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The domestic data releases this week turned out to be a mixed bag. Annual growth in manufacturing production was better than expected, but mining output was weaker. However, as foreshadowed last week, the big (economic) story for the week stemmed from the US inflation (CPI) data for February. Against expectations, headline consumer inflation accelerated from January, making many reconsider the likelihood of the US Federal Reserve (Fed) cutting in June. This was reinforced by a significant overshoot in US producer price (PPI) inflation later in the week, with the monthly uptick double that of the consensus forecast (0.6% m-o-m vs 0.3% expected).
The sticky US inflation data led to a big jump in US treasury yields as markets mulled the possibility of the Fed delaying its first cut to the second half of the year. At the same time, a potential upside risk to the global (and SA) inflation outlook is coming into play. The spot Brent crude oil price has increased by about 8% since the beginning of the year, with the price hitting the highest level since early November ($85/barrel) this week. Some upward pressure came from the International Energy Agency (IEA) stating that the oil market would be in a “slight deficit” this year. In January, the IEA was still expecting a “substantial surplus”.
With Fed fund futures currently pricing in less than three 25bps cuts this year, the dollar strengthened during the week to Thursday. Remarkably, the rand managed to appreciate slightly against the stronger dollar w-o-w, although it closed weaker on Thursday from Wednesday.
The domestic section below covers the details of the mining and manufacturing production data releases for January, but two other local policy developments over the past week stood out. The first being the announcement that the Social Relief of Distress (SRD) grant would be increased by R20 to R370, an increase of 5.7%. This is the first increase since the introduction of the grant in 2020 and does not make up for the full loss of purchasing power amid rising inflation, but the timing of the announcement can conceivably be linked to the upcoming election (especially given that the Budget Review was not so long ago, and it could have been announced then). The rise will cost the fiscus about R2.2 billion extra in 2024/25 than anticipated in February. The other development is the passing of the Electricity Regulation Amendment Bill by the National Assembly. This could facilitate a multimarket model for electricity trading – although hurdles remain.
Next week sees two key releases on price trends for SA. The first will be the BER Inflation Expectations Survey on Tuesday. Inflation expectations reaccelerated in Q4, and market participants (and, of course, the SARB) will be keen to see if this continued in 2024Q1 or whether expectations were adjusted downward once more. On the next day, Stats SA will publish consumer price inflation data for January. CPI inflation is set to reaccelerate quite a bit in February from 5.3% y-o-y in January. Indeed, we expect headline consumer inflation to peak at 5.7% y-o-y in February, before slowly moderating towards the middle of the target band by the end of the year. Various factors could introduce volatility or disruptions to this trajectory, which would see the SARB continue emphasising the upside risks to inflation and its data dependence in making repo rate decisions going forward. More worrying than this temporary reacceleration in headline inflation is core inflation, which we expect to pick up to above 5% in February. A significant driver of the higher inflation expected in February is medical health insurance, which Stats SA surveys annually in February. Major medical aids raised their rates by about 6.9%-9.6% for 2024, despite the Council for Medical Schemes' recommendation to cap hikes around 8%. Moving back to headline CPI, other significant contributors to the February print will come from high food inflation, which is still faced with high base effects (although this will likely ease in the second half of the year), and transport inflation, owing to the higher fuel price during February.
Next week will also provide an update on the internal trade sector, with the BER Retail Survey due on Monday and Stats SA publishing retail, wholesale and motor trade data for January later in the week.
On the international front, three of the big global central banks have policy meetings scheduled next week. While for some time markets thought the US Fed may well make its first cut during the March meeting, the probability of this happening has now virtually diminished. Instead, the focus will be on the Fed’s economic projections and, most notably, the so-called dot plot. This will shed light on the number of cuts expected by individual voting members. The Bank of England (BoE) meets later in the week, but there again the focus will be more on the expectations going forward rather than the decision on the day (with little chance of the BoE adjusting the rate in March). The one central bank where we might see a change, or at least more noticeable talk about a change, will be meeting early in the week: the Bank of Japan (BoJ). The talk will, however, be about rising rates rather than cutting. Markets generally expect the first rise from current negative interest rates in April, but some recent hawkish comments from BoJ officials suggest that a March hike is not fully off the table. Indeed, major wage settlements (shunto) this week have come in higher than last year, bolstering the case for a pending hike.
