BER Weekly, 26 January 2024


Domestically, the theme of the week centred around monetary policy and inflation, with the SA Reserve Bank (SARB) making its first repo rate decision of the year on Thursday. Furthermore, Stats SA released both consumer and producer price inflation data for December. The SARB kept the repo rate unchanged, as expected, and once again flagged upside risks to the inflation outlook. Indeed, while inflation is slowing (see domestic section for details on the December data), even without these risks materialising, headline inflation is not expected to reach the midpoint of the SARB’s target range until the fourth quarter of this year. This means that the bar for future rate cuts remains fairly high – although we still expect to see a shallow cutting cycle through the second half of this year as inflation moves closer to the midpoint of the target and expectations, hopefully, follow suit.

Globally, monetary policy was also important, with the European Central Bank (ECB), Bank of Japan (BoJ) and Turkish central bank announcing monetary policy decisions last week. The ECB struck a fairly dovish note, as, unlike the SARB, which generally focussed on upside risks, it outlined both upside and downside risks to its inflation outlook. However, wage growth dynamics will remain important for the ECB and it is unlikely to cut the policy interest rate before it sees these moderate. The BoJ did not make changes in this meeting, but its next move is expected to be a hike, going against the tide predicted for other advanced economies as it moves away from its current ultra-loose monetary policy stance. In even sharper contrast to the advanced economies, the Turkish central bank – faced with inflation of nearly 65% - hiked its policy rate for the eighth consecutive meeting. However, with the policy rate at 45%, the bank suggested that this could be the last hike, for now, as inflation is set to slow over time as previous tightening filters through.

On the data front, Q4 GDP figures from the US once again reflected the economy’s remarkable resilience and outperformance relative to the other advanced economies (see international section). Indeed, with inflation slowing and the economy remaining strong, the US seems to be pulling off the ‘soft landing’ scenario. This also means that the US Federal Reserve (Fed) does not have to rush rate cuts, with the market again pushing back expectations for the first cut after the GDP print. On the political front, Donald Trump convincingly won the New Hampshire Republican primary and is all but set to become the party’s nominee to contest President Joe Biden in the US election later this year.

In financial markets, the rand is trading a touch stronger compared to the very weak levels seen at the end of last week. While the somewhat hawkish flair to the SARB statement may have benefitted the currency, this was also due to the dollar losing some ground (with the rand/euro exchange rate flat). The Brent crude price closed at the highest level seen this year as the better-than-expected US GDP print sparked some hope about improved demand. Monetary stimulus in China (with the People’s Bank of China announcing stimulus mid-week through a 50-bps cut in its reserve ratio requirement) may have also helped with demand prospects. Still, growth in non-OPEC+ output seems to be able to satisfy any uptick in demand or cut in OPEC+ output, and this keeps a lid on price increases. Still, as flagged by the central bankers this week, the oil price remains sensitive to developments in the Middle East.

Week ahead: first SA activity data for January; US Fed and BoE decide on policy rates

Next Thursday, we will see the January prints of the Absa manufacturing PMI and naamsa new vehicle sales figures. The Absa PMI ticked up to expansionary terrain in the last month of last year, and the question is whether this positive momentum was sustained during another month of relatively less load-shedding compared to much of 2023. Vehicle sales likely remained under pressure at the start of the year.

The key focus next week will, however, be on international developments. The Fed and Bank of England (BoE) have monetary policy meetings scheduled. As with the ECB this week, the apex banks are expected to keep their policy settings unchanged, but the statements will be scrutinised for any indications of the expected timing of the first interest rate cut. While only available after the Fed decision on Wednesday, the US labour market data due on Friday will also be important in that regard (as will the core PCE data out later today). Across the Atlantic, we will see the release of Q4 GDP data for the Eurozone (EZ) early in the week and a flash estimate of January inflation on Thursday. Following a slight contraction in Q3, the region is on the brink of a recession and may well record another quarterly contraction in Q4.

Later today, the International Court of Justice (ICJ) will announce its decision on emergency or provisional measures in an interim verdict after SA accused Israel of committing genocide in Gaza. To be sure, the court will not deal with the question of whether Israel is committing genocide (this could take several years), but only whether it can order provisional measures (and if so, what these would be) as the case continues. Importantly, while the court’s decision is final and it cannot be appealed, the ICJ has no authority to enforce it.

Note from the editor: We are experiencing some technical issues with the formatting of the Weekly on the HTML platform. We are working on this, but we would like to assure you that the content remains the same. Apologies for the inconvenience, Lisette.


SARB keeps the repo rate steady and upside risks mean that the bar for cuts remains high

For a fourth consecutive meeting, the SARB kept the repo rate unchanged at 8.25%. Although the SARB expects moderating global and domestic inflation, it continues to stress upside risks to the inflation outlook. In fact, since the previous meeting, which took place in November, we have seen an uptick in inflation expectations and renewed geopolitical risks. This gives the SARB reason to wait before embarking on a shallow cutting cycle. Clients can click here for a comment on the SARB decision.

