The sentiment in the money market has changed significantly during November. The market took cognisance of the Reserve Bank Governor’ comments on inflation with regard to the secondary effects of the sharp oil price rise during the year. Consequently, 3 month to 12 month money market rates rose as the market priced in the possibility of the repo rate hike after the December MPC meeting.

However, inflation figures released for October were well below market expectations, with CPIX at 4.4% year-on-year. This coincided with Vodafone’s offer to increase their holding in Vodacom to 50% and subsequently a significant strengthening in the rand against most currencies. With the local petrol price falling sharply in both November and December as the international oil price corrected downwards, the outlook for inflation improved significantly.

Money market rates reacted to the bullish news and corrected down to October levels. The latest comments by the Governor also supported the positive turn around in rates that reflect an unchanged repo rate.

Total PSCE slowed to 19.5% year-on-year in October, while M3 grew by 16.4% year-on-year. The securitisation of mortgages by Standard Bank of R4.5 bn caused the growth rate in PSCE to decline. Real GDP growth slowed to 4.2% in 3Q05 from a revised 5.4% in 2Q05. Agriculture, construction and wholesale and retail trade made the biggest contribution.

The investment objective of the fund is to provide a medium whereby investors can obtain undivided participation in a diversified portfolio of such money market instruments as defined from time to time. The primary performance objective of the fund is to obtain as high a level of current income as is consistent with capital preservation and liquidity.

The PSG Money Market Fund actively invests in South African cash deposits and highly liquid, fixed-interest securities such as Negotiable Certificates of Deposit, Bankers' Acceptances, Treasury Bills, Debentures, Gilts and Semi-Gilts. A spread of investments in top-quality financial instruments and institutions moderates risk through diversification. Only short-term instruments with a maturity of one year or less are permitted, however the fund will maintain a weighted average maturity of no more than 90 days. This reduces the fund's exposure to price fluctuations and interest rate volatility and ensures added capital stability. Returns consist of interest income. The fund aims to outperform traditional savings vehicles such as fixed deposits and call accounts over the long term and to provide capital security, a steady income yield and high liquidity.

The next Monetary Policy Committee Meeting may give the market a clear direction on where interest rates are going over the next year. The sharp rises in oil prices have significantly increased the risk of inflation rising faster. The need for stronger economic growth to lower unemployment versus lower inflation creates a challenging situation for monetary policy decisions.

CPIX rose to 4.8% year-on-year in August due to the impact of the sharp rise in fuel prices, while PPI rose by 4.2% year-on-year.

Year-on-year Money Supply (M3) grew by 19% and private credit by 23%. Strong consumer spending expanded vehicle and retail sales to new record levels.

Interest rates were left unchanged at the latest monetary policy meeting in mid August.

The markets’ anticipation for a further rate cut has been put on hold as the rising price of oil is having a serious impact on inflation this year. Strong growth in domestic spending on the back of sharply higher credit growth and higher wage settlements has also added to the Reserve Banks cautious approach toward lowering the repo rate.

CPIX surprised on the upside rising 4.2% year-on-year in July. The drivers of the 1% rise in the month were fuel costs, housing costs and food prices. PPI rose by 3.6% year-on-year in July with rising petroleum, electricity and agricultural prices making the largest impact.

The next Monetary Policy Meeting in mid August will provide the direction for money market rates. The outcome will depend on which economic policy priorities to give the most weight to. If the emphasis is to stimulate economic growth and employment, then a further cut in the repo rate can be expected.

Consumers appetite for debt continued in June with asset backed finance showing the highest growth. Low interest rates and a strong growth in disposable income support the current trend.

CPIX slowed to 3.5% year-on-year in June as the petrol price fell by 16c per litre and food prices declined. The rise in petrol over the next two months will drive inflation higher.

Money market rates moved sideways in June as the repo rate was left unchanged at the Monetary Policy Committee Meeting. This pattern will probably continue in July.

The South African Reserve Bank gross reserves improved strongly to $18.6bn as foreign exchange reserves increased by $1400m. In contrast the trade account showed a deficit of R2.85bn as oil imports increased markedly. The cumulative trade deficit for January to May amounts to a deficit of R7.7bn versus a surplus of R0.6bn last year.

