South African financial markets expected that both the US Federal Reserve’s Open Market Commission (FOMC) and the South African Reserve Bank’s Monetary Policy Committee (MPC) will keep their bank (repo) rates at hold. What led to negative sentiment on most global equity markets, as well as on the JSE, was the hawkish stance of both the committees.
Both announced that the upside risks to inflation remains strong and that the next move in interest rate may rather be up. In the US, consumer inflation has dropped from a year-over-year peak of 9.1% in June 2022 to 3.7% in August 2023. It is, however, well above the Fed’s 2 %, and the majority of the FOMC members voted that the Bank rate stayed the same. The FOMC also forecast that another hike is on the cards by the end of the year.
The Fed also predicts that rates will stay at the higher level till the second part of next year. The FOMC foresees that rates will be cut only two times next year, fewer than the four rate cuts they had predicted in June.
The MPC of the Reserve Bank also took an aggressive stance. According to the MPC the risks to the inflation outlook are assessed to the upside, even though the fact that the inflation rate eased to less than 5.0% (4.8%) in recent months.
Food price inflation remains high, oil markets have tightened significantly, and core inflation looks sticky. Fuel prices continue to increase to the record levels of last September and will cause through the base effect a worrying upward pressure on the inflation rate by the end of the year. Load shedding and logistics constraints continue to push up the cost of doing business and the cost of living. Considerable risks remain for spiralling average inflation. Three of the MPC members voted for rates to remain while two members called for a hike of 25 basis points.
The hawkish stance of both the FOMC and the MPC had a devastating effect on share prices on the JSE last Thursday. The All Share index lost 1 564 point, or 2.1%, on Thursday alone and ended the week 1.3% in the red.
The Industrial index (IND25) traded down by 2.3% last week, the financial index (Fin15) traded sideways, losing only 0.29%. The resources board (RES10) decreased by 1.0%.
The Brent crude oil price remains high and even tested the $95 (R1781) per barrel last week. The rand also remains under pressure and trades around R19.00 against the dollar.
As a result of these two main factors that determine the fuel price at the pump, the price for diesel is already 185 cents under recovered since the last price announcement and the price for 95 petrol is under recovered by 118 cents per litre. The Central Energy Fund will announce the expected price increases somewhere next week.
US stock markets traded down for the fourth consecutive week. The Dow Jones industrial index ended -1.9% and is now lower by -1.5% in the past month and traded now only 2.4% higher for the year. The S&P500 lost 2.8% past week, is down by 0.26% over the past month, but traded higher by almost 13.0% since the beginning of the year. The Nasdaq ended the week -3.4% in the red, -3.7% over the past month, but is up by more than 27% for the year-to-date.
This coming week Statistics South Africa will release the producer price inflation (PPI), which are prices at the factory gate, for August on Thursday. It is expected that the PPI would increase by 3.0% against the 2.70% rate in July.
On the global markets the US will announce the durable goods sales for August on Wednesday, as well as its crude oil stock change. It is expected that the stock decreased further by 2.5 million barrels and can place pressure on oil prices.
On Thursday the US will release the final estimate of its gross domestic product economic growth rate. It is expected that it will be adjusted upwards from 2.0% to 2.2% and may lead to markets to discount the last Bank rate increase by the Fed next month as the economy is not moving near a recession.
On Friday the US will publish the personal income and spending figures for August, that will also give an indication on how strong the US economy is performing. In Europe, the Eurozone and most member countries will release their inflation rates for August.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT