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The SA election grabbed the headlines this week and was even featured by many global outlets ahead of, during, and after the vote on Wednesday. Flying under the radar of the election projections coming through on Thursday, the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) announced its interest rate decision. The central bank kept the repo rate unchanged - see the domestic section for more.
Although the National Election results are still trickling in, with just over half of the votes counted by the time of writing, projections are starting to line up. However, it remains premature to make a firm call on the final share allocation per party – official results are expected this weekend. Still, some trends, are clear. The ANC is on track to lose its majority in parliament but remains the biggest party at a national level. The rise of the MK party is remarkable (the number of votes outside of KwaZulu-Natal is particularly significant) and largely responsible for the loss in votes for the ANC as the established opposition parties failed to make significant inroads. In fact, at this stage, it is not inconceivable that MK will end up with more national votes than the EFF. With the ANC most likely losing its majority at a national level, it will have to cooperate with other parties to remain in charge of government. There seems to be no clear single party that could form a coalition with the ANC without either party making significant concessions. The question is how the horsetrading will play out. As expected, KwaZulu-Natal and Gauteng provincial results are also tight, and this could play into national government negotiations.
In financial markets, the rand started Thursday on a fairly firm footing but lost ground once the CSIR poll put the ANC national vote at about 41%. Yields rose and markets became more jittery. A later estimate by ENCA for a 45% ANC outcome contributed to some renewed rand strength. The rand remained volatile throughout the day and closed around a one-month low against the dollar. To be sure, volatility was always expected, and yesterday’s ranges are not out of line given the levels of uncertainty around the election outcome. The rand is set to remain volatile over the next two weeks as parties negotiate a national coalition.
On the JSE ALSI, it was mainly bankers and retailers that suffered yesterday as markets digested election projections. Global equity markets were also under pressure with renewed concerns that the Fed may keep the interest rate higher for longer. As such, US bond yields climbed, while European bond yields ticked up following the somewhat higher-than-expected German CPI print (see international section below). Global sentiment also contributed to the rand weakness and underperformance of SA assets. The Brent crude oil price steadily moved higher last week, but data showing an uptick in US inventories amid weaker demand pushed prices lower late yesterday. Traders are hesitant ahead of an OPEC+ meeting this weekend, which should provide an update on whether the producer group will extend, deepen or unwind supply cuts. Some expect existing production cuts to be extended into 2025.
On the global front, the data calendar was pretty quiet, with good news on sentiment in Germany and a lift in the IMF’s growth forecast for China unpacked in the international section below. Earlier this morning, however, we saw disappointing data from China with the official manufacturing PMI slipping back below the neutral 50-point mark in May. In politics, Donald Trump was found guilty on all counts in a ‘hush money’ trial – sentencing will happen in July. Despite the news coverage around the trial, Trump is still doing well in presidential election polls and is ahead of President Joe Biden in key swing states. Convicted criminals are not prohibited from holding office.
Next week will see some of the most keenly awaited releases on the SA economic data calendar. Monday will kick off with the Absa PMI for May and new vehicle sales for the same month, the whole-economy PMI follows later in the week. The PMIs showed a nice improvement in activity in April, but it remains to be seen if this was sustained in May. Should we see another month of better activity, this will set us up for a nice recovery in economic activity during the second quarter as the first quarter is likely to be bleak. Stats SA will release Q1 GDP figures on Tuesday. The available high-frequency data suggests that the economy eked out some quarterly growth (we are currently at about 0.2% q-o-q), but it is increasingly possible that the economy stagnated or even contracted. As always, the lack of information on the performance of most of the industries in the tertiary sector makes it tricky to firm up our view, and we are concerned about possible revisions to Q4 agriculture GDP in particular. While it is a small industry, large swings in gross value added have had an outsized impact on the quarterly GDP performance in recent quarters. We will release a comment to clients about the GDP data on Tuesday.
Hot on the heels of Q1 GDP, the RMB/BER Business Confidence Index (BCI) for Q2 will be released on Wednesday. Business confidence was subdued in Q1 but activity should have benefitted from the lack of load-shedding in Q2 so far. On the other hand, last year, some respondents already mentioned that they were in a ‘wait-and-see’ mode ahead of the elections and were wary of making any major business decisions. This would not have changed in Q2. On Thursday, we move back to Q1 as the SARB is due to publish the current account data for the first quarter. In Q4 the current account deficit widened to 2.3% of GDP from 0.5% before.
