Market Commentary




3Q21 Money Market Commentary

The global economic recovery remains strong but there are signs that momentum has slowed. Global Gross Domestic Product (‘GDP’) has now risen above its pre-pandemic level, however, the recovery remains uneven, with countries emerging from the COVID-19 crisis facing different domestic challenges. Countries with central bank support and high vaccination rates are faring far better than those that are lagging on these counts. The Organisation for Economic Co-operation and Development (‘OECD’) released its Interim Economic Outlook report in September, where it tweaked its global growth estimate for 2021 to 5.7% (from 5.8% in May) and projected 4.5% growth in 2022 (from 4.4% in May).  It encouraged countries to maintain accommodative monetary policies, due to concern that an early end to central bank support will disrupt the economic recovery.

Central bankers have been trying for a while to convince us the current elevated level of inflation is transitory and will likely recede in the coming month. We remain concerned about the upward pressure on food inflation, particularly in relation to the erratic weather patterns in the past few months. We came across an interesting Bloomberg article that illustrates the extent to which localised events in key agricultural markets like Brazil are fuelling this concern. Incorporating Brazil in the global food inflation outlook is essential. Quoting from a Bloomberg article, “no country on Earth puts more breakfasts on kitchen tables than Brazil. The farms that dot the vast plains and highlands that rise above the Atlantic coast produce four-fifths of the world’s orange juice exports, half of its sugar exports, a third of coffee exports and a third of the soy and corn used to feed egg-laying hens and other livestock. When the region’s crops were scorched and then frozen this year by a devastating one-two punch fuelled by climate change - the worst drought in a century followed by an unprecedented Antarctic front that repeatedly coated the land in thick frost - global commodity markets shook. The cost of Arabica beans soared 30% over a six-day stretch in late July; orange juice jumped 20% in three weeks; and sugar hit a four-year high in August. The price spikes are contributing to a surge in international food inflation - a U.N. index has jumped 33% over the past 12 months -that’s deepening financial hardship in the pandemic and forcing millions of lower-income families to scale back grocery purchases across the globe. What’s more, the episode is sending an ominous warning of what’s to come as scientists anticipate rising global temperatures and declining soil humidity will increasingly wreak havoc on farmlands in Brazil and much of the rest of the world”.

In line with consensus expectations, SA inflation rose to 4.9% year-on-year (y-o-y) in August, from 4.6% in July. Core Consumer Price Index (‘CPI’) was also higher, ticking up to 3.1% y-o-y, from 3% in July. US inflation remains elevated but eased slightly to 5.3% y-o-y in August, from 5.4% y-o-y previously. The Europeans saw their CPI rise by 3.0% in August, up from 2.2% y-o-y in July. Across the Channel, the UK’s CPI accelerated to 3.2% y-o-y in August, from 2.1%, which was far worse than consensus expectations of 2.9% y-o-y. The key drivers that have been cited for the acceleration in inflation are higher food costs, a surge in energy prices and supply-chain disruptions.

The South African Reserve Bank (‘SARB’) Monetary Policy Committee (‘MPC’) kept the repo rate unchanged at 3.50% in September. The decision was in line with the market’s expectation and, similarly to the last meeting, was unanimous. Just like their international counterparts, the MPC continues to see the rise in inflation as temporary and will maintain an accommodative monetary policy stance. The tone of the statement was meaningfully more hawkish than the last one so we should brace ourselves for higher rates in the not-too-distant future.

On the performance front for the quarter, the Fund returned 1.10%, bettering the benchmark, Alexander Forbes Short-term Fixed Interest Composite Index (STEFI), by 15 basis points.