Last week again I commented that when the world economy (US) sneezes, the South African economy and financial markets catch a cold.
The news the previous week that US inflation rate data were higher than expected was followed up last week by the US Federal Reserve’s Open Market Committee (FOMC) decision to keep interest rates unchanged.
Fed chairperson Jerome Powell also announced at the press conference last Wednesday: “We continue to make good progress in bringing inflation down, but it has become evident there are some persistent price pressures in housing and the services sector.”
He also stressed that: “We’ve got nine months of 2.5% inflation, now we’ve had two months of kind of bumpy inflation and the question is, are they more than bumps? And we can’t know, that’s why we are approaching this question carefully.”
Analysts now believe the FOMC will only start to lower interest rates during the second part of the year, and that the next meeting in May will also see rates unchanged.
Not only did these remarks put the rand under renewed pressure, but also the news that South Africa’s inflation rate sparked upwards again in February to 5.6% from 5.3% in January – much higher than expectations of 5.3%.
The currency depreciated from R18.69 against the dollar on Wednesday, before the domestic inflation numbers and the FOMC press conference, to R19.01 on Friday.
Most crypto currencies also reacted negatively to the FOMC expectations on interest rates and US economic growth for the rest of 2024. Bitcoin traded lower by 11.4% over the past week, Ethereum lost 14.7% and Litecoin was down by 12.7%.
It is now certain the Monetary Policy Committee (MPC) of the SA Reserve Bank will keep its repo rate at 8.25% when they meet this coming Thursday. This will keep the prime rate of banks also on its current level of 11.75%. The risks of a further depreciation of the rand and accelerating inflation above the MPC’s upper target level of 6.0% will keep the repo rate at its current level until the Fed indicates it will start to lower its bank rate.
Despite the announcement by the FOMC on US rates, US share indices continue to surge upwards, with record levels for all three main indices, namely the Nasdaq, Dow Jones Industrial Index and the S&P500.
The dovish outlook by the Fed as it expects to lower interest rates three times this year by a total of 0.75%, as well as Powell announcing that his latest forecast on the US economy is also more bullish at 2.1%, well above December’s 1.4% forecast, pushed equities to new highs.
The Dow Jones Industrial Index closed Friday evening 1.75% higher than the previous week. The index is now 4.75% higher since the beginning of the year and trades 23.3% above a year ago. The S&P500 followed the same tendency and traded 1.6% up over last week, gaining 10.4% for the year-to-date and is up by 33.1% on a year ago.
The Nasdaq increased last week by 1.7%, gaining 11.30% since the beginning of January and is a massive 40.8% higher than a year ago.
On the JSE, equity prices remain under pressure. Although the price for gold hit a new record level of higher than $2200 (R41081) per ounce, closing on $1963 on Friday, share prices remain nervous and to the downside.
The All Share Index ended the week -0.5% in the red, and is -5.8% lower since the beginning of the year. The All Share Industrial Index also traded in the red last week (0.75%) and is now for the year-to-date (YTD) down by 3.4%.
Although resources (RES10) gained 0.4% last week, it is still 6.9% down for the year. Financials follow the same pattern with the FIN15 losing 365% last week and -7.5% down for the YTD.
This coming week local markets will await the press conference of the MPC on Thursday to hear the decision on the repo rate. And the release by Statistics South Africa of the inflation rate for February on Wednesday.
The SA Reserve Bank will publish its composite leading business cycle indicator for Jan 2024 on Tuesday. The indicator dropped by 0.8% month-on-month in December 2023 and the market expected that the index will decrease by another 0.5%. Statistics SA will release the Producer Price Inflation (PPI) rate Thursday and it is expected that PPI rate will increase by 5.0% in February, up from the 4.5% number in January.
On global markets, financial markets await the US durable goods orders figures that will be released on Tuesday, its final estimate of the growth in gross domestic product for quarter four 2023 on Thursday, US personal and income spending during February on Friday, as well as Powell’s speech.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT