First quarter overview
Increasing risks of a global recession are adding a significant layer of uncertainty to the domestic and foreign interest rate outlook. A divergence in these policy views is now worsened by China’s growing COVID outbreak and the US’s declining levels of real income, which have collectively reduced the pace of manufacturing across both regions. Furthermore, a continuation in Russian sanctions is not only growth negative, but also remains well poised in favouring commodity-linked currencies relative to their G7 counterparts. A moderate weakening of the US dollar versus a trade weighted EM currency basket was catalyst to the momentary respite of US equity markets during the month of March, however, the strengthening of the US dollar during the latter part of April could see a reversal of this.
On the local front, the SARB hiked the repo rate twice over the quarter by 25bps each in January and March taking the repo rate to 4.25%. At the March MPC, the balance of preferences was not unanimous, with three members of the MPC voting for a 25bps hike and two voting for a 50bps hike. The SARB now expects inflation to average 5.8% in 2022 from the previous forecast of 4.9% at the January 2022 meeting.
CPI & GDP
Our view is that the uncertainty surrounding both the pandemic and the Russia-Ukraine war is likely to make these policy estimates a lot more volatile. Negative real wage growth, tepid labour absorption rates, and muted capital expenditure programs, point towards limited second-round effects as well as growing headwinds for global economic activity. Risks to this outlook currently emanate from aggressive Fed policy tightening and a prolonged conflict between Russia and the Ukraine. Notwithstanding the MPC’s hawkish undertone, the implied policy path of the SARB’s Quarterly Projection Model is now in-sync with our views, which remains moderately dovish relative to the FRA market. The chart below shows the FRA curve, i.e., this tells us what the market is pricing in 3m rates to be going forward.
South African Forward Rates
Taquanta Asset Managers