Weak factory data; Europe set to cut before Fed


Lisette IJssel de Schepper

It was a relatively quiet economic data week, both locally and globally. The main domestic data release was the manufacturing production print for March. Output significantly undershot expectations and tumbled by more than 6% y-o-y. Worryingly for Q1 GDP, the sector is set to contract on a quarterly basis. The streak of no load-shedding so far in April and May, however,  does set the stage for a strong performance in the second quarter.

On the international front, the focus was on monetary policy decisions rather than data. In line with expectations, the Bank of England (BoE) kept its policy rate unchanged this week. Encouragingly, the central bank acknowledged that inflation dynamics were improving somewhat faster than expected, which suggests that the first rate cut is likely to be soon. While the BoE did not regard a cut in June as a “fait accompli”, it also did not rule out the possibility. On the chances that the BoE cut could now come before the US Fed, Governor Andrew Bailey said that “there is no law that the Fed moves first”. Indeed, the central bank of Sweden lowered its policy rate for the first time in eight years this week,  by 25bps to 3.75%. This was despite the Riksbank warning that the weakening Swedish krona (already down by about 7.5% against the dollar this year and likely to be under further pressure following the cut) could lead to higher imported inflation and poses an upside risk to inflation. For now, two more cuts are expected this year. In Europe, the Swedish, Swiss, Czech and Hungarian central banks have now reduced their policy interest rates before the US Fed. Our belief is that the European Central Bank (ECB) will follow in June. In emerging markets, Brazil’s central bank cut its interest rate again, by 25bps, with four out of the nine members wanting a 50bps drop instead. Like many other Latin American central banks, Brazil started hiking much earlier than most advanced economies, which allowed it to enter its cutting cycle sooner (in August 2023).

Whether the SA Reserve Bank (SARB) decides to cut before the Fed remains to be seen and likely hinges on the development of local inflation expectations. Of course, the actual timing of the first Fed cut will also matter, with markets currently seeing some probability of easing in September (the Fed meets a day before the SARB is due to announce its interest rate decision). Expectations for the timing of the first Fed cut seesaw with every notable US data release –last week’s disappointing nonfarm payrolls and a surge in jobless claims this week argued for a more dovish stance after a recent streak of hot price data had pushed out expectations. To be sure, not all European banks have jumped on the cutting bandwagon yet; just last week, the central bank in Norway kept rates on hold, with experts now seeing the first reduction in December or even next year. It is also important to note that not all cutting cycles will be equally fast or steep (or perhaps slow and shallow are the better words to use). In SA, for example, we expect to see only about 100bps worth of cuts, with some scope for a further downtick in 2026 if inflation (and expectations) ‘behave’ and settle around the midpoint of the target. Should the SARB, in the meantime, firm up intentions to target a lower inflation rate, this later cut may be off the cards. Of course, successfully achieving a lower inflation target over time would enable lower interest rates in due course.

So far in May, the rand exchange rate and oil price are doing their bit not to worsen the local near term inflation outlook. The Brent crude oil price dipped for another week, while the rand strengthened by 0.8% w-o-w against the dollar. The dollar weakened by a similar margin to the euro, suggesting that this is not necessarily a strong rand but rather a weaker dollar narrative. Oil is now about $5/barrel lower than it was this time last month, while the rand is back at the same level seen this time in April after having weakend past R19.20/$ late April. The yield on the 10-year government bond followed a similar pattern. The local JSE ALSI is currently quite a bit better than it was this time in April (about 2.5% higher). Yesterday, the local bourse benefited from generally higher global stock markets following a weaker US jobless claims report (i.e. more people filing for unemployment benefits thus signalling a deterioration of the job market). A typical ‘bad news is good news’ outcome that highlighted that a US rate cut is still on the cards, albeit not imminent.


Following this week’s poor manufacturing and electricity production data for March, we will see more high-frequency data releases for the same month next week. Mining production was surprisingly solid in February, with a 9.9% y-o-y increase from a low base in 2023 on the back of a 5% monthly surge. Such a strong growth figure is unlikely to be repeated, but some monthly growth is needed to push quarterly momentum in positive terrain and for the sector to make a positive contribution to GDP. Internal trade data will further colour in the Q1 GDP picture. Retail is so far on track for a quarterly loss, but wholesale and motor trade are looking better. Stats SA will also publish the Quarterly Labour Force Survey for Q1 on Tuesday. In Q4, the unemployment rate ticked up to 32.1% from 31.9% in Q3. We could see another uptick if school leavers and other labour market entrants at the start of the year did not find employment.

