When European Central Bank (ECB) president Mario Draghi declared that the bank’s monetary policy was “working to build reflationary pressures” and the lower than expected inflation would be “temporary as long as policy remained persistent and prudent” at the ECB Forum in Sintra, Portugal, the market interpreted his comments to mean monetary policy would not be eased further. In anticipation of policy tightening, investors bought the Euro against the US dollar resulting in a strengthening of over 7.5% and 10-year government bonds in Germany rose from 0.25% to just over 0.6%. This was clearly an undesired result because over the next two months European central bankers and Fed officials made it clear that policy normalisation will neither be quick nor synchronised. Within the Governing Council, Bundesbank President Jens Weidmann, is a notable critic of ultra-loose monetary policy and has been calling for “a quick and orderly exit” from asset purchases. The central banker’s symposium in Jackson Hole delivered very little for the markets, Janet Yellen spoke about the need to preserve regulations which had banking safer while Mario Draghi warned about trade restriction.

The third quarter has also been marked by an increase in tensions on the Korean peninsula. North Korea test fired missiles over Japan and has even threatened to test a hydrogen bomb. Trump used his first speech before the General Assembly of the United Nations to escalate tensions further when he threatened to “totally destroy North Korea”. US 10-yr Treasuries rallied as the demand for safe assets increased with the US 10-year rallying from 2.2% to about 2.03%. The gains did not last however as the FOMC September statement was more hawkish than expected. The market had pared back rate hiking expectations from 60% to just 20% for 2017, but the FOMC characterised the low inflation numbers as temporary and reiterated their intension to raise the Fed Funds rate one more time before the end of the year. The FOMC also stuck to their earlier plan to reduce the size of their balance sheet. In the UK the pound strengthened some 8% against the US dollar as inflation surprised to the upside at 2.9% in August. The Bank of England is now expected to raise rates in the 1Q2018.

The 2017 hurricane season has been one of the strongest observed in recent years. Hurricane Harvey affected oil refineries in Texas, leading to a spike in gasoline prices. Later in September we saw the Brent oil price touch $59 per barrel from $48 in June, after Kurds in northern Iraq held a referendum vote for independence. Turkey threatened to cut off the oil pipelines passing through its territory, Kurdish people can also be found in Turkey.

In July, Finance Minister Gigaba announced his 14 point Inclusive Growth Action Plan. The rating agencies and independent economists pointed out that the minister’s priorities will only have an indirect impact on growth and failed to address the “elephant in the room” - poor consumer and business confidence. The minister’s response to a bailout request from SAA after yet another lender refused to lend money to the struggling airline, despite government guarantees, highlights the magnitude of the credibility gap between business and government. SAA is a poster child for the need for SOE reform and how contingent liabilities become actual liabilities of the guarantor.

Bond market review

The Reserve Bank surprised the markets by delivering a repo rate cut of 0.25% to 6.75% at its July meeting. The decision was supported by inflation reducing from 5.4% to 5.1% in June with further moderation expected. Reserve Bank was also surprised by the very weak growth outcome of the first quarter of -0.6%. Against market expectations, the MPC left the repo rate unchanged at 6.75% at the September meeting. The decision was particularly confusing because most of the factors that had previously been used to justify a rate move had pointed to a rate cut, such as long-term inflation expectations. The bank’s own projections increased by 0.1% for both 2018 and 2019. SARB expects inflation to average 5.2% and 5.3% respectively. However long-term inflation as surveyed by the BER declined from 5.9% to 5.6%. The main constraint to economic growth is not monetary policy, but a lack of confidence on the part of consumers and businesses. The front-end of the yield curve re-priced aggressively higher leaving the curve flatter after many months of steepening.