The US economy continued to recover from the first half of the year. The US unemployment rate fell to 6.1% in August from 6.2% in July. Consumer confidence in the US dipped slightly as job creation and home sales reduced. In the UK, growth continued as retail sales increased, the unemployment rate dropping more than expected and house prices rising. In contrast, growth in the Eurozone remains weak. Germany continues to deal with the impact on the trade and confidence in the region due to the Ukraine conflict and the sanctions against Russia. Manufacturing conditions in the Eurozone have been deteriorating over the last three months. Locally, as expected the Monetary Policy Committee left the interest rate unchanged. The decision to keep the repo rate unchanged was influenced by the downward revision in the SARB's GDP growth forecast and better than expected inflation data. SA Reserve Bank Governor, Gill Marcus announced that she will be stepping down from her position.

Contrary to market expectations, CPI ticked up slightly to 6.4% year-on-year from 6.3% the previous month. The upward movement was mainly due to food price inflation and new vehicle prices. Core inflation (which excludes food, energy and petrol costs) rose again for the third consecutive month to 5.8% year-on-year from 5.7% the previous month. PPI inflation dropped again from 8.0% the previous month to 7.2% year-on-year. The components involved in the drop in PPI were coke, petroleum, chemical, rubber and plastic products.

Growth in Private Sector Credit Extension (PSCE) slowed to 8.8% year-on-year from 9.8% the previous month. The biggest contributor to PSCE was loans to companies, where growth slowed to 15.1% from 17% the previous month. The gradual slowdown in loans to households continued, reducing to 3.6% from 4.1%. Vehicle sales increased surprisingly to 11.5% year-onyear from -1.4% the previous month while money supply reduced from 6.9% the previous month to 6.4% year-on-year.

The global growth recovery remains varied across developing and developed countries. The US and the UK have been improving while the Eurozone has remained weak due to the conflict between Russia and Ukraine. Locally, inflation remained outside the Reserve Bank target limit and the rand remains a key risk to inflation. The SARB kept the repo rate unchanged at the last MPC meeting in September; however the market is pricing in at least a 50 basis point increase in interest rates by the end of next year. Domestic issuers of fixed income assets are coming under pressure, with auctions clearing at or above indicated spreads over Jibar - a phenomenon that has not been seen in the market for the last while! We expect further spread widening in the coming months. The fund is well invested for a flat to rising interest rate cycle.

The Nedgroup Investments Core Income Fund continues to be exposed largely to banks (88% of the fund) while 12% of the fund is in government, parastatal, conduit and corporate debt. The September 2014 gross return was 0.57% September

In the US, the first quarter growth numbers came out much weaker than initial estimates suggested. GDP was estimated to have contracted by 2.9% quarter-on-quarter. Most of the decline was due to the dreadful weather during the quarter, which disrupted output and ran down inventories. However, some momentum has returned, retail sales rose in May, house prices rose more than expected and the unemployment rate was steady at 6.3%. News in the UK remains positive, manufacturing PMI remained above the key 50 level and unemployment rate fell to 6.6% in April, its lowest level since January 2009.

Locally, the longest strike in South Africa's 130 years of mining history is finally over, but the impact of the strike will be felt for some time to come. It is estimated that companies lost R24bn and workers sacrificed R10.7bn in earnings. Fitch lowered South Africa's outlook to negative from stable, the main reasons was weak GDP figures, rising public indebtedness and failure to narrow the current account deficit. S&P also downgraded SA's foreign currency credit rating by one notch from BBB to BBB- with a stable outlook and the local currency rating from A- to BBB+.

The rising movement in inflation continued in May. CPI rose to 6.6% year-on-year from 5.9% in the previous quarter, well above the SARBs 6% limit. The increases in CPI were led by higher food prices. For the third consecutive month, core inflation remained unchanged at 5.5% year-on-year. The major risk to inflation in South Africa is the rand and the rising oil prices. PPI rose over the quarter however the figures that came out in June of 8.7% year-on-year were lower than market expectations of 9%.

