Oil price increases dominated the local and international economic environment during the last quarter, mainly as a result of potential production and delivery concerns due to hurricane Katrina. Brent crude subsequently rose above $70pb before dropping to $62bp.

The higher oil prices will continue to impact inflation, which has already deteriorated over the last quarter. Inflation, as measured by CPIX, was reported at 4.8% (3.9% at end June). CPI showed inflation at 3.9% (3.3% at previous quarter). Manufacturer's inflation as per PPI was at 4.2% (2.4% at previous quarter). The petrol price increases over the last four months has taken the current petrol pump price in excess of R6 per litre.

The rand was stronger than the last quarter R6.35 (R6.66) versus the US dollar. However, this did little to halt the petrol price hikes, which is seen as the main catalyst for higher inflation. M3 money supply in August grew 19% year-on-year and PSCE was at 23% year-on-year.

Inflation is expected to be above 5% for September. Over the longer-term persistently high international oil prices, continued growth in domestic spending and strong credit demand will push inflation towards the upper end of the target range.

Money market rates ticked up slightly from the previous quarter-end. Money market yields ended the month 30 Sep 05 (30 Jun 05) as follows: 3-month NCD 6.85% (6.85%); 6-month NCD 7.05% (6.90%); 9-month NCD 7.20% (7.00%); 12-month NCD 7.30% (7.05%); 3-month Jibar 6.96% (6.95%); Prime 10.50% (10.50%).

The yield on the benchmark R153 government bond was higher at 7.87% from 7.57% at the June quarter-end.

The yield on the fund remained fairly steady compared to the previous quarter, with short-term rates marginally up towards quarter end. The yield curve is still relatively flat, suggesting that the market is uncertain of future direction. Should further inflationary pressure arise, rates may rebound sooner rather than later. The fund has been positioned for flat rates for the remainder of 2005 and early 2006.

Although the rand managed to strengthen during August, partially offsetting some of the oil price increases, it appears that the probability of any rate cuts in South Africa this year are much reduced. The South African Reserve Bank will most likely be watching the inflationary effects of oil and GDP growth, before making any further rate moves for the rest of 2005 or early 2006. No change in the repo rate is expected at the October Monetary Policy Committee meeting. We will consequently position the portfolio for rates remaining on hold over the medium term.

Oil price increases dominated the local and international economic environment during August, mainly as a result of potential production and delivery concerns due to hurricane Katrina. Brent crude subsequently rose above $70pb and has remained high since, increasing concerns of inflationary pressures worldwide.
GDP accelerated to 4.8% in the second quarter, from 3.5% in the first quarter - due to a positive turnaround in the manufacturing sector, which grew 7.3% in the second quarter compared to a contraction of -1.9% in the first quarter. M3 money supply in July grew 19.86% year-on-year from 17.05% in June.
Reported CPIX came in unexpectedly 0.3% year-on-year higher (at 4.2%) than consensus in July. CPI was higher at 3.4% vs. 2.8% in June. The 29c/l increase in the petrol price, which pushed transport costs up by 2%, was partly responsible for the large monthly rise. Another petrol price increase in August, and a potentially large shortfall in the Equalisation Reserve Fund, should also contribute to further inflationary pressures from this sector over the next few months.
The rand managed to strengthen again during August, ending at R6.35 versus the USD, from R6.56 at the end of July.
Money market rates ticked up slightly from the previous month-end. The money market yields ended 31 August 2005 as follows:3-month NCD 6.90% (31 July 2005 6.90%); 6-month NCD 7.00% (31 July 2005 6.90%); 9-month NCD 7.05% (31 July 2005 7.00%); 12-month NCD 7.20% (31 July 2005 7.00%); 3-month Jibar 7.00% (31 July 2005 7.00%); Prime 10.50% (31 July 2005 10.50%).
The yield on the benchmark R153 government bond was marginally higher at 7.62%, from 7.56% at the July month-end.
The yield on the fund remained fairly steady compared to the previous month, with short-term rates marginally up. The yield curve is still relatively flat, suggesting that the market is uncertain of future direction. Should further inflationary pressure arise, rates may rebound sooner rather than later. The fund has been positioned for flat rates for the remainder of 2005 and early 2006.
Although the rand managed to strengthen again during August, partially offsetting some of the oil price increases, it appears that the probability of any rate cuts in South Africa this year are now greatly reduced. The South African Reserve Bank will most likely be watching the inflationary effects of oil and GDP growth before making any further rate moves for the rest of 2005 or early 2006.
We will consequently position the portfolio for rates remaining on hold over the short to medium term.