Rate of increase in headline CPI and PPI slowed in December

According to Stats SA, headline consumer inflation (CPI) moderated from 5.5% y-o-y in November to 5.1% y-o-y in December (slightly lower than our expectation for 5.3%). The downside surprise relative to our forecast was due to both food and core CPI inflation. Annual inflation averaged 6% in 2023 (from 6.9% in 2022), largely in line with expectations. Food and non-alcoholic beverages (FNAB) inflation moderated from 9.0% y-o-y in November to 8.5% in December on the back of the first monthly decline (of 0.1%) since October 2019. Meanwhile, core CPI inflation was unchanged at 4.5% y-o-y in December, undershooting our and the Thomson Reuters consensus forecast of 4.6%, as falling core goods inflation offset rising core services inflation (stemming largely from housing costs, which are surveyed quarterly).

Headline producer price inflation (PPI) for final manufactured goods slowed to 4% y-o-y in December, down from 4.6% in November. This was due to a 0.6% m-o-m decline. For the full year, average factory gate inflation slowed to an average of 6.7%, from 14.4% in 2022. PPI for intermediate manufactured goods was -2.2% y-o-y in December (-2.3% in November). Due to annual contractions from July to December, intermediate goods PPI was just 1.2% on average in 2023, sharply down from 14.6% in 2023 and 16.2% in 2021.



US 2023Q4 GDP outperforms expectations

After defying expectations in Q3, with real GDP growth expanding by an annualised rate of 4.9% q-o-q, the US economy continued to outperform in 2023Q4. Real GDP expanded by 3.3% q-o-q in Q4, driven by robust consumer outlays and government spending. Higher net trade and more private and residential investments also lifted the latest GDP reading.

Following Q4 GDP surprising on the upside, business activity saw another notable uptick in performance at the start of the year. The flash S&P Global US Composite PMI rose to 52.3 in January from 50.9 in December. This was the fastest rise in business activity since June 2023, driven by gains in services and manufacturing. The services sector saw the strongest growth in seven months (52.9 in January vs 51.4 in December), while manufacturing activity saw the first improvement in nine months (50.3 vs 47.9), albeit amid a moderate decline in output. Inflationary pressures, meanwhile, eased with the rate increasing at the second-weakest pace since October 2020.

ECB keeps policy rate steady despite recessionary fears

Across the Atlantic, as widely expected, the ECB kept its key policy rate unchanged at a record high. While acknowledging that the disinflation process is under way, the ECB remains attentive to upside inflation risks amid geopolitical uncertainties, notably disruptions in the Red Sea. In a post-statement Q&A, ECB President Christine Lagarde stated it was “too early” to discuss rate cuts for the EZ economy, but at the same time expressed concerns that the risks to economic growth are “tilted to the downside”.

Indeed, the flash HCOB EZ Composite PMI signalled another tough start to 2024Q1. While the headline PMI improved to 47.9 in January from 47.6 in December, it remained in contractionary territory for the eighth month. The moderation in contraction was attributed to a lower decline in manufacturing production (46.6 vs 44.4), the softest since April. Services activity deteriorated by the most since October (48.4 vs 48.8). Despite disruptions to shipping in the Red Sea causing supply chains to lengthen for the first time in a year, manufacturing input costs moderated. However, there was an acceleration in the growth of service sector costs, leading to the steepest overall increase in prices charged for goods and services since May last year.

Business activity improves in the UK

Britain’s economy started 2024 on a stronger footing. The flash S&P Global/CIPS UK Composite PMI rose to a seven-month high of 52.5 in January from 52.1 in December. This was the third consecutive month of expansion, spurred by a surge in service sector activity, which saw its fastest expansion in eight months (53.8 vs 53.4). However, the manufacturing sector faced challenges, with production declining (44.9 vs 45.5) for the eleventh month and at the quickest rate since October. Meanwhile, input costs surged to their highest since August. This was primarily due to intensified cost pressures within the manufacturing sector where factories reported the first growth since April in input costs as the re-routing of ships away from the Red Sea added to freight costs.

The BoJ maintains an ultra-loose monetary policy

Finally, as expected, the Bank of Japan (BoJ) kept its short-term policy interest rate at -0.1%. The BoJ also maintained the 10-year bond yield target at around 0%. However, the BoJ revised its inflation forecast downward for 2024 to 2.4% from 2.8% while increasing its 2025 core inflation forecast to 1.8% from 1.7%. Meanwhile, the central bank’s 2023 economic growth projection was lowered to 1.8% from 2%, while the forecast for 2024 was increased to 1.2% from 1%.



Editor: Lisette IJssel de Schepper
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Name: BER Weekly, 26 January 2024