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In the lead-up to the national election, local news remained focused on political developments. This week, attention centred on a pivotal decision by the electoral court allowing former president Jacob Zuma to contest for a parliamentary seat. Zuma was initially deemed ineligible by the Independent Electoral Commission (IEC) under Section 47 of the Constitution, which disqualifies individuals sentenced to over twelve months in prison from parliamentary candidacy. However, his legal team argued that despite a 15-month sentence from the Constitutional Court, the former president did not serve the full term and remission by the incumbent President Cyril Ramaphosa rendered him eligible. They also contested the IEC's authority to enforce Section 47. Zuma, a talisman in the uMkhonto weSizwe Party (MK), aims to pull support from the ruling ANC. This may very well come to fruition as an election poll by the Social Research Foundation revealed a significant decline in ANC support as the MK party gains traction.
In other domestic news, following a wage agreement in the gold mining sector, attention shifts to the manufacturing sector. Despite faring better in February (see details in the domestic section), the industry has been under strain. Negotiations at the Metal and Engineering Industries Bargaining Council (MEIBC) are anticipated to be tough. Solidarity, a trade union, raised concerns that the pandemic-era agreement disadvantaged skilled workers and warned that a similar deal would result in more skilled individuals looking for employment abroad.
On the international front, newsfeeds were dominated by the currency and commodity markets. The US dollar strengthened significantly last week, gaining 1.5% against the euro. The combination of a strong nonfarm payrolls report and a higher-than-anticipated inflation print in March (covered in the international section) resulted in markets further delaying their expectations for interest rate cuts. Before the hot inflation report, markets were pricing in three US Federal Reserve (Fed) rate cuts in 2024, with the first expected in June. Markets are now pricing in two rate cuts this year, with the first in September. Furthermore, the European Central Bank’s (ECB) more dovish tone after yesterday’s monetary policy decision (see international section) has also given more credibility to the idea that the ECB will likely cut interest rates before the Fed, which should keep the dollar strong. The rand also lost ground against the dollar, but this was primarily due to the greenback’s strength and not rand weakness. Indeed, the local currency appreciated against both the euro and pound last week.
In commodity markets, the gold price reached a new record high this week. There has been a lot of safe-haven demand for the metal as investors weighed the consequences of a potential escalation in the Middle East. The government of Iran vowed to strike back at Israel after the latter attacked an Iranian embassy in Syria. In addition to geopolitical risk, there are reports of large gold purchases from central banks. On a sourer note, the current gold rally has done little to stem the flow of job losses in the local mining sector. During the week, Sibanye-Stillwater announced that additional restructuring plans at some of its gold mining operations could result in 3100 job losses. This comes on top of around 2600 announced job losses at its PGM operation earlier in the year. Speaking of PGMs, platinum increased by a sizeable 4.4% last week.
Moving to Brent crude oil, the commodity has continued to trade around $90/bbl. Supply shocks coupled with stronger-than-expected demand with an added layer of geopolitical risk meant that the oil price traded at its highest level since the aftermath of Hamas’s attack on Israel in October. Sustained high oil prices pose a real upside risk to global, and local, headline inflation dynamics.
In financial markets, the S&P 500 gained slightly. Despite expectations of higher-for-longer interest rates, the US bourse has remained high. The JSE ALSI was slightly down w-o-w, with most losses on Thursday. It was a less rosy picture in European markets. The UK’s FTSE 100 and Germany’s DAX both declined last week. Moving to the bond market, the SA 10-year bond yield followed US yields higher, increasing by a significant 25bps.
On the domestic front, Stats SA will release a slew of internal trade data. February retail sales will be released on Wednesday. Previous data revealed a sizeable monthly decline in January. Wholesale trade sales, to be released on Thursday, showed a similar decline in January. Conversely, motor trade sales, released on Thursday, performed better in January. An increase in new vehicle sales, as indicated by Naamsa, and a rise in the petrol price in February point to another increase in motor trade sales. Finally, Stats SA will release the March consumer inflation print. Consumer inflation accelerated in February, off the back of a faster rise in the miscellaneous goods and services category. The increase in the category was primarily due to the annual increase in medical aid costs (surveyed in February each year). Looking at March, a hefty petrol price increase likely supported the m-o-m rate in the overall CPI. However, due to a higher base, headline CPI is expected to have moderated very slightly in March. Looking further ahead, inflation likely peaked in February; however, persistent upside pressure means the CPI could remain sticky and only dip below 5% in the second half of the year.
