SA financial markets: US inflation drop and Trump's demands shape trading week
Most global and South African financial markets continued to recover for the second consecutive week after the lower-than-expected US core inflation rate (3.2%) was released the previous Wednesday.
The Dow Jones industrial average increased by 3.0% last week and is 4.4% higher since the beginning of the year (year-to-date). The Standard & Poor’s 500 (S&P 500) index gained 2.9% last week, reaching a new record high, and recorded a year-to-date increase of 3.5% at the close on Friday.
In a video speech to the World Economic Forum in Davos, Switzerland, last Thursday, US President Donald Trump emphasised that he would "demand that interest rates drop immediately". The president also indicated that he would put pressure on Saudi Arabia and the Organisation of the Petroleum Exporting Countries (OPEC) to reduce oil prices. In reaction to these remarks, oil prices fell sharply, while the 10-year US Treasury yield increased by four basis points to 4.646%.
The US Federal Reserve is meeting this week for the first time in 2025. It is expected that the Federal Reserve’s Open Market Committee (FOMC) will keep its bank rate unchanged.
On South African financial markets, the Brent crude oil price fell by $2.50 (R47) per barrel, while the gold price reached a new record of $2 783 on Friday, gaining $13 per ounce over the last five trading days. On the JSE, the All Share Index remained flat last week, gaining only 0.5% and still being 0.18% down since the beginning of the year. Similarly, the Industrial 25 Index traded 0.47% higher, but remains 2.5% in the red for the year-to-date.
Given the uncertainty surrounding the repo rate decision by the Monetary Policy Committee (MPC) at its next meeting this coming week, the Financial 15 Index traded 3.6% lower last week and is still 3% lower since the beginning of the year.
The Rand exchange rate, buoyed by the record gold price and the lower oil price, continued to strengthen. By Friday, the currency traded below R18.40/dollar (R18.36/$), appreciating by forty cents since the previous Friday. Against the British pound (£) and the euro (€), the Rand traded flat last week at R22.94/£ and R19.30/€, respectively.
The much stronger Rand and the lower Brent crude oil price may have a significant positive effect on expected fuel prices next week. According to the Central Energy Fund’s latest daily report, the price for 95-octane petrol was under-recovered by 87 cents per litre, while diesel was under-recovered by R1.12 per litre.
This coming week, investors around the globe await the FOMC’s announcement on the Federal Reserve’s bank rate this Wednesday. Domestically, the main driving force influencing sentiment towards risky assets like shares will be the SA Reserve Bank’s Monetary Policy Committee (MPC) meeting starting on Tuesday, with the decision to be announced at a press conference on Thursday. There is a consensus in the market that the MPC will lower its repo rate by 25 basis points to 7.5%, reducing banks’ prime overdraft lending rate from 11.25% to 11%.
The European Central Bank will also announce its interest rate decision this week. The US will release its durable goods orders for December 2024 on Tuesday, as well as its personal income and spending figures on Friday. Additionally, most developed nations, including the US, the UK, France, Germany, and the European Union, will release preliminary data on their gross domestic product economic growth rates for the fourth quarter of 2024. Statistics South Africa will publish the producer price index for January on Thursday.
Chris Harmse is the consulting economist at Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT