A late third quarter search for quality yield favoured attractively priced SA debt following a broad-based emerging market bond sell-off that began in August 2018. The South African benchmark yield sold-off to 9.33% in September, before strengthening to end the quarter at 8.99%. Real yields moved up marginally in the third quarter, with the largest moves taking place in the short end of the curve after consumer price inflation for August 2018 continued surprising forecasts to the downside at 4.9% against consensus estimates of 5.2% year-on-year.

Global yields trended higher on the back of strong economic data releases, with the 10-year US yield ending the 3rd quarter just over 3%. Restrictive monetary policy is currently the global economic order as economic recovery returns. The US Federal Reserve also remains committed to raising the policy rate over the coming quarters, with the committee signalling another four rate hikes between December 2018 and December 2019.

Following extended negotiations to salvage the North American Free Trade Agreement (NAFTA), a new deal has finally been reached, which seeks to resuscitate the automotive and dairy industries of the three member nations (US-Canada-Mexico). The conclusion of the new NAFTA deal goes some way to settle global trade tensions that have previously induced high volatility levels across emerging market economies in the second and third quarter of the year.

Furthermore, the introduction of SA's stimulus package announced by President Cyril Ramaphosa during the third quarter could be instrumental in anchoring positive growth expectations and avoiding a possible credit rating downgrade to junk from rating agency Moody's. Fiscal details of the stimulus package are expected to be outlined in the upcoming Medium Term Budget Policy Statement (MTBPS) as markets hope for a rebound in economic activity following a dismal start to the
year.

According to Statistics South Africa (Stats SA), South Africa's real gross domestic product (GDP) decreased for the second successive quarter in the second quarter of the year 2018 by 0.7%. This followed the first quarter's 2.6% decline in broad-based economic activity. Successive quarter on quarter contractions in GDP growth rates imply a technical recession. The largest contributors to the negative growth in GDP were: agriculture; transport and trade, each moderating by 29.2%, 4.9% and 1.9% respectively.

Notwithstanding a subdued local economic environment, elevated unemployment levels and muted pass-through inflation, the South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) still remains concerned of headwind inflationary threats currently stemming from rising global oil prices, rand depreciation, and increasing electricity tariffs. Despite leaving the policy rate unchanged in September, a more hawkish MPC statement has led the market to start pricing in a more than 60 percent chance of a 25 basis-point policy rate hike before the end of the year.

The Federal Reserve Bank played to script hiking the policy rate by 25 basis points in March as was expected. The quarter began with the dollar on the back foot weakening against a basket of currencies. The Fed is expected to hike rates another 2 to 3 times this year. Political noise abounds keeping short term market moves unpredictable. US global trade relations, specifically with China have been in the spotlight. Economically, the focus is turning towards wage inflation finally coming through as the unemployment rate of 4% is effectively full employment.

The European Central Bank kept its policy rates unchanged at both their monetary policy meetings in the first quarter but have guided to ending quantitative stimulus this year. There are no changes expected to European policy rates this year but normalisation is expected early in 2019.

The oil price traded in a narrow range between $60 and $70 per barrel.

The intense and swift correction experienced in domestic fixed income market sentiment and prices after the December elective conference outcome continued throughout the first quarter as a flurry of growth and ratings positive developments took place. These included a cabinet re-shuffle that with some significant and stabilising changes, a VAT hike at the February budget, CPI moving to 4.0% YoY , a surprise outlook change to stable from negative while maintaining its investment grade rating by Moody's and a cut of 25 bp's bringing the repo rate to 6.5%. The March MPC whilst cutting rates signalled that any further change to policy rates would require inflation expectations moving closer to the middle of the target range.

4th quarter SA GDP figures surprised again to the upside with an agricultural recovery assisting the rebound to 3.1% growth (against an expectation of 1.8%) QoQ SA annualised.