fragile inflation expectations.

Short Note                                                                              16 March 2016

Extreme Rand tails  16/3

by Cees Bruggemans          words 680

With the Rand already severely undervalued at 16:$ (fair value nearer 10:$), current global and local events make it unlikely this will stabilise soon. Instead, either more severe undervaluation (increasing the discount) as compared to clawing back lost ground (narrowing the discount).

There have been some major processes weakening the Rand that don't quite need to repeat, but also others more freshly in play and longer to run, globally and locally.

Short Note                                                                              10 March 2016

The world exits panic?    

by Cees Bruggemans          words 680

The world remains an anxious place, going by commentary endlessly analysing potential and scenarios for crisis. But perhaps things aren't as threatening as what they appear to be.

Markets were screaming only two weeks ago that the world was ending. What has changed, getting them out of their nosedives? The world clearly wasn't ending after all.

Short Note                                                                                       6 March 2016

New European crisis brewing?   

by Cees Bruggemans                 words 550

It may turn out to be nothing, despite the media hype. But then again it could be more serious than ever imagined. With what implications for the Euro? For ECB support actions? For the state of global risk markets? For gold, Rand and SARB interest rate policy?

The past year was witness to growing European stress about the rapidly rising tide of incoming political refugees and economic migrants. This flow is to be better managed henceforth. But of that so far not much evidence. With the British starting their countdown to the June Brexit referendum. Could this cause some unexpected surprises in coming months?

Short Note                                                                              2 March 2016

Running on petrol fumes 

by Cees Bruggemans          words 750

It is getting to be thin gruel indeed. The 4Q15 tells us the SA economy is in deep trouble in places, while having little momentum left in others and that little is now steadily being cut off. The sense of drifting into recession this year is a strong one.

Meanwhile, our markets are a playball of global emotions (down in the dumps the one moment, recuperating the next) and local political twists & turns. Makes for substantial volatility, and tail scenarios (very bad, potentially worsening the Rand undershoot, as well as good clawback potential). Hellish on the nerves.

Short Note                                                                               25 February 2016

A Startlingly Mild Budget    

by Cees Bruggemans                 words 700

No major bold strategic moves. Instead, promises of spending reductions, procurement savings and tax increases allowing measured budget deficit reduction, and some budget reprioritisation, while shielding the little growth still left in the economy.

There is an attempt to address rating agencies and business concerns, also through as yet vague State Owned Enterprise reforms, while mainly keeping the electorate broadly satisfied, with any higher burdens mainly carried by higher incomes, keeping the redistribution focus instead of strengthening supply side incentives. The political imperative keeps trumping the economic one.

Short Note                                                                              23 February 2016

An Overdue Hat-Trick     

by Cees Bruggemans          words 430

A hat-trick is for the same player to score three times in one game. What is our overdue hat-trick, for which we have been waiting for years (decades even)?

There are three things that govern our growth process: the outside world, the quality of our public sector delivery, and our domestic business commitment. It is claimed that government doesn’t have control over the outside world, that it doesn't have control over public sector delivery (labour unions), and that private businesses control their own destinies. Ergo, helplessness.

Short Note                                                                               19 February 2016

America’s 2017 President   

by Cees Bruggemans                 words 580

There is still much choice at this early stage as to who will become America’s next President. For the outside world this may matter more than for America itself. For at home, the President has to share space with the Congress, its House of Representatives and the Senate, as well as the Supreme Court. The checks and balances build into its domestic political system ensures a government of paralysis, where no-one can easily dominate, and where denying legislative initiatives is a fine art.

In contrast, the President stands much stronger in his position as Commander in Chief in foreign relations, with fewer checks. This has clear implications with regard to the present leading crop of presidential candidates.

Short Note                                                                              12 February 2016

Summing All our Fears     

by Cees Bruggemans          words 680

Global panic infecting key markets is causing growing & spreading disruption, with heavy equity selloffs (into bear market territory), the US 10yr Treasury yield falling to 1.6% and gold reaching $1260 before receding to $1230 reflecting desperate safe haven flight, while the Dollar eases and Euro & Yen gain, as do EM currencies. Where will this end?

Meanwhile, for the second year running, the State of the Nation occasion turned into a political spectacle. More importantly, the SA political message was one of encouraging more “cooperation” with business, but short of changing the policy paradigm in any major way. The Budget will see public perk trimming, and spending curtailment, but not on social spending while there will be no major privatization of existing assets, seeking co-investment only for “new” ventures. But where does that leave the budget shortfall if the deficit has to meaningfully be reduced? The tax hit could be large after all. Where will that be heading?

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