US Federal Reserve chairman Jerome Powell at a press conference in Washington, DC, on Wednesday last week. Photo: AFP
There was bullish trading on global equity markets after a “surprise” 50 basis points interest rate cut by the US Federal Reserve last Wednesday – a bigger cut than expected.
Markets also welcomed the Federal Open Market Commission’s (FOMC) dovish approach, which suggests that another 25 basis points cut in the bank rate is on the cards for their next meetings, in November and in January next year.
The FOMC declared that US inflation is likely to reach its 2% target soon, and that the unemployment rate moving towards 4.5% (the FOMC target) gave direction to its decision. The Fed clearly is intent on fine-tuning the path between low inflation and avoiding a US recession.
The Monetary Policy Committee (MPC) of the South African Reserve Bank followed the FOMC last Thursday by cutting its repo rate by 25 basis points, to 8%. This cut “surprised” many as it was expected to lower its repo rate by 50 basis points to 7.5%.
Governor Lesetja Kganyago warned: “Inflation could be higher than our baseline forecast, given scenarios such as higher housing costs, larger electricity price increases, or wage increases that outrun inflation and productivity growth.”
These words indicate the more hawkish mood of the MPC. This modest cut in the repo rate came after an announcement on Wednesday that South Africa’s inflation rate decreased in August to 4.4%, from 4.6% in July, and is now under the MPC’s midpoint target of 4.5%.
In reaction to the FOMC’s decision, share prices on the JSE recovered strongly on Thursday, following sideways to lower movement over the past two weeks, after it was announced that the US may go in a recession as its unemployment rate shot up to 4.3% in July, remaining at this level in August.
The All Share index increased on Wednesday by 1.3%, and despite some nervousness on Friday, ended the week 2.6% in the green. At one stage on Friday the index recorded a new record high of 84 700 points before contracting in late trade. The index is now 8.9% higher since the beginning of the year, and 11.9% up over the past year.
On the sub-indices, the Resources 10 gained 5.3% last week as the world price for all commodities and metals spiked. The price for gold traded at new record highs, reaching $2 622.40 on Friday evening.
The rand, as was expected, appreciated sharply against the dollar during the week. The currency gained 34 cents last week and traded at R17.46 against the dollar in New York on Friday evening. Against the pound (R23.24/£) the rand remains flat and strengthened by 21c against the Euro to close at R19.50/€.
Since the Central Energy Fund adjusted fuel prices in South Africa, the rand moved much stronger against the dollar, whereas Brent crude oil increased $3.40 per barrel to close $74.67 (R604). Nevertheless, the over-recovery in the prices for petrol remains R1.17 a litre and that for diesel R1.10 a litre. It is expected that motorists will see a fifth consecutive cut in fuel prices next Wednesday.
This coming Wednesday, the Reserve Bank will publish its composite leading business cycle indicator for July 2024. The indicator fell by 0.4% month-on-month in June 2024, following a 1% drop in the previous month. Statistics South Africa will release the producer price inflation index (PPI) on Thursday. It is expected that prices at the factory gate increased by 4.0% in August and lower than the 4.2% during the previous month.
Financial markets will await the speech of Fed chair Jeremy Powell on Thursday to get an indication of when, and by how much, the Fed is likely to cut its bank rate again. The release of new orders for manufactured durable goods in the US on Thursday and the final estimate of its real gross domestic product will also dominate global and South African financial markets this week.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT