Equity markets across the world traded flat and nervous last week.
The release of the US consumer price index inflation rate for August last Wednesday was as expected and enforced market sentiment that the Federal Open Market Commission (FOMC) will increase its bank rate at its news conference on Wednesday.
The US mainline inflation rate increased at its slowest rate in over three years as consumer prices rose by only 2.6% in August, down from 2.9% in July 2024. Year on year prices for petrol, used cars and trucks, and some other items fell. Core inflation, the price indicator that the FOMC prefers to use, rose by 3.2% last month, the same margin as in July 2023 and as what was expected.
Analysts now expect that these data increased the expectations that the FOMC will cut interest rates by at least 0.25 percentage points at its meeting. The odds are now much lower for a bigger cut due to an unexpected rise in housing costs.
“Overall, inflation appears to have been successfully tamed but, with housing inflation still refusing to moderate as quickly as hoped, it hasn’t been completely vanquished,” said Paul Ashworth, the chief North America economist for Capital Economics.
The Monetary Policy Committee (MPC) of the South African Reserve Bank will also meet this week. The MPC will make its decision on the repo rate on Thursday. The biggest advantage for the MPC will be that they will know what the decision of the FOMC will be and can adjust its decision accordingly.
Many investors and analysts in South Africa are of the opinion that the MPC will not lower its repo rate before the US does out of concern for an outflow in portfolio capital that will put the rand/dollar exchange rate under pressure. It is expected that the repo rate will also be cut by 25 basis points.
South Africa’s inflation rate for August will be released by Statistics South Africa on Wednesday. The market expects that headline inflation came down to 4.5%, against the 4.6% recorded for July 2024. The rate of 4.5% is on the unofficial midpoint rate of the MPC and should encourage the repo rate cut.
Equity prices on the JSE moved flat and nervous last week as the news of the inflation rate and the MPC decision awaits all investors. The All Share Index (ALSI), however, ended the week 0.7% higher as metal prices recovered, the rand exchange rate remains strong as foreign buying of local stock remains positive. The index is still 11.4% higher for the year-to-date, after it accelerated 7.0% over the past three months. Most of the other indices on the JSE followed the main ALSI index and closed the week marginal higher.
The rand held its ground last week. Against the dollar the currency appreciated by ten cents to close Friday at R17.73 against the dollar. Against the British pound the rand ended 15c stronger last week on R23.27/£. On the commodity markets the gold price closed Friday at a record elevated level of R2 5806 in intra trade. Brent crude oil remains around $72 (R1278) per barrel, the beginning of October 2024.
In the US, equity prices, in reaction to the better-than-expected inflation rate numbers, had an exceptionally good week. The Dow Jones Industrial index was up by 2.1%, (9.75% for the year-to-date) The S&P500 index increased by 3.4% (18.62% year-to-date) and the Nasdaq 5.0% (19.8% year-to-date). This momentum on US markets is expected to continue as US rates start to decline.
Apart from the announcement by the FOMC and the Reserve Bank’s MPC on interest rates this, as well as the release of South Africa’s inflation rate numbers, StatsSA will publish the retail sales figures for July on Wednesday. On global markets, the Bank of England will also announce its repo rate decision on Thursday. The Bank of Japan will also follow on Friday.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT