BER WEEKLY, 2 FEBRUARY 2024

US FED PUSHES BACK AGAINST EARLY RATE CUTS

Editor: Lisette IJssel de Schepper| Contributors: Nicolaas van der Wath and Tracey-Lee Solomon

THE WEEK IN PERSPECTIVE

It was another big week for global monetary policy with the scheduled interest rate decisions for the US Federal Reserve (Fed) and the Bank of England (BoE). As expected, both banks kept current policy settings unchanged, but the focus was always going to be on what the statements would imply about the interest rate path going forward. The Fed all but confirmed that interest rate cuts are coming, but pushed back against expectations for cuts as early as March. The BoE also suggested that markets were pricing in too many rate cuts, with two of the nine members of the committee even voting to hike the policy interest rate in this meeting. Central banks will be very wary of cutting too soon and continue to emphasise that they need more confidence that price increases are under control as upside inflation risks remain. However, waiting too long also brings risks. Indeed, this week’s weak economic data and slowing inflation coming from the Eurozone will increase calls on the European Central Bank (ECB) to loosen policy sooner rather than later. All this, as well as the mixed bag of PMI data from China, is unpacked in the international section below.

In the domestic section, the focus is on the recent batch of disappointing activity data. The January Absa PMI plunged as demand and activity faltered, while new vehicle sales and exports also declined. The trade surplus and credit extension data for December, on the other hand, were somewhat better than expected. The improved outcome on the trade surplus could, however, have been the result of disruptions at the ports – which would not be good news for SA trade and growth dynamics in the longer term. Furthermore, at least part of the sharp deterioration in the Absa PMI is likely due to these logistical challenges at the ports. In addition to the collapse in activity and demand, the inventories index declined once more in January to reach the lowest level since mid-2020. It could be that local harbour issues prevented imported stocks from reaching manufacturers and a lack of materials and goods required in the production process may have held back output.

In financial markets, it was all about the Fed. Following the statement, markets scaled back the odds for a rate cut in March to about a third, while the probability stood at about 60% heading into the meeting. It must be said that the odds had increased from about 40% just days before on the back of weaker labour market data released before the statement. Furthermore, the realisation that cuts could be coming later led to the biggest single-day decline in the S&P500 in the US in over four months. Stock markets, including the local JSE ALSI, have recovered some lost ground with the ALSI up 0.6% on Thursday compared to the week before. The rand exchange rate managed to close somewhat stronger across the board and gained about 1.5% against the euro, pound and dollar. Meanwhile, the spot Brent crude oil price closed above $82/barrel mid-week for the first time since November last year – although dipping lower again on Thursday. The rise was on the back of announcements of further stimulus measures in China following the liquidation of property developer Evergrande.

Week ahead: SA manufacturing data for December

On the domestic data front, the December manufacturing production release from Stats SA on Thursday will help firm up our view of whether the SA economy is set to escape a technical recession. Only a very steep monthly decline could tip the manufacturing sector into a quarterly contraction, but the improvement in the output index of the December Absa PMI suggests that this is unlikely. Furthermore, electricity production data released earlier this week showed a decent 2.7% q-o-q (sa) expansion. This bodes well for a GDP growth recovery in Q4. On Monday, the S&P Global PMI for January will give some indication of whether the weakness reflected in the manufacturing PMI and naamsa vehicle sales was also visible in other sectors of the economy. Although arguably less important from an economic and financial market perspective than the upcoming Budget on 21 February, there will be some interest in President Cyril Ramaphosa’s State of the Nation Address on Thursday.

Globally, the most important data release will be later this afternoon with the US nonfarm payrolls and unemployment rate for January. Job growth is expected to slow to below 200k following a 216k expansion in December, while the unemployment rate could tick up a nudge to 3.8%. With a March cut now significantly less likely, US labour and inflation data in the coming weeks will help the markets (and the Fed) make up their mind about whether the cut will come in May or later. As such, surprises relative to consensus forecasts could result in swings on financial markets. Finally, next week will see the final services / non-manufacturing PMI releases for January from across the globe and consumer inflation data for China where consumer prices have fallen for three straight months already.

DOMESTIC SECTION

PMI plunges, while vehicle sales decline in January

The Absa PMI reflected a very poor start to the year for the local manufacturing sector. The headline index declined to 43.6 index points in January 2024, down from 50.9 in December. Worryingly, the decline came on the back of a sharp deterioration in demand and activity. Outside of the global financial crisis in 2008/09 and the pandemic-induced lockdown period of 2020, the index has only fallen to this low level a handful of time – click here for more.

According to naamsa, new vehicle sales also experienced a tough January. Domestic new vehicle sales declined by 3.8% y-o-y as passenger vehicles dropped by 6.7%. This was despite robust buying from the rental market (15% of sales), underscoring the weakness of consumer demand weighing on sales. However, it was not just local sales underperforming as exports declined by 2.1% y-o-y on the back of a significant 15.1% m-o-m decline (seasonally adjusted).