The inflation rate (as measured by CPIX) was at 3.5% from 3.9% previously. The change in CPI was at 2.8% from 3.3%, while the change in PPI was at 2.3% from 2.4% previously. The rand ended the month a little stronger at R6.56 versus the USD, than the previous month close at R6.66.
The improved inflation data, along with a steady rand has turned the sentiment around, with most analysts forecasting a rate cut by the October Monetary Policy Committee meeting.
Money market rates changed marginally from the previous month-end and money market yields ended the month 31 Jul 2005 compared with 30 Jun 2005 as follows:
3-month NCD 6.90% (6.85%); 6-month NCD 6.90% (6.90%); 9-month NCD 7.00% (7.00%); 12-month NCD 7.00% (7.05%); 3-month JIBAR 7.00% (6.95%); and Prime 10.50% (10.50%).
The yield on the benchmark R153 government bond was marginally lower at 7.56% from 7.57% at the June month-end.
The yield on the fund has decreased with lower market rates. The yield curve is relatively flat, suggesting that the market is uncertain as to how far it can still drop. Unless more than one cut is expected, rates may rebound sooner than later. The fund has been positioned for flat rates for the remainder of 2005, but going forward, the possibility of a rate cut will be factored in.
CPIX is set to remain within its target range during the course of this year. The high oil price remains a concern but there may now be room for a rate cut later this year. We believe that any rate cut, should it materialise, will most likely be at the October Monetary Policy Committee meeting. We will consequently position the portfolio for this probability.

The rand has weakened over the quarter to R6.66 from R6.24 in March. The latest inflation data, as measured by CPIX, indicate that the rate of inflation is 3.9% (previous quarter: 3.1%). CPIX is expected to remain within the target range of 3% - 6% for the next 12 months. CPI inflation increased by 3.3% (previous quarter 2.6%) y-o-y. PPI increased by 2.4% (1.2% in March).
The positive sentiment (following the relatively good inflation data) has been tempered by a weaker rand, high international oil price ($60pb) and increasing credit extension. Following the rate cut in April, money market rates were lower than at the previous quarter-end.
Money market yields ended the month (30 June 2005) as follows:
3-month NCD 6.85% (31 March 2005 7.45%)
6-month NCD 6.90% (31 March 2005 7.50%)
9-month NCD 7.00% (31 March 2005 7.50%)
12-month NCD 7.05% (31 March 2005 7.70%)
3-month Jibar 6.95% (31 March 2005 7.55%)
Prime 10.50% (31 March 2005 11.00%)

The yield on the benchmark R153 government bond was also lower at 7.57% from 8.25% at the December month-end.
The fund felt the full impact of the unexpected rate cut. The possibility of another rate cut exists, but expectation is that rates will remain flat for the remainder of the year. The focus, over the next few months, will continue to be on short to medium-term assets.
CPIX is set to remain within its target range during the course of this year. The weaker local currency and the higher oil price will lead to further bearishness in the market. The probability of a further rate cut this year has diminished.