Internationally, attention will be on China’s 2024Q1 GDP estimate. Growth is expected to have slowed on an annual basis in the first quarter. The country announced a growth target of around 5% for 2025. However, an ailing property sector and weak consumer demand have some forecasters doubting whether China can reach its target. The International Monetary Fund (IMF) will release the World Economic Outlook (WEO) next week, and the regional forecasts will be of crucial interest. Other data releases include US and UK retail sales for March, Japanese CPI for March and Germany’s ZEW economic sentiment for April.
Next week also sees the start of the six-week long election process in India. After a decade in office, Prime Minister Narendra Modi is expected to win a third term. Almost 1 billion people are eligible to vote. The results will be known on 4 June.
Following a challenging start to the year, mining activity improved by much more than expected in February. According to Stats SA, mining production rose by a solid 9.9% y-o-y from an upwardly revised 2.8% y-o-y contraction in January. This is the strongest growth in mining output since mid-2021, surpassing market expectations of a 3.5% y-o-y expansion. More than half of the growth in annual production came from iron ore (+42.9% y-o-y, adding 5.1% pts) with coal (+14.6%, adding 3.7% pts) also making a sizeable contribution. Seasonally adjusted (sa) mining production rose by 5% m-o-m in February after an upwardly revised 0.4% decline in the prior month.
More positive news was that annual manufacturing production expanded by more than expected and at the fastest pace since June 2023. Output was up 4.1% y-o-y in February, from an upwardly revised 2.9% rise in January. This marks a fifth straight month of growth in manufacturing activity. The largest positive contribution came from wood, paper and paper products (+14.9% y-o-y, adding 1.5% pts). In contrast, the production of vehicle parts and accessories was the biggest drag on annual output (-16.5% y-o-y, shaving off 0.8% pts). Compared to January, factory production (sa) declined by 0.3% m-o-m in February.
On balance, March will determine whether the manufacturing sector adds to or subtracts from GDP in Q1, but barring an unexpectedly large drop in March, mining is set to contribute positively to growth.
Lastly, according to the SA Reserve Bank, gross gold and foreign exchange reserves increased to $62.3bn in March, up from $61.7bn in the prior month. This increase largely came from gold reserves rising to $8.9bn (vs. $8.2bn in February), reflecting the strong 8.9% monthly increase in the gold price. In contrast, foreign exchange reserves declined to $47.2bn from $47.3bn.
The ECB met on Thursday for their third meeting of 2024. In line with expectations, no change was made to the central bank’s main policy rates. Unlike in the US, where price inflation is still much more elevated (see below), Eurozone price inflation, especially food and goods inflation, has come down nicely in recent months. This has led to an ECB narrative signalling more strongly that policy easing will start taking place towards the middle of the year. Although the ECB continues to emphasise a very “data-dependent and meeting-by-meeting” approach, some members were reportedly ready to cut interest rates at yesterday’s meeting.
The US Bureau of Labor Statistics (BLS) reported a 0.4% monthly increase in headline CPI inflation in March. This translates to a 3.5% y-o-y increase, the highest number since September 2023 and exceeding expectations for the third consecutive month. Core inflation, which excludes food and energy prices, remained stubbornly high at 3.8% y-o-y, largely due to a 5.7% y-o-y increase in shelter prices. Food price inflation, on the other hand, eased in March. Furthermore, in a separate BLS release on Thursday, PPI inflation increased by 0.1% m-o-m and 2.1% y-o-y in March. Consistent with the patterns in the CPI numbers, prices for final demand goods declined by 0.1% m-o-m, while that of final demand services increased by 0.3% m-o-m in March.
Although the Federal Reserve follows the PCE deflator as its main measure of price inflation, the unexpected sticky CPI inflation raises concerns for policymakers hoping for inflation relief. Additionally, last week’s labour market data surprised on the upside, showing a drop in the unemployment rate to 3.8% in March when it was expected to remain level at 3.9%. Although this is a positive sign for US economic activity, it does, together with the persistently high inflation, suggest the Fed may delay and reduce the number of interest rate cuts this year.
Meanwhile, CPI data from the National Bureau of Statistics in China tell a completely different story. March CPI numbers reveal a 0.6% m-o-m decline in prices compared to February and only a 0.1% y-o-y increase. This means CPI inflation averaged 0% y-o-y in 2024Q1. The decline in March is mostly due to falling food prices, among which are pork prices, which declined by 6.7% m-o-m and 2.4% y-o-y. The sharp increase in pig populations has caused pork prices to drop significantly over the last year. In contrast to global struggles to meet inflation targets with sticky inflation remaining too high, China remains well below its 3% target. Likewise, Chinese PPI decreased in March, dropping by 0.1% m-o-m and 2.8% y-o-y.
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, 12 Apr 2024