Money supply was higher in May at 7.6% compared to the previous quarter of 5.9% year-on-year. Private sector credit extension came down from the previous quarter by 0.4% to 8.3% year-on-year. Household credit growth decreased for the second consecutive month to 4.3% year-on-year from 4.6% in the previous month. The slowdown in household credit extension is due to the stricter credit criteria used by lenders as bad debts have increased. However, the lending to corporates increased to 13% from 12.5% year-on-year.

Though the infamous 5-month platinum strike is over, there is however a threat of strikes in other industries as NUMSA has already declared a strike starting in July. The downgrade and negative outlooks from S&P and Fitch may affect foreign flows into South Africa. The SARB continued a hawkish tone, emphasizing that interest rate will have to increase to the help the high inflation.

The Nedgroup Investments Core Income Fund continues to comfortably out-perform its benchmark. The Fund continues to be exposed largely to banks (92% in June) while 8% of the Fund is in government, parastatal, conduit and corporate debt.

'Interest rates: rise on the way’

The US economy continued to recover from a cold winter, which affected spending, production and trade. Consumer confidence in the US picked up strongly in March, reaching its highest level since January 2008. In Europe, the region’s PMI stayed well above the 50 level in March. Confidence, however, dipped in Germany due to fears of a possible increase in conflict between the West and Russia over Ukraine. In South Africa, heavy rainfall in March unsettled production at many coal mines and resulted in power outages and restrictions, as a result mining production declined sharply. The SARB opted to keep the repo rate unchanged at 5.5%. Governor Gill Marcus hinted at further rate hikes in the near future. The decision to keep the repo interest rate unchanged seems to have been influenced by the rand’s recent strength. Overall, the expectation for global interest rates is to the upside with local interest rates being no exception.

CPI inflation edged up to 5.9% year-on-year from 5.8% in the previous month. This was in line with market expectations with further increases forecast. The reasons for the upward movement were the transport, housing, goods and services as well as food and non-alcoholic beverage categories. For the sixth successive month, core inflation remained controlled at 5.3% year-on-year. PPI inflation increased to 7.7% year-on-year from 7% beating the consensus forecasts of 7.2%.

Money supply decreased from 6.4% to 5.9% year-on-year. PSCE increased to 8.7% year-on-year from 8.2%. An uptick in the corporate growth was mostly the reason for increase in the PCSE, which rose to 12.6% year-on-year from 11.1% the previous month. Household credit slowed to 5.2% year-on-year from 5.6% the previous month. A contraction in vehicle sales is also expected to slow down household credit growth.

The Nedgroup Investments Core Income Fund continues to comfortably out-perform its benchmark. The Fund continues to be exposed largely to banks (88% in March) while 12% of the Fund is in government, parastatal, conduit and corporate debt.

The US Federal Reserve announced that tapering will continue, dropping monthly asset purchases by another US$10 billion in March. Improved growth numbers in the US and the Eurozone will provide support for future interest rate increases. The effects of the strike in the South African mining industry will be felt in the next few months, but the economic circumstances are still expected to improve later in the year. If there are no further major strikes or interruptions in power supply, stronger global demand and the weaker rand should increase production and exports. Better local growth figures will make further monetary policy tightening by the SARB more likely.

Global equity markets continued their positive trend in 2013, in spite of nervous investor sentiment that rising equity prices may advance equity markets deeper into bubble territory. Financial markets also began pricing in the unwinding of the US bond stimulation program and emerging markets experienced significant decreases in capital flows as a result. Overall, economic growth in the developed nations was encouraging in the year and after bailout fears the Eurozone is still holding itself together. Local growth figures for South Africa were however disappointing and far from the 7% growth rate targeted by the National Development Plan. Although there is increased focus by National Treasury on efficient fund allocation, local metrics such as the upwardly revised fiscal deficit, the current account deficit, low GDP growth, increased labour unrest and rand volatility over the year are a cause for concern. Hopefully, the expected recovery in the global markets in 2014 may assist in pulling up the domestic growth figures in the coming year.