On the international front, more PMI data from China will be keenly awaited following this morning’s disappointing manufacturing print. However, the biggest event of the week will be the interest rate decision by the European Central Bank (ECB). The Bank is widely expected to lower its policy rate by 25bps, joining some other European central banks in cutting before the US Fed made its first move. Indeed, the Bank of Canada also meets next week, and while consensus still thinks its policy rate will be kept on hold until inflation shows more signs of cooling, there are some voices also calling for a June move for Canada. Back to the ECB, while a cut could put some additional weakening pressure on the euro, ECB officials in recent weeks sound confident that this would not derail the slowdown in inflation. The pace of the rate-cutting cycle is likely to be slow and data dependent. Speaking of data able to move interest rate expectations, the PCE price data later today and the nonfarm payrolls due next week Friday will be important for the US.
As expected, the Monetary Policy Committee (MPC) kept the repurchase rate unchanged at 8.25% (prime at 11.75%) for a sixth consecutive meeting. The unanimous decision was in line with expectations. The statement was broadly neutral, with a slight improvement in the inflation outlook. The SARB now sees CPI inflation reaching its 4.5% objective by the second quarter of next year. While this is earlier than the initial expectation of achieving this goal in late 2025 only, its average forecast for 2025 is just a smidge lower (4.5% vs 4.6% before). The bank sees the inflation risk as being broadly balanced (as opposed to emphasising upside risks in previous meetings) but remains concerned about high inflation expectations (especially for price setters, businesses and trade unions). We expect the first rate cut in September.
Clients can click here for a more detailed comment on the MPC decision.
According to Stats SA, headline PPI inflation accelerated to 5.1% y-o-y in April from 4.6% in March. This was on the back of a 0.5% m-o-m uptick. The acceleration was largely due to fuel inflation, while food price increases were somewhat lower than expected. This could be good news for headline consumer inflation down the line.
The latest results from the GfK’s Consumer Climate survey continue to show an upward trend in consumer sentiment and the economic outlook in Germany. Consumer confidence edged up another 3.1 points to -20.9 points in the June forecast, the highest level since April 2022. Overall, it appears that German consumers have lowered their savings rate and expect higher wages, which should boost spending power. The increase in income expectations is also in step with last week’s ECB wage negotiation data, showing negotiated wages rose by 4.69% in 2024Q1, following a 4.45% rise in 2023Q4. Hopes for an economic recovery are also growing, with the economic sentiment indicator rising by a significant 9.1 points to bring the overall level to 9.8 points in June.
Meanwhile, Germany's preliminary HICP inflation data showed a slight uptick in May, with an annual inflation rate of 2.8% compared to 2.4% in April. This increase was primarily driven by higher services inflation, while goods inflation remained low. Core inflation was unchanged at 3% y-o-y. Encouragingly, the m-o-m inflation rate slowed to 0.2% in May from 0.6% in the previous three months. Later today, the overall Eurozone HICP data will be released, where the consensus is also for a slight uptick in inflation in May, reflecting the higher wage negotiations.
In its most recent Article IV report for China, the IMF increased the outlook for Chinese economic growth for 2024 and 2025. After a better-than-expected first quarter for 2024 and the government continuing to implement growth-boosting policy measures, real GDP growth is now expected to reach 5% in 2024 and 4.5% in 2025, both 0.4 %pts higher compared to the IMF’s April WEO projections. However, the IMF warns that risks are still tilted towards the downside. Policies are in place to steer the property market towards a more sustainable path, such as recent measures to support low-income housing, but uncertainty remains regarding the timing and strength of the recovery in this industry.
This morning, the official manufacturing PMI declined to 49.5 In May—against expectations of remaining virtually unchanged at 50.5. The services sector performed better, although, at 51.5, it declined from April and was a touch below consensus.
Yesterday, the US Bureau of Economic Analysis (BEA) released its second estimate for 2024Q1 economic growth. The estimate revealed that real GDP growth in the first quarter of 2024 was 2.9% y-o-y, lower than the initial 3%. The q-o-q annualised rate is now estimated at 1.3%, down from 1.6%. The downward revision primarily reflects lower consumer spending. Despite this, consumer spending grew at 2.3% year-over-year in Q1 2024, driven by services rather than goods consumption.
Editor: Lisette IJssel de Schepper
Tel: +27 (21) 808 9777
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 31 May 2024
