Which way now?

One has to look back quite a long way in our recent economic history to find a time when investors were less certain about the direction of local interest rates, says Paul Stewart, head of retail asset management at m Cubed.

Indeed, domestic demand-led inflation, supply constraints in the global oil market, rand volatility and a change in US short-term interest rate policy have all been factors quoted by local economists as reasons for rates to move. 
 

But little consensus exists in terms of in which direction this movement is likely to be.
 

Globally, consensus is developing that Fed Chairman Alan Greenspan will be looking at making a shift in US monetary policy later in 2004, after he recently indicated that the factors necessary for such a move had begun to fall into place. 
 

Broad US economic indicators are showing good acceleration in key data like employment and core inflation.  Added to this, the Bank of England recently moved rates higher in the UK based on some demand-led pressures. 
 

The prospect of stubbornly higher oil prices, driven by supply constraints, is likely to further push global inflation during the US and European summers.  Some economists believe this is the primary reason to expect SA monetary to policy to pre-emptively tighten alongside these global trends later.
 

While there is no doubt that these trends will impact the local market, other specific local factors do perhaps mitigate some of these global pressures. 
 

For example, local demand-led inflation is still largely under control (although in an upward trend now after CPIX for April rose to 4.4%) and manufacturing exports do seem to be showing promise, a factor that will support the trade balance and the currency in the future. 

But with GDP growth for April weighing in at 3.1%, the economy is by no means overheating. 
 

The rand remains volatile but supported on weakness.  After the 10% fall in April, the rand recovered 5.8% against the US dollar in May.  So, provided these factors hold and oil prices don’t overshoot to the US$40/barrel level, interest rates may well not have to rise in the latter part of 2004.
 

The SA markets were all up in May after the equity and bond markets lost ground in April.  The FTSE/JSE All Share Index rose 0.31%, supported by Resources (up 0.25%) and Financials which climbed by 1.31%. 

Industrials, especially IT (-10.14%0, Consumer Goods (-3.26%) and Cyclical Services (-1.82%) were the laggards in the month. 
 

The Top 40 significantly outperformed the mid- and small cap indices this month.  Listed property had a mixed month with Property Loans Stocks falling by 0.76%, while PUT’s rose marginally at 0.06%
 

On the fixed interest side, bonds had a change in fortunes, reversing a series of negative months.  Bonds were up 0.14% in the month, but are still at –1.0% for the year-to-date. 
 

The yield curve showed some interesting shifts as managers fled to be short of duration, with long and medium bonds sharply negative, while short dated issues rose nicely. 

Cash was up 0.67% and is the best performing asset class for 2004, up 3.4%, with equities up 1.5% and bonds still down 1%.