CPI inflation is now well within the 3-6% SARB target after breaching the band for a few months. In comparison, there was little movement in the core inflation figures over the year compared to headline inflation. Although CPI came in lower than expected at 5.3% y-o-y in November, inflation figures are expected to increase going forward from this cyclical low. PPI also printed lower than expected at 5.8% y-o-y from 6.3%. Moderating inflation figures support the view of unchanged rates in the beginning of 2014 however there are notable upside risks to this outlook particularly from food prices.

Money supply was lower in November at 6.3% y-o-y compared to the previous quarter. PSCE also printed lower at 6.98% y-o-y. Both figures peaked in May 2013 and have been on a declining trend since. Credit figures for households have been showing a slowing trend over the year and these figures support the view of muted consumer demand. Consumer confidence was weak over 2013 compared to 2010 and 2011 and demand pressures are likely to be contained as we head into 2014.

The Nedgroup Investments Core Income Fund continues to comfortably out-perform its benchmark. The Fund continues to be exposed largely to banks (93% of the Fund) while 7% of the Fund is in government and corporate debt.

The global sentiment is for more robust growth figures in the major markets in 2014. There is ample risk in this outlook however from the Eurozone sovereign debt levels and the timing to the end of the Fed's stimulus program. Locally, the SARB maintained the Repo rate at 5% over the year and is expected to hold it at this level in the first quarter of 2014 at the least. Market expectation (reflected in the FRA market) is for rising interest rates in the short-medium term while risks for local inflation and currency movements are to the upside. The Fund is well invested for a flat to rising interest rate cycle.

The US remains central to the risk concerns of the global market and political participants. While the tapering of the US bond buying program appears to have been placed on hold for the time being, the concern is now on the possibility of default by the US government if the debt ceiling is not raised by mid-October. The implications, if the political impasse is not breached, include a possible downgrade of the US credit rating and with it higher interest rates on borrowings. Higher rates would disrupt the accommodative stance of the US Federal Reserve aimed at encouraging growth and poor growth figures in the US would have ramifications on global growth.

Locally, the South African Reserve Bank governor mentioned the US situation and reiterated concerns over domestic growth and the deteriorating inflation outlook. The SARB inflation trajectory implies an eventual return of inflation rate back into the target band. The SARB GDP forecast for 2013 is 2%. The SARB maintained the repo rate at 5% and it is unlikely there will be interest rate changes for the rest of the year.

The CPI inflation figures came in at 6.4% y-o-y, higher than the previous month but in line with expectations. The acceleration was due to higher food and transport prices. Core inflation, however, was lower at 5.1% from 5.2% y-o-y last month. PPI surprised to the upside printing at 6.7% while the consensus expected a decrease from last month's figure of 6.6%. Both CPI and PPI inflation figures have deteriorated over the quarter. Inflation is expected to peak at this month's figure and decrease over the coming months to under 6%. There is significant risk to this outlook from recent rand weakness and higher labour and input costs. The subdued core inflation figure lends weight to the view of weak demand pressures on inflation and supports the MPC decision to keep the repo rate unchanged.

Money supply continued its decreasing trend to 6.9% y-o-y from 7.36% last month. PSCE however bucked its decreasing trend (since May) and came in higher than consensus expectations at 8.2% y-o-y. The increase in PSCE figures was mainly supported by credit extension to corporates which jumped to 10.1% y-o-y from 8.6% the previous month. Household credit extension continues to moderate and will likely feed into subdued consumer demand figures. Though the increase in corporate credit is encouraging, it is still early to view this as an indicator of an improving economy. The recent credit figures support the current accommodative monetary policy stance of the SARB.

The Nedgroup Investments Core Income Fund continues to comfortably out-perform its benchmark. The Fund continues to be exposed largely to banks (96% of the fund) while 4% of the fund is in government and corporate debt.

We expect interest rates to be flat for the remainder of the year. The focus in the upcoming month will be the politics surrounding the raising of the debt ceiling in the US, in addition to the continuing debt issues in the Eurozone. In the domestic market, the SARB maintained the repo rate at 5% - as expected - but emphasised the risk to the inflation and economic growth forecast. The current market data supports the accommodative stance of the MPC and we do not expect a change in interest rates for the remainder of the year. The fund is well invested for a flat to rising interest rate cycle.