On the data front, China will release its usual monthly data dump covering retail sales, industrial production and fixed investment early on Monday morning. It will cover the Lunar Holiday period (January/February). Thursday sees the release of flash PMI figures for March for the US, Eurozone (and some individual member countries) and the UK.
Mining activity experienced a tough start to the year, with output unexpectedly contracting in January. According to Stats SA, mining production slumped by 3.3% y-o-y, marking the first annual contraction since September, following a downwardly revised 0.2% y-o-y increase in December. This was the steepest decline since July 2023, led by marked declines in manganese ore (down 27.1% y-o-y), gold (-2.7%) and diamonds (-41.2%). This was outweighed by a solid 9.8% increase in the relatively big iron ore subsector. Seasonally adjusted (sa) mining production fell by 0.8% m-o-m in January after an upwardly revised 4.6% m-o-m slump in December. In step with record-high gold prices and, at the time, high iron ore prices, mineral sales increased by 5.7% y-o-y in January. Gold sales soared, up 113.3% y-o-y in January, while iron ore sales rose by 11.9% y-o-y.
Manufacturing activity fared better in January. Indeed, according to Stats SA, production rose by 2.6% y-o-y in January from an upwardly revised 1.3% y-o-y increase in December. The headline reading handsomely exceeded the market consensus for modest annual growth of 0.9%, with virtually all gains coming from petroleum, chemical, rubber and plastic products (up 13.6% y-o-y and contributing 2.9 %pts). This was mainly due to a double-digit rise in coke, petroleum products and nuclear fuel (up 25.9 y-o-y). This subsector has been a major driver of annual production growth, likely lifted by the return in production of a refinery. In contrast, food and beverages weighed the most on output, declining 4.1% y-o-y in January. After a downwardly revised 1.3% m-o-m decline in December, factory output (sa) rebounded by a better-than-expected 0.8% m-o-m in January.
In the US, headline CPI inflation for the US rose to 3.2% y-o-y in February up from 3.1% in January, and slightly above market expectations. On a monthly basis, headline inflation increased to 0.4% from a 0.3% rise in the previous month. This was driven by a surge in shelter and energy prices, while food prices remained unchanged. Meanwhile, core CPI inflation, which excludes food and energy prices, edged up more than anticipated to 3.8%, albeit lower than January’s 3.9%. Furthermore, factory-gate prices (as measured by the PPI) rose by 0.6% m-o-m – which is double the consensus forecast for a 0.3% uptick. Annual PPI inflation accelerated to 1.6%.
The stubbornness inflation has shown in moderating towards the Fed’s 2% target will likely reinforce a hawkish stance of central bank officials during next week’s Federal Open Market Committee (FOMC) meeting. As a result, a cut in the benchmark interest rate may be kicked further down the road into the second half of the year.
Following a very poor start to the year, nominal retail sales rebounded in February, rising by 0.6% m-o-m following an upwardly revised 1.1% decline in January. This was slightly weaker than expected. Higher gasoline prices and a rise in sales of building materials and motor vehicles drove the recovery.
UK real GDP recorded a 0.2% m-o-m expansion in January, rebounding from a slight 0.1% contraction in December 2023. Growth was primarily driven by increased economic activity in the service and construction sectors. The service sector expanded by 0.2% after a 0.1% contraction in the previous month, while the construction sector saw a notable 1.1% growth following a 0.5% decline in output. Worryingly, annual real GDP growth contracted by 0.3% in January relative to stagnant growth in December. Nevertheless, the return to monthly expansion is welcome after the economy slipped into recession in the second half of 2023.
Editor: 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.
Friday, 15 Mar 2024
