September rate cut by Fed back into play; local May data disappoints

THE WEEK IN PERSPECTIVE

Tracey-Lee Solomon

The international focus was on the US, with a key speaking engagement by Federal Reserve (Fed) Chair Jerome Powell and the headline inflation print important in shaping interest rate expectations. In Europe, the results and consequences of the French and UK elections stole the headlines. Locally, we saw parliament elect the chairs of various portfolio and standing committees while on the domestic data front, industrial production figures for May came out somewhat weaker than expected.

In other domestic news, the SA Municipal Workers' Union (Samwu)  signed a one-year agreement granting a 7% wage increase for water sector workers, effective from July 1 2024. This deal, involving Samwu—representing about 160 000 of the nation's 300 000 municipal workers—and the water boards, aims to stabilise the crucial water sector. However, above-inflation wage increases pose challenges for the National Treasury and the SA Reserve Bank (SARB) by potentially straining the budget and contributing to sticky inflation, even more so through higher administrative costs in the water sector. Meanwhile, striking workers at the Ford Silverton Assembly Plant return to work today after a R20 000 once-off payment from the company.

In politics, Songezo Zibi of Rise Mzansi was elected unopposed as chair of the Standing Committee on Public Accounts (Scopa). Zibi, nominated by the ANC and seconded by the DA, will lead the committee overseeing public financial accountability. Although the EFF objected to Zibi’s election, they did not propose their own candidate. Due to its important oversight role, the Scopa chair is traditionally held by an opposition party. While Rise Mzansi is a member of the Government of National Unity (GNU), it does not hold any positions in the national executive. Meanwhile, in an interview with Business Day, Health Minister Aaron Motsoaledi expressed his determination to push through the controversial National Health Insurance (NHI) bill. A note on the associated funding, infrastructure, capacity, and administration requirements that should be considered before implementation can be found here.

International political developments were also in focus this week. In France, the second round of National Assembly elections brought surprises. Contrary to initial projections, the far-right National Rally Party (NRP) secured less than a third of the seats. Instead, the left-wing New Popular Front (NFP) got the most seats, with even President Emmanuel Macron’s centrist bloc doing better than NRP. The diverging ideologies of these blocs have resulted in a hung parliament with no clear path to forming a governing coalition. Indeed, although an NRP landslide was averted, Macron’s gamble has led to parliamentary chaos. As per a published letter by Macron, “no one won” the election.

In Kenya, President William Ruto dismissed nearly all his Cabinet ministers on Thursday following weeks of protests over a hastily passed finance bill. Ruto announced his new government would focus on efficiency and be leaner. The controversial finance bill, introduced to secure IMF funds through fiscal austerity, was withdrawn, but protests continue. Demonstrators are frustrated that the government prefers tax hikes over addressing corruption and misuse of public funds.

Moving to the US, Fed Chair Powell testified before Congress on Wednesday, stating that the Fed would not reduce the federal funds rate until there is "greater confidence that inflation is moving sustainably toward 2%." While Q1 data did not provide this confidence, recent inflation figures have shown modest progress. Powell noted that the US economy has cooled, prompting the Fed to look at the other half of its dual mandate, the labour market, and not just inflation. His testimony preceded June inflation data, which came in below expectations. Consequently, markets are now pricing in a 92% chance of a rate cut in September. We are leaning towards a September cut too. Meanwhile, public calls for President Joe Biden to withdraw his candidacy to stand as the Democratic Party nominee for president are growing. A Washington Post-ABC News-Ipsos poll revealed that most Democrats believe that Biden should end his re-election campaign following a poor debate performance. Indeed, just last night, while handling policy questions well, Biden mistakenly introduced Ukrainian President Volodymyr Zelenskyy as “President Putin” and referred to Kamala Harris as “vice-president Trump”.

In financial markets, the US dollar weakened as speculation grew that the US Fed might cut its policy rate in September following last week's downwardly revised nonfarm payrolls data and softer June inflation figures. Consequently, the rand closed yesterday below (i.e. stronger than) R18/$, marking a 1.5% weekly gain. However, dollar weakness was not the sole factor; the local currency also saw modest gains against the euro and pound sterling. Healthy appetite for local bonds contributed to a 22bps decline in the yield of the 10-year government bond. The JSE was flat w-o-w, contrasting with the US S&P 500's 1.7% gain, driven similarly by anticipation of a Fed rate cut.

In commodity markets, gold continued its bullish trend, rising by 2.5% for the week ending Thursday. In contrast, platinum fell by 0.5%, reversing the previous week's gains. The Brent crude oil price declined by more than 2%, buoyed by optimism surrounding a potential ceasefire between Israel and Hamas. The Middle East risk premium, long embedded in oil prices, tends to ease with signs of reduced tensions. Meanwhile, wildfires in Alberta, Canada, threatened production, and Hurricane Beryl led to refinery shutdowns in Texas. Despite these disruptions, Middle East geopolitical developments remained the primary driver of crude prices.

