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Key SARB Rate decision this week

by , 14 July 2014

Last week was rather volatile as local and international news kept the market under pressure. On the local front, the NUMSA strike had its first full week. When the strike first started, I had expect it to be reasonably short as it seemed that a compromise increase of about 10% would be acceptable to both parties. However, as the week progressed, I have changed my view.

No end in sight

The employers current offer is for 10% in year one and 9,5% in year two. Effectively a 10% increase. This has been rejected by unions who are now asking for 15%, up from their earlier demands of 12%. This may mean that the strike has become increasingly politicised, which would likely lengthen its duration.

We also got local mining and factory data on Thursday. It was disappointing on both fronts. Most troubling, I believe was the factory data. Since these numbers were for May, well before the current strike action, I would have expected a slight uptick in production in anticipation of the strike. Instead we had a significant pullback, which could indicate that the sector was weak to begin with, and is only likely to get worse during the current labour unrest. 

Portugal’s Banking Woes

On the international front, we had some troublesome news out of both Europe and the US. The US Fed has come out and said that it will end its bond buying program by October, a couple months earlier than some had been hoping for. There is a silver lining to this cloud however. The fact that the Fed is comfortable ending QE within a couple months speaks volumes about the strength of the US economy.

In Europe, a Portuguese bank sparked a bit of a panic on Thursday. A company that owns about 25% of Portugal’s second largest bank Banco Espirito Santo, didn’t pay one of its debts on time. This causes the market to speculate that there may be an issue with the bank as well. We say Portuguese government bond yields spike up as a result. The panic also affected its neighbours Italy and Spain, though to a lesser extent. By Friday however the panic had diminished and we saw a slight drop in yields.

Don’t be surprised by a hike

This week the SARB rate decision is likely to be a critical event for local markets. Expectations are for a 25 basis point rate hike. Despite the fact that the economy remains weak, the SARB primary mandate is price stability. Given the fact that inflation remains well above 6%, it is likely that the Reserve Bank will feel it has no choice but to act. The Bank usually moves by 0,5% but a smaller mover has been proposed for some time and the Governor Gil Marcus has hinted at 25 basis point moves for some time

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Key SARB Rate decision this week
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