Manufacturing Index rises for third consecutive Month

p. The Kagiso Manufacturing Index (PMI) rose for a third consecutive month to a high of 51.8 in October from 50.8 in September, on account of a strong rise in new sales orders, suggesting that domestic demand is slowly recovering from strike-related production stoppages in the first half of the financial year 2014/2015. The inventories index also rose sharply, to suggest that purchasing managers anticipate improved demand conditions. Going forward, there is scope for the index to consolidate around current levels, with the broader outlook on the local productive sector remaining subdued. Structural hindrances such as a constrained power grid, onerous red tape and a shortage of skilled labour continue to weigh on operations, while aggregate demand remains sluggish.

h3. Rand Update

p. Brent crude is currently trading under US$70 for a barrel and has seen its losses stretch to 14.5% over the past week. Longer term charts reveal a rough but notable inverse correlation between the price of Brent crude and the dollar index. Brent and the dollar index also hold positive and negative relationships respectively with the MSCI Emerging Market (EM) stock index, as the rising cost of dollar debt and the weakening of EM currencies ultimately forces a rebalancing through higher domestic interest rates, often a result which is seen to damage short-term growth potential. For all the positives to South Africa that can be generated through a lower oil import burden, there are still risks born out of a stronger US Dollar, especially when other commodity prices are also tumbling.

p. Furthermore, we have yet to even see the positive effect of lower oil prices on SA’s terms of trade – data last week showed the trade deficit surprising at a huge ZAR 21.3bn in October (see Into SA eNEWS from 28 October). The rand weakened in response to the release, but the fallout may well have been stronger were it not for the recent spate of stimulus rhetoric from the major central banks. Into the new week, commodity currencies have remained under pressure post the softer Chinese manufacturing PMI.

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