The month of May was marked by worsening economic data, but still generally better than forecasts. The biggest concern were the credit numbers as reflected by the M3 and Private Sector Credit Extension (PSCE). These numbers were at 13.91% and 20.35%, versus forecasts of 12.00% and 17.60%.
The better than expected inflation data was met with little market reaction, which had earlier moved with the weaker rand. Rather than focussing on the good inflation data, the market considered the negative impact the weaker rand and the relatively high oil price will have on inflation going forward. The inflation rate (as measured by CPIX) was at 3.8%, from 3.6% previously. The change in CPI was at 3.4% from 3.0%, while the change in PPI was marginally lower at 1.8% from 1.9% previously.
US dollar strength weighed heavily on the local currency, which ended the month at R/$6.79 (April = R/$6.06).
Money market rates were marginally changed from the previous month-end.
The yield on the benchmark R153 government bond was higher at 7.99% from 7.88% at the April month-end.
The yield on the fund has breached the 7.0% level on the downside in line with market rates. This is expected to remain the case for much of the remainder of this year, while rates remain flat. The fund is positioned for a flat rate cycle and we do not foresee a change until the last quarter of this year.
CPIX is set to remain within its target range for the next year. There is a small chance of a rate cut by the August Monetary Policy Committee. However, this may be unlikely with credit extension on the rise, inflation off its lows, and the fact that further rate cuts may not necessarily have any meaningful impact on the level of the rand. No rate cut is foreseen at the June Monetary Policy Committee Meeting. We expect rates to remain flat for the remainder of the year and will position the fund accordingly.

The South African Reserve Bank (SARB), following their bi-monthly Monetary Policy Committee meeting, surprised the market by cutting the official repo rate by 50bp to 7.00%. This rate cut was a change in stance, with the importance of the local currency level and economic growth highlighted as key to the Monetary Policy Committee decision. Consumer inflation (as measured by CPIX) bottomed out at 3.1% with the latest figure being 3.6%. CPI was at 3.0% from 2.6%, while PPI was higher at 1.9% from 1.2% previously.
The rate cut appears to have had the opposite impact on the local currency, although the pending Barclays-ABSA deal is weighing heavily on it. The rand strengthened to 6.06 (6.24 at the end of March) versus the US dollar.
The decrease in international oil prices is also a major positive support for the rate cut but it is too early yet to suggest that the heat is off the oil price.
Money market rates were lower than at the previous month-end and yields ended the month (30 Apr 2005) as follows:
3-month NCD 6.85% (7.45% 31 Mar 2005)
6-month NCD 6.95% (7.50% 31 Mar 2005)
9-month NCD 7.00% (7.50% 31 Mar 2005)
12-month NCD 7.00% (7.70% 31 Mar 2005)
3-month Jibar 6.95% (7.55% 31 Mar 2005)
Prime 10.50% (11.00% 31 Mar 2005)

The yield on the benchmark R153 government bond was lower at 7.88% from 8.25% at the previous month-end.
The rate cut was unexpected and has had a marginal impact on the fund thus far. The portfolio is now being positioned for flat rates for the remainder of 2005. The focus, over the next few months, will continue to be on medium-term assets.
CPIX is set to remain within its target range during the course of this year. The surprise rate cut leaves the door open for more such cuts. However, this may be unlikely with credit extension on the rise, inflation off its lows and the fact that further rate cuts may not necessarily have any meaningful impact on the level of the rand. No rate cut is foreseen at the June Monetary Policy Committee meeting. We expect rates to remain flat for the remainder of the y ear and will position the fund accordingly.

A historically low CPIX figure of 3.1% for February was met with a realisation that the (inflation) tide is about to turn. The local currency has always been a key driver in the direction of inflation - it weakened, albeit dollar strength, to R6.24 (from R5.66 at the end of December) versus the US greenback. The currency impact becomes more significant when international oil prices (which has been heading toward $60per barrel) keep rising. These factors have, no doubt, cast aside any hopes of further rate cuts with increased probability of a rate hike sooner rather than later.
The latest round of inflation data was lower than forecast. The latest data released has CPI at 2.6% y-o-y (3.7% at the previous quarter-end) with CPIX at 3.1% y-o-y (4.6% previously). PPI decreased to 1.2% versus 2.5% previously.
Money market rates were higher than at the previous quarter-end. Money market yields ended the month 31 Mar 2005 as follows:
3-month NCD 7.45% (7.40% 31 Dec 2004)
6-month NCD 7.50% (7.35% 31 Dec 2004)
9-month NCD 7.50% (7.30% 31 Dec 2004)
12-month NCD 7.70% (7.30% 31 Dec 2004)
3-month Jibar 7.55% (7.47% 31 Dec 2004)
Prime 11.00% (11.00% 31 Dec 2004)
The yield on the benchmark R153 government bond was higher at 8.25% from 7.81% at the December month-end.
The curve has started taking shape (positively-sloped), which indicates higher rates going forward. The fund has been positioned for this scenario. Over the next few months, the focus will continue to be on short- to medium-term assets.
CPIX is set to remain within its target range during the course of this year. The weaker local currency and the higher oil price will lead to further bearishness in the market. No rate cut is foreseen at the April Monetary Policy Committee Meeting. We expect rates to start moving higher and the fund is ideally positioned for this with the focus on short-term instruments.

