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Following some hesitant gains ahead of the election and then struggling to find direction afterwards, markets piled into SA assets this week. Positive local economic data played along, and global dynamics did not derail the optimism towards SA. The rand strengthened below R18/$ for the first time since August 2023, stocks surged, and bond yields declined (which is a good thing) amid strong demand for local bonds. Long may it last, but the keenly anticipated announcement of the cabinet will be pivotal in determining sentiment going forward, at least in the near term.
It has been just two weeks since the ANC put forward the Government of National Unity (GNU). Since then, several parties have agreed to the deal, and some general guidelines have been made public. But of course, a lot still needs to be firmed up, and a lot of agreeing and disagreeing will still take place as the GNU tackles tough policy choices and governs the country. The next hurdle will be the composition of the cabinet and, simply put, deciding who gets what. Markets will find comfort in a balanced cabinet with component ministerial appointments. On the flip side, any signs of public dissent within the GNU will be unsettling. Some expect the announcement as soon as today, but there is no constitutional requirement on the timeframe.
On the local data front, annual headline CPI inflation was unchanged at 5.2% in May (see domestic section for more on CPI and the latest batch of internal trade data). Looking ahead, we expect inflation to continue moderating throughout the rest of the year, and average around 5% in 2024. This should support a repo rate cut(s) later in the year, provided that inflation expectations of price-setters, namely trade unions and businesses, start to trend lower. Slowing inflation, a stronger rand and more favourable oil price dynamics (until this week at least) have already resulted in markets increasingly betting that headline inflation will moderate to the midpoint of the SA Reserve Bank’s (SARB) target soon(er), which will provide the bank with scope to lower the policy interest rate. The five-year breakeven rate (a measure of price growth expectations) fell to its lowest level in 16 months after Wednesday’s CPI release. Of course, the Fed may still throw a spanner in the works, and a SARB cut is far from guaranteed (although, for now, it is still our baseline view).
Indeed, despite inflation slowing to the targeted 2% in May, the Bank of England (BoE) kept its policy rate on hold yesterday. Services inflation came in at a higher-than-expected 5.7% y-o-y, and as such, core inflation remains sticky – see the international section for more. The BoE said that it wants to see if overall price increases stay muted and kept the door open for a possible late (UK) summer cut. Meanwhile, the Swiss National Bank lowered its policy rate for the second time this year on the back of a strengthening franc. In contrast, the Norwegian central bank said that the first cut would only be coming in 2025 and kept the policy rate steady at a sixteen-year high.
Back to financial markets, the rand exchange rate has appreciated by more than 2% against the dollar, euro, and pound from last Thursday. In fact, the rand closed at below R18/$ for the first time this year on Wednesday, but pulled back a little on Thursday. After reaching an intraday high on Wednesday, the JSE ALSI also lost some of its gains on Thursday, but still closed almost 5% w-o-w higher. Global stocks were also generally up this week – although not by as much as the local bourse. US shares were buoyed by chipmaker Nvidia, which took the top spot as the most valuable company in the world early in the week (the top three are Apple, Microsoft and Nvidia). Even European shares were fairing relatively well this week despite worries about the outcome of the upcoming snap election in France and its implications for France’s fiscal picture. French bond yields have ticked up relative to other European countries as investors are building in a bit of a risk premium. In SA, the yield on the 10-year government bond dipped below 10% for the first time since early February.
The Brent crude oil price rose by 3.5% w-o-w and edged back above $85/barrel for the first time since late April amid concerns about an escalation of conflict in the Middle East.
Stats SA is set to publish enterprise-based labour data (QES) for Q1 on Tuesday. The Q4 release was the first based on a new sample and showed a much stronger post-COVID jobs recovery than previously thought, although formal non-agri employment still fell by 194 000 jobs q-o-q in Q4. The disappointing Q1 GDP print suggests that employment may also be poor, but the already released household survey for Q1 suggests we could see a slight quarterly bump in formal non-agri. The relationship between the two employment measures, however, is far from perfect. Also from Stats SA, the PPI for final manufactured goods will follow on Thursday. Following an acceleration in April, we expect headline PPI to tick down in May. Indeed, with recent more favourable-than-expected fuel price dynamics, the peak in PPI is likely behind us, and factory gate inflation is likely to slow through the remainder of the year (although not in a linear fashion).