On the global front, the US consumer inflation print for April will receive a lot of attention. To repeat the message once more, any upward or downward surprise to the consensus view could lead to some volatility in financial markets as the market readjusts its interest rate expectations. Especially if inflation accelerates for a third consecutive month – the view is for inflation to be unchanged at 3.5% y-o-y and for the pace of monthly price gains to slow. We will also see US producer price statistics for April, and the New York Fed is set to publish its Household Debt and Credit Report. The report will be scrutinised for the impact of high borrowing costs on debt levels and delinquency rates. The latter has been trending higher for younger borrowers in particular.


Katrien Smuts


According to Stats SA, manufacturing production plummeted in March and came in much weaker than expected. Output decreased by 2.2% m-o-m and was down by 6.4% compared to March 2023. This was the biggest annual decline in almost two years.

While monthly fluctuations are noteworthy, examining quarterly trends offers a clearer understanding of the sector's dynamics and gives a good idea of the sector’s contribution to GDP growth. In 2024Q1, output was 1% lower than in 2023Q4. Notably, two of the largest divisions made positive contributions to quarterly growth: food and beverages (2.7% q-o-q; +0.6%pts) and petrochemicals (2.6% q-o-q and +0.5%pts). This was outweighed by steep declines in vehicle manufacturing (-14.9%; -1.5%pts) and steel and machinery (-3.1%; -0.6%pts). Fortunately, following a poor start to the year, the recent more upbeat Absa PMI suggests a potential improvement in production in April.

April’s electricity production should also be better than Q1's, given the lack of load-shedding. More load-shedding in 2024Q1 relative to 2023Q4 meant that electricity output was down 1% q-o-q.


Similar to the recent Absa PMI result, the S&P Global South Africa PMI showed an increase in April. Both indicators have now surpassed the critical 50-point threshold, signalling an expansionary phase. However, unlike the Absa PMI, the S&P PMI reported a slight decline in new order sales compared to March. Nevertheless, both sets of results underscore the beneficial impact of reduced load-shedding and fewer supply chain disruptions on business operations in SA.


SA’s gross foreign reserves declined from its three-month high of $62.3bn in March 2024 to $61.8bn in April 2024. There was a $937mn drawdown in foreign exchange reserves, but this was counterweighed by a $408mn increase in gold reserves, boosted by an especially high gold price in April.


Tshidiso Mofokeng


The BoE decided to leave its benchmark interest rate unchanged at 5.25%, as anticipated. Two members opted for a rate cut while the other seven voted to maintain it at the current level. Governor Bailey, during the press conference on Thursday, said that more evidence is needed to confirm that risks on inflation persistence are to the downside and cautioned that the bank is not yet ready to cut. However, the BoE foresees headline inflation moderating closer to the 2% target in the near term which could provide scope for a cut. As the monetary policy stance remains restrictive for now, the board welcomed cooling inflationary pressure, although it drags on economic activity.


The Caixin composite PMI ticked up to 52.8 in April from 52.7 in March. The continued upward momentum will be welcomed as China seeks to pivot from a bloated property-led to a manufacturing-led growth model. Meanwhile, the services PMI slipped to 52.5 in April from 52.7 in March. However, all sub-indices remain positive and signal more room for improvement ahead.

The trade surplus widened to $72.35bn in April from $58.55bn in March. The performance of both exports (1.5% y-o-y in April vs -7.5% y-o-y in March) and imports (8.4% y-o-y vs -1.9% y-o-y) improved. Meanwhile, on trade relations, Chinese President Xi Jinping visited a couple of European Union (EU) nations to strengthen trade ties amid concerns of overcapacity in Chinese factories leading to dumping of cheap(er) exports on international markets. China instead argues that its high-tech products are cheaper because its production is more efficient, not subsidised. However, the problem with cheap exports rather lies with products not used in its ailing domestic construction sector.


The HCOB composite final PMI for the Eurozone pushed further into expansionary territory after rising to 51.7 points in April from 50.3 points in March. While the manufacturing sector remains weak, a solid expansion in the services PMI  drove the overall index higher.


Editor:         Lisette IJssel de Schepper
Tel:              +27 (21) 808 9777
Email:          lisette@sun.ac.za

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Name: Weak factory data; Europe set to cut before Fed