Executive Summary

• In the past month, we have seen global central banks capitulate, along with some EM central banks, as a result of lower global growth, inflation metrics and trade activity. Further geopolitical risks in the form of trade wars and tighter financial conditions exacerbated the capitulation. In the past month, we have also seen global inflation rates continue to ease, aided by lower energy, commodity and raw material costs. Inflation rates in DM economies are now below those of central bank targets.

• High-frequency data prints show a positive end to growth in 4Q18. However, there are a few caveats. While the SA PMI improved markedly, rising above 50 index points in December, the SACCI Business confidence index deteriorated. Manufacturing production remained positive but slowed relative to the pace of growth seen in October. Sales of minerals rose sharply in Q4, and throughout 2018, although production did not maintain the same pace. Retail sales growth surprised to the upside in November but this is likely to be short-lived as consumers still battle with elevated unemployment levels, rising interest rates and inflation, and lacklustre disposable income growth. The Nedbank Group Economics Unit forecasts a current account deficit of 3.7% of GDP in 2018, narrowing to 3.4% of GDP in 2019. SA real growth is expected to rise gradually to 1,4% in 2019, from the forecasted 0,7% in 2018.

• In line with our expectations, the SARB unanimously kept the repo rate at 6.75% as the SARB MPC turned dovish. Despite the positive developments from an inflation perspective, the SARB is still mindful that risks to the inflation outlook are assessed to be moderately to the upside. Our headline inflation forecast is now well above that of the SARB’s. We now believe that CPI risks are to the upside relative to the SARB’s estimates given a volatile rand and oil price assumption. As such, we believe the risk now is that the SARB has capitulated too far in its inflation forecast. That is, it has moved from a headline inflation forecast that was too high to a forecast that is too low for 2019. We expect a gradual uptick in CPI in 2019, to average 5.2% due to low base effects, with downside risks dependent on the currency and international oil prices. We also expect a further rate hike by the SARB in the current year as a result of still-elevated inflation expectations, and believe risks to the SARB’s inflation outlook are now to the upside.

• The USDZAR appreciated by 7.4% in January, quashing almost half of the 15% that it had lost in 2018. While we maintain a fair-value range of R14.00-R15.00/USD as our strategic view, tactically, the USDZAR could strengthen in the near term before moving weaker and back within our targeted range. The USDZAR could test the R13.18/USD mark  in the near term. However, we do not believe rand strength will be sustained over the medium term, with rand support close to R13.85/USD and R14.10/USD. Technical indicators appear stretched as well, with the RSI at the most overbought level since January 2018.