On Wednesday, the BER will publish the FNB/BER Civil Confidence Index. Civil confidence rose to a near eight-year high of 47 points in the 2024Q1 on the back of higher activity. Signs of continued activity in this sector (often linked to large infrastructure projects) would be very welcome. The FNB/BER Consumer Confidence Index (CCI) for Q2 will be released on Thursday. The CCI is a good measure of consumers’ willingness to spend. The fieldwork of the Q2 CCI took place after the election results were announced, but there still was little certainty on what the seventh administration would look like. Slowing inflation usually helps with consumer confidence, but borrowing costs remained high during the survey period (and are not expected to come down in the very near future).
According to Stats SA, annual headline consumer price inflation remained at 5.2% in May, unchanged from April. Price increases in more than half of the CPI basket slowed or remained steady. Food and non-alcoholic beverages were stable and up by ‘only’ 4.7% y-o-y, while housing and utilities were unchanged at 5.8%. Softer price increases were seen in miscellaneous goods and services (up 7.1% y-o-y in May vs 7.2% in April). In contrast, faster price increases were recorded for transport (6.3% vs 5.7%). At 4.6%, annual core inflation, which excludes food and energy costs, remained sticky in May. Headline consumer prices rose by 0.2% m-o-m in May, following a 0.3% m-o-m increase in April. The monthly increase in headline CPI was ‘fuelled’ by petrol and diesel prices increasing by 0.6% m-o-m.
Stats SA released a slew of data on the internal trade industry during the week. In April, real retail sales disappointed, rising by ‘only’ 0.6% y-o-y (vs an expected 1.5% y-o-y increase). This follows a downwardly revised 2.3% y-o-y gain in March. Half of the increase in the headline reading came from pharmaceuticals and medical goods, cosmetics and toiletries retailers (up 4.1% y-o-y). In contrast, hardware, paint, and glass retailers saw the steepest decline (-1.7% y-o-y). Positively, seasonally adjusted (sa) retail sales rose by 0.5% m-o-m, following a 1.3% m-o-m increase in March.
The wholesale industry painted a similar picture, with real trade sales rising by 1.2% y-o-y in April. This marks the end of a streak of annual contractions. Real trade sales (sa) were 6.9% higher in April compared to March. The motor industry also fared better. Real motor trade sales rebounded by 3.9% y-o-y in April, following a 10.2% decline in March. Used vehicle sales soared, increasing 19.5% y-o-y in April (adding 3.7% pts to the headline print). In contrast, fuel sales fell (down 2.8% y-o-y, slashing off 0.8% pts). After declining by 7.2% m-o-m in May, real motor trade sales (sa) increased by 7.2% m-o-m in April, reversing the previous month’s decline.
Overall, the latest batch of internal trade data, combined with more robust mining, manufacturing, and electricity data, points to a solid start to Q2 GDP.
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In the UK, headline CPI inflation slowed to 2% y-o-y in May, down from 2.3% y-o-y in April. This was largely due to a slowdown in the food and non-alcoholic beverages category, which was up by only 1.7% y-o-y in May and down by 0.3% m-o-m. As a result, overall goods prices remained unchanged between April and May 2024. However, core inflation, particularly in services, remains a significant concern. Though lower than in April, core inflation still ran at 4.2% y-o-y in May, with services inflation at 5.9% y-o-y.
Despite overall inflation aligning with the BoE target, persistent core and services inflation continues to hinder monetary policy easing. This issue was a key point in the BoE’s Monetary Policy Summary yesterday. The BoE maintained its policy rates, emphasising that inflation must sustainably return to the 2% target before considering rate cuts.
Meanwhile, retail sales in the US were up by 0.1% m-o-m, lower than the expected 0.2% m-o-m increase. Auto sales were the strongest contributor to the overall positive growth, as retail sales, excluding motor vehicles and parts, were negative between April and May.
China's May industrial production and retail sales data, released on Monday, showed annual increases. Industrial production grew by 5.6% y-o-y in May, with positive contributions from mining, manufacturing, and electricity production. Automotive manufacturing, in particular, saw significant growth, increasing by 7.6% y-o-y in May and 10.5% from January to May compared to the same period last year.
Retail sales rose by 3.7% y-o-y in May, better than the expected 3% increase. However, domestic automobile sales declined by -4.4% y-o-y and only grew by 0.2% y-o-y from January to May 2024 compared to the same period in 2023. This suggests that Chinese-produced automobiles are either being stockpiled or exported, with the latter being more likely as indicated by soaring automobile export data.
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, 21 Jun 2024