The year ended with a stronger currency, albeit much US dollar weakness, lower international oil prices and, locally, slightly higher than expected inflation numbers.
The South African Reserve Bank (SARB) decided to leave rates unchanged at their latest bi-monthly Monetary Policy Committee meeting. The market (having already discounted a 50bp rate cut), is looking to the February Monetary Policy Committee meeting for this rate cut to materialise.
The latest round of inflation data was slightly higher than the previous numbers. However, CPIX is expected to remain well within the target range (3%-6%) for the next year to eighteen months. The latest data released, has CPI at 3.7% y-o-y (2.4% previously) with CPIX higher at 4.6% y-o-y (4.2% previously). PPI increased to 2.5%, versus 1.9% previously.
The rand closed the month at R5.66 versus R6.43 (at the end of September) to the US greenback.
Money market rates were little changed from the previous quarter-end, ending the 31 Dec 2004 as follows:
3-month NCD 7.40% (7.15% 30 Sep 2004)
6-month NCD 7.35% (7.30% 30 Sep 2004)
9-month NCD 7.30% (7.40% 30 Sep 2004)
12-month NCD 7.30% (7.50% 30 Sep 2004)
3-month Jibar 7.47% (7.25% 30 Sep 2004)
Prime 11.00% (11.00% 30 Sep 2004)
The yield on the benchmark R153 government bond was lower at 7.81% from 8.80% at the previous quarter-end.
The fund has been positioned for a flat rate cycle and has been investing in medium-term assets. The curve has been relatively flat, with fair value in the three to six month area.
CPIX is set to remain within its target range during the course of 2005. The market sentiment remains positive and with the oil priced at lower levels, the rand holds the key to the direction of interest rates. We expect rates to remain unchanged at the next two Monetary Policy Committee meetings. The focus will be on medium-term investments.

November ended on a bullish note as a result of a strong local currency, stable inflation and an improved oil price. The majority of economists see no change at the South African Reserve Bank's December Monitary Policy Committee meeting. However, the market is discounting a 50bp cut in the repo rate.
The latest round of inflation data was slightly higher than the previous
numbers. However, CPIX is expected to remain well within the target range (3-6%) for the next year to eighteen months. The latest data released has CPI at 2.4% year-on-year (1.3% previously) with CPIX higher at 4.2% year-on-year (3.7% previously). PPI increased to 1.9% versus 1.4% previously.
The rand closed the month at R5.78 versus R6.11 (at the end of October) to the US greenback. Money market rates started discounting a cut in the official repo rate and ended the month lower.
Money market yields ended 30 Nov 2004 as follows: 3-month NCD 7.35% (7.35% 31 Oct 2004); 6-month NCD 7.30% (7.45% 31 Oct 2004); 9-month NCD 7.30% (7.50% 31 Oct 2004); 12-month NCD 7.25% (7.55% 31 Oct 2004); 3-month Jibar 7.45% (7.45% 31 Oct 2004); Prime 11.00% (11.00% 31 Oct 2004)
The yield on the benchmark R153 government bond was lower at 8.26%, from 8.56% at the previous month-end.
The fund has been positioned for a flat rate cycle and has been investing in medium-term assets.
CPIX is set to remain within its target range for the remainder of this year and for most of 2005. The market sentiment is, therefore, a little more positive with the local currency an important variable in the direction of rates during 2005. We expect rates to remain unchanged at the next two Monitary Policy Committee meetings. The focus will be on medium-term investments.