Taquanta Asset Management
In the US, the Federal Open Market Committee raised the target range for the federal funds rate to 0.50-0.75% from 0.25-0.50% in a unanimous decision due to expectations of further labour market strength and inflation. The Fed's tone was more hawkish indicating that they expect to tighten monetary policy at a faster pace in 2017 than they had forecast at their last meeting. In the UK, CPI surprised on the upside to 1.2% year-on-year from 0.9% the previous month.
Inflation is currently at a two-year high and the key upward drivers were a surge in import prices, higher prices of clothing, household goods and equipment, as well as rising fuel costs. UK input PPI (measuring change in the prices of materials and fuels bought by UK manufacturers for processing) remained high at 12.9% year-on-year, from 12.4% the previous month. The growth outlook in the Eurozone is on a moderate pace as business investments picked up, supported by favourable financing conditions. Eurozone employment increased by 0.2% in the third quarter of 2016; this marks the highest number of employed people in the EU since the financial crisis in 2008. Locally in South Africa, the SARB's quarterly bulletin reflected a worsening current account deficit, subdued economic activity, weak employment creation, higher inflationary pressure, a sharply weaker rand, dismal trade gains as exports slumped, and a moderate under collection of tax. The current account deficit widened to 4.1% of GDP in the third quarter, from 2.9% in the previous quarter. South Africa's headline CPI inflation increased to 6.6% year-on-year from 6.4% the previous month. On a month-on-month basis, CPI increased by 0.3%due to increases in transport inflation. Food price inflation remained in double digits in November (11.8% year-on-year, previously 12.0%). Core inflation remained unchanged at 5.7% year-on-year. Producer price inflation (PPI) for final manufacturing products increased to 6.9% year-on-year, slightly more than expectations, from 6.6% the previous month.
Favourable weather conditions are expected in the near future and could see white and yellow maize harvests increase, which will moderate food price inflation and help to reduce CPI and PPI inflation going forward. South African private sector credit extension (PSCE) reduced even further in November. PCSE slowed sharply to 4.6% year-on-year from 6.3% in October. It is the weakest since November 2010. Household lending is expected to remain subdued due to weak levels of consumer confidence and stricter lending criteria. Money supply (M3) also reduced to 4.67% year-on-year compared to 6.62% the previous month. The yield on the Nedgroup Investments Core Bond Fund as at 31 December 2016 was 9.63%.