Johannesburg - Despite the forward market appearing
to price in a 6.50% end to the rate cut cycle, Absa Capital feels that a 7%
"terminal" repo rate should rather be expected.
"Poor April manufacturing data last week provided support for a significant
(16 basis point) rally in the forward rate agreement (FRA) curve. We estimate
that the (...) FRAs are now once again pricing in a 6.50% end to the rate
cut cycle. Data from last week also showed business confidence falling to a
fresh 10-year low of 26 in the second quarter this year from the first quarter's 27. We see no reasons in this data
for the MPC to deviate from the view stated after the May MPC meeting that
there was little room for further 'significant' rate cuts," said the Absa
Capital market analysts.
"In our view, the large number of holidays in April exaggerated the
manufacturing decline, with PMI data suggesting that May will see some
improvement. We therefore believe that the second quarter is unlikely to see a repeat of the first quarter's dire GDP performance," they say.
However, Absa Capital continues to caution against paying FRAs at current
levels.
"This week sees the release of April retail sales (Wednesday) and the
SARB's Quarterly Bulletin (Thursday), which will contain the expenditure side
GDP data for the first quarter this year among other things. Both releases are likely to highlight
the week state of consumer demand and could spur further rallies in the FRAs,"
say the analysts.
The week also saw substantial bond and swap curve rallies with good
appetite for bonds seen from domestic investors following the sell-off over the
past few weeks, while supply has been temporarily curtailed by the lack of an
auction this week - due to the 16 June public holiday.
"Government comments have also been supportive of the rates market with
President Zuma twice (Sunday June 7 and Friday June 12) speaking against trade
union threats of a general strike and agitation against current economic
policy," concluded the analysts.
South Africa's repo rate is currently at 7.5%, with the next decision due
on June 25.
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