Consumer demand for credit grew by 22.6% year-on-year in May as demand for mortgages increased by 26.3% year-on-year. The wealth effect created by rising housing prices, together with real wage increases and lower interest rates, is making consumers confident in taking on credit.

CPIX increased by 3.9% year-on-year in May with the higher petrol price and a rise in domestic worker costs the main contributors. The PPI increased to 2.4% year-on-year with fuel prices, basic metal prices and metal products driving the acceleration from 1.8% the previous month.

The rand’s weakening against a falling euro has not impacted on the money market. The market’s approach is that rates will not necessarily change as the currency weakens. Exporters are benefiting from the repricing of the rand.

The current money market rate structure with 3 month NCD’s at 6.85% and 12 month NCD’s at 7.15% reflects a neutral view on interest rates.

Economic data still confirm a very buoyant domestic economy. Where individuals were driving credit demand until March, it is noticeable that overdrafts and other borrowings by companies have also increased significantly during April.

CPIX rose to 3.8% year-on-year in April due to higher fuel prices. This was better than expected

The Reserve Bank surprised the markets by reducing the repo rate to 7% at the Monetary Policy Committee meeting in April. The adjustment in market rates was greater than the 0.5% move in the repo rate, as such a move was against the market’s perception. The 3 month NCD rate fell from 7.5% to 6.85%, while the 12 month NCD rate fell from 7.7% to 7.0%.

After inflation (CPIX) reached a low of 3.1% year-on-year in February, it increased to 3.6% in March due to rising fuel prices and education costs.

The domestic economy remains very buoyant as the lower interest rate environment has increased the demand for credit. Over the year to March 2005 mortgage and instalment credit grew by 24.2% and 21% respectively. Vehicle sales have grown by over 20% for the first four months of 2005.

The bond and money market sentiment turned negative as emerging market spreads widened during March. The rand also weakened against the major currencies. The money market yield curve shifted higher with the 3 month NCD rate rising by 10 basis points to 7.5% and the 12 month NCD rate by 45 basis points to 7.7%. Where the market previously expected a further 0.5% cut in the repo rate, the current rate structure implies an unchanged repo rate over the year.

Inflation (CPIX) reached a low of 3.1% year-on-year in February. With all fuel prices rising sharply in both March and April, we anticipate CPIX to rise to 5% over the year.

Consumer spending and demand for credit continued strong during the first quarter of 2005.

The tone in the market turned positive as the US dollar weakened again causing both the rand and domestic bonds to rally. The good CPIX figure of 3.6% in January supported the positive mood for a further cut in the repo rate in April. Longer dated NCD’s are pricing in this expectation. The market was further kept buoyant by the annual budget, as well as the massive maturity of R151 bonds.

Consumer spending remains the major driver of GDP growth. Retail sales grew by 10.3% in 2004 versus 2003. Vehicle sales continued to rise in the first two months of 2005 by 26.6% over 2004. Private sector credit grew strongly on the back of mortgage and instalment credit growth.

January started on a weaker note, as the oversold US dollar corrected sharply. The rand weakened back to the R6 per USD level and subsequently money market rates moved higher, especially at the longer end. The mood changed again when the CPI X slowed for December to 4.3% from 4.6% the previous month. The driving force was a fall in food and petrol prices. With fuel prices declining further in January, CPIX may remain low for a few more months.

The appetite for credit continued unabated in December with mortgage finance rising by 24% year-on-year. Installment credit slowed to 15% year-on-year, as the high growth rate of December 2003 was not repeated in 2004.

Retail sales are benefiting strongly from the strong credit growth. New vehicle sales increased by 20% year-on-year, as low interest rates and improved disposable income stimulated demand.

The positive sentiment in the money market was supported by the strong rand over December, which reached a new low of R5.60 per US dollar. At year end the three month NCD rate was at 7.4% and the 12 month NCD rate at 7.3%. The market is pricing in a further 0.5% reduction in rates in the first half of 2005. This reflects the market’s view of benign inflation as especially imported goods become cheaper.

On the other hand, credit growth remained strong in November with mortgages and installment credit growing by 22% annually. Retail sales have benefited strongly from the strong credit growth. One may argue that a further lowering of interest rates are not needed as it may send the wrong signal to consumers.

It is our expectation that interest rates will remain unchanged in 2005.