The Week Ahead of 5 February 2019

  • The US economy remains strong.

    A guy looking into the distanceUS nonfarm payrolls rose by a whopping 304k jobs in Jan, way above consensus forecasts of around 165k. However, it should be noted that Dec 2018’s figures were revised down markedly, from 312k to 222k. Nevertheless, it is still a very strong showing, especially in such a late stage of the economic cycle. Of concern to the US Fed in terms of its monetary policy is the large increase in wage rates-up 3.2% to $27.56/hour in Jan. If this trend continues throughout the year, the Fed Chairman’s current dovish stance on interest rates may have to be revised.

    Geopolitical tensions rose a few notches at the weekend when firstly the US and then almost immediately Russia withdrew from the Intermediate-Range Nuclear Forces (INF) treaty. The Russians also announced that it would begin building nuclear weapons previously banned under the INF treaty and would no longer talk to the US about matters related to nuclear arms proliferation. The most concerning aspect of this event is that it could well trigger a return to the so-called “cold war” stalemate between nuclear powers that existed from the 1950s until the late 1990s, with an added new toxic ingredient-China-into the equation.

    The S&P 500’s January rally was largely powered by an unwinding of the highly oversold position that existed at late Dec 2018 and expectations that the US Federal Reserve would adopt a much more dovish stance on interest rates. Fed Chairman Powell’s remarks were indeed interpreted as being sufficiently dovish to justify the strength in the S&P 500 but from here on in, a lot more is required if the momentum is to be sustained. Firstly, US corporate earnings season needs to surprise on the upside and secondly, there needs to be meaningful progress in the US-China trade negotiations. Outside of the US, a conclusion to Brexit negotiations between the UK and EU would also probably have a positive impact on the S&P 500’s direction.

    The S&P 500 rose by 2.3% during the course of last week to close at 2 706.5. It is now 7.7% below its all-time high of 2 930 set on Sep 20 2018 and is out of correction territory.

    The JSE All Share Index was virtually flat last week, falling by 0.2% to close at 53 930. The index is still in correction territory, being 12.6% below its peak of 61 685 on 25 Jan 2018. The index received a temporary boost from US Fed Chairman Powell’s dovish remarks on Wed 30 Jan, as it suggested that US interest rates may well have peaked for the time being and risk-on investment is back in vogue. However, by Fri 1 Feb, the euphoria had all but blown over and the Alsi was treading water once again.

    Absa CEO Maria Ramos announced that she would be retiring at the end of Feb 2019, just after reaching the age of 60. This was interesting from a number of perspectives. Firstly, normal retirement age at Absa is 63, not 60. Secondly, Ramos is leaving on one month’s notice, rather than the traditional three or even six months. Lastly, she is being replaced by an acting CEO-Rene van Wyk-and there was no mention of a permanent successor. Adding to the intrigue has been the suggestion in the media that Ramos is about to be offered a big position in Cyril Ramaphosa’s administration. The Absa share price rose sharply on the announcement.

    The ZAR strengthened all week, in line with most other emerging market currencies, closing at 13.32/USD. The next few weeks and months will be critical for the ZAR, considering how many possible negatives may be thrown in its path. The state of the nation (SONA) speech will be delivered by President Cyril Ramaphosa on Feb 7 and the national budget will be unveiled on Feb 20 by Finance Minister Tito Mboweni.  Q4 2018 GDP figures will be released on 6 Mar and the general election will be held in May.  All of these events have the capability to move the currency either way, so require to be watched carefully.

    Economic data releases this week;

    • 4 February 2019
      • SACCI Business Confidence Indicator - January
    • 5 February 2019
      • Standard Bank PMI - January
    • 7 February 2019
      • SA Foreign Exchange Reserves