June 18, 2003

By Reuters and Sapa-AFP

Johannesburg - Bond yields were at lows yesterday as higher-than-expected consumer inflation for May failed to dim rate cut hopes, but analysts said short-term debt market gains looked limited.

The rand was steady to a bit weaker with an expected range today of between R7.75 and R7.95 to the dollar.

It was bid at R7.8313 to the dollar in late trade compared with its late Friday level of R7.8538.

Bonds maintained a recent strong rally, which got an extra boost last Thursday when the Reserve Bank cut its key lending rate by 150 basis points - 50 basis points more than had been anticipated - to 12 percent.

The yield on the R153 strengthened 12 basis points to a record best of 8.9 percent.

The yield on the R150 strengthened 23 basis points to a new best of 9.16 percent, dealers said, but the rally was expected to take a breather soon.

One analyst said: "I think on the short end of the curve [the R150] things have been overdone, we could see some profit taking soon. The scope for further significant gains this week does seem limited."

The targeted CPIX inflation measure less mortgage costs, rose by 7.7 percent in the year to May, slowing from an 8.5 percent increase in April, Statistics SA said yesterday.

This brought the index closer to its 3 percent to 6 percent official target range, which was missed in 2002 in the wake of soaring prices triggered by the rand's historic slump in 2001.

Headline inflation, came to 7.8 percent from 8.8 percent.

Economists said there was still plenty of room for the Reserve Bank's monetary policy committee to cut rates further this year despite May's inflation being higher than expected, which helps explain why the debt market maintained its firm tone  
.

The rand was steady and traders said market players were being cautious after recent volatility.

One dealer at a major local bank said he thought we would see a range today of between R7.75 and R7.95 to the dollar. He added that if we got around R7.90 to the dollar that should spark good exporter demand for rands.

European stock markets and the dollar rose yesterday as investors were cheered by US economic data on industrial output, housing and consumer prices, which appeared to show faint signs of a recovery.

The euro was quoted at $1.1815, down from $1.1849 on Monday but better than the $1.1805 recorded at midday in London before the release of the US figures.

Federal Reserve industrial production figures showed that US factories, mines and utilities boosted output by 0.1 percent in May, bringing an end to two months of declines.

Also, new housing projects surged 6.1 percent in the same month and consumer prices, while unchanged in May when compared with April, were up 2.1 percent from a year earlier.

The latter figure alleviated some of the recent worries about possible US deflation, although it in turn meant a much-expected US interest rate cut next week was likely to be a quarter rather than half a percentage point, analysts said.

European markets were very much on the lookout for good news, said Barclays Stockbrokers' analyst Hilary Cook.

"It's exactly the opposite of six months ago. Then, if we got five pieces of good news and one bad, the market would focus on the bad news" she said.

"But now the US seems set on getting everything moving, and people are going along with that. It's all very momentum driven."