Trade surplus narrows in December, while credit extension ticks up slightly

In December, the trade surplus declined to R14.1 billion, from R20.6 billion in November. The decline was due to exports contracting at a quicker pace than imports during the month. Exports fell by 11.5% during December, while imports fell by only 9%. Nonetheless, for 2023Q4, the trade surplus sums to R21.3 billion, which may support the current account on the balance of payments in Q4.

Meanwhile, credit extension to the private sector expanded by 4.9% y-o-y in December, faster than expected and up from 3.8% in November. Still, this is slightly below the consumer inflation rate over the same period (of 5.1%), meaning that in real terms, credit extended declined.  Higher corporate credit drove the acceleration (which could be a tentative sign of faster private sector investment growth), while household lending slowed further.

INTERNATIONAL SECTION

US Fed pushes back against interest rate cuts in March

As expected, the US Fed held its monetary policy interest rate steady on Wednesday at 5.25% - 5.5%. Attention was paid to the wording of the Fed’s official statement, which tilted slightly more dovish compared to previous statements. The Fed noted that although economic growth was more robust than expected, the risks to “achieving its employment and inflation goals are moving into better balance”. This does not imply that interest rate cuts are imminent.  In the press conference following the meeting, Fed Chairman Jerome Powell noted that although cuts were likely to begin this year, they are unlikely to happen as early as the March MPC meeting. The March meeting is nevertheless important. The Fed will release its Summary of Economic Projections (SEP) following this meeting, which includes the MPC members’ own policy rate projections. The December SEP suggested 75bps worth of cuts in 2024. 

BoE leaves Bank Rate unchanged but warns against cutting rates too quickly

On Wednesday, the BoE delivered a somewhat hawkish pause. While the Bank Rate was kept steady at 5.25% as expected, two Monetary Policy Committee (MPC) members voted to raise the rate by 25bps (with one opting for a cut and the majority of six members voting for unchanged). Although broadly positive developments were reported, the BoE’s inflation projections appeared to push back at market expectations for significant cuts in 2024. Based on the implied path of the Bank Rate, which includes 100bps worth of cuts in 2024 and 200bps in total for this cutting cycle, inflation is expected to average 2.6% in 2024. In addition, the Bank flagged that inflation risks are skewed to the upside amid the ongoing conflict in the Middle East and disruptions to shipping through the Red Sea. This implies that the BoE considers the markets’ expectations for the Bank Rate too dovish and is unlikely to make as many cuts given current information. Indeed, based on the 200bps rate cut assumption, the MPC expects inflation to only reach the 2% target in 2026Q4. Alternatively, the BoE notes that should the Bank Rate remain at its current level, inflation would fall below target by 2025Q4.

A weak EZ economy and falling inflation intensifies call for interest rate cuts

According to the first estimate from Eurostat, the Eurozone (EZ) economy was stable in the fourth quarter, narrowly escaping an expected technical recession. This meant that the EZ economy grew by 0.5% y-o-y in 2023. Among the member states, Portugal (+0.8% q-o-q) recorded the highest growth rate, followed by Spain (+0.6%). Worryingly, although foreshadowed by earlier data, after two consecutive quarters of no growth, the German economy contracted by 0.3% q-o-q in 203Q4.

A preliminary estimate showed that the EZ consumer inflation rate edged down to 2.8% y-o-y in January from 2.9% in December 2023. Energy price deflation slowed to 6.3% y-o-y (compared to 6.7% in December). Price increases of food, alcohol and tobacco moderated to 5.7% y-o-y in January. Core inflation, which removes the volatile food and energy categories, slowed to 3.3% y-o-y from 3.4% in the prior month. Services inflation was unchanged at 4%. Regarding the largest economies in the EZ, both Germany's (to 3.1% y-o-y from 3.8%) and France’s (to 3.4% from 4.1%) inflation rates decelerated significantly. Meanwhile, inflation ticked up in Spain (to 3.5% from 3.3%) and Italy (to 0.9% from 0.5%). With minimal growth and moderating inflation, calls for the ECB to lower interest rates will continue. 

NBS PMI shows continued weakness in China’s manufacturing sector

Activity in China’s manufacturing sector contracted for the fourth month in a row. The official NBS Manufacturing PMI ticked up 49.2 points in January but crucially stayed below the neutral 50-point mark. Despite increasing, the new orders, foreign sales and employment indices all remained in contractionary terrain. On the contrary, output rose at its fastest pace in four months. The NBS noted that January was typically a more subdued month as people prepared for the Lunar New Year, which takes place on the 10th of February this year. The Caixin General Manufacturing PMI told a more upbeat story, beating market forecasts and remaining unchanged at 50.8 points in January. Output growth was positive amid growing foreign sales.

CONTACT US

Lisette IJssel de Schepper
Tel: +27 (21) 808 9777

Email: lisette@sun.ac.za

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Please refer to the glossary on the BER website for explanations of technical terms.

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Name: BER WEEKLY, 2 FEBRUARY 2024

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