WEEK AHEAD: SARB TO KEEP INTEREST RATE ON HOLD

After the release of May industrial production data this week (see domestic section), attention will shift to next week’s internal trade data from Stats SA. April's retail trade sales came in below expectations but showed some sustained monthly momentum, with a 0.5% increase following a 1.3% rise in March. Optimism remains for the second quarter, supported by the BER’s Retail Survey results which showed improvement in retailers’ confidence in 2024Q2. Wholesale and motor trade sales in April started Q2 strong, up 3.9% and 7.2% m-o-m, respectively. Unlike previous months, fuel prices did not inflate motor trade results. The BER’s 2024Q2 business surveys indicated improved confidence among wholesalers, though vehicle dealers' confidence was extremely low.

Next week, the SARB Monetary Policy Committee (MPC) meets to decide the repo rate. In May, the MPC kept rates at 8.25% and no change is expected in July. However, with moderating inflation, a rate cut could be possible by September. Several European central banks have already cut rates, and markets anticipate the US Fed to cut in September. Although the SARB does not explicitly follow the US Fed, the Reserve Bank does take the rand exchange rate and inflationary impacts of a potentially depreciating local currency into account. (Ceterus Paribus, the rand would likely weaken if the SARB lowers rates and the US not).

The European Central Bank (ECB) is expected to hold its deposit rate steady next week, with markets pricing in a 92% chance of no change. Regarding the Bank of England (BOE), although they do not meet next week, the UK’s June inflation data, released Wednesday, will be critical to their decision on whether to cut rates or hold them in their August meeting. May's inflation hit the BOE's target at 2%, but services inflation remains high. UK retail sales data will also be released next week.

In Asia, Chinese GDP, industrial production, and retail sales data will be released, with expectations of slowed Q2 growth due to weak consumer demand. Japanese consumer inflation data will be out Friday; persistent above-target inflation might prompt the Bank of Japan to raise rates again (after an initial increase way back in March) to support the yen against the US dollar.

DOMESTIC SECTION

Romano Harold

MINING PRODUCTION SURPRISES ON THE DOWNSIDE IN MAY

According to Stats SA, annual mining production was flat in May after rising by an upwardly revised 1.4% y-o-y in April. The headline reading was lower than expected, with the market consensus calling for a modest increase of 0.9%. The main positive contributors were coal (up 7% y-o-y, adding 1.6% pts) and chromium ore (17.1%; 0.7% pts). In contrast, gold (down 9%, shaving off 1.3% pts) and PGMs (down 4.1%; -1.1% pts) were the main negative contributors. On a monthly basis, seasonally adjusted (sa) mining production unexpectedly contracted by 0.6% following a 0.8% increase in April. The unexpected decline was driven by a double-digit slump in PGMs (down 11% m-o-m in May).

WEAK MANUFACTURING PRINT FORESHADOWED BY ABSA PMI

There was more disappointing news in the manufacturing sector as production fell by 0.6% y-o-y in May, following a downwardly revised 4.9% increase in April. The decline was driven by basic iron and steel, non-ferrous metal products, metal products and machinery (down 8.1%; -1.8% pts) and motor vehicles, parts and accessories and other transport equipment (down 11.8%; -1.2% pts). After increasing by 5.2% m-o-m in April, manufacturing production (sa) declined by a bigger-than-expected 3.2% in May. This decline was telegraphed by the Absa PMI, which fell to 43.8 in May from 54 in April. While the headline PMI improved to 45.7 in June, it remained in contractionary territory, with insufficient demand seeming to have weighed heavily on the sector’s performance.

Mining and manufacturing are arguably the most electricity-intensive sectors of the economy. Despite the stable electricity supply through Q2, these two sectors struggled in May after bouncing back in April. Still, the available high frequency suggests some recovery in overall real GDP after the Q1 decline and supports our view of modest quarterly real GDP expansion.

INTERNATIONAL SECTION

Nkosiphindile Shange

US CONSUMER INFLATION SLOWS, INCREASING THE PROBABILITY OF TWO RATE CUTS IN 2024

Fed Chair Powell presented the semi-annual monetary policy report to the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday and Wednesday. On the second day, Powell said that he believed that inflation was receding but was not yet confident that price gains were sustainably slowing to the central bank’s 2%-target and required more data. Such data came the next day. On Thursday, the official Bureau of Labor Statistics data showed that annual consumer inflation (CPI) fell to 3% in June, slightly below consensus and down from a 3.3% increase in May. Even core CPI, which excludes volatile energy and food prices, came in below consensus (at 3.3% vs 3.4% expected) in June, lower than the 3.4% forecast. Markets upped their probability of a rate cut in September to 92% compared to 72% before the official CPI data. Treasury yields dropped, and stock futures rose as traders increased their bets on the probability of two rate cuts this year.

CHINESE CONSUMER AND PRODUCER PRICES SLOW

Official data by the National Bureau of Statistics showed that the Chinese CPI rose by a below-consensus 0.2% y-o-y in June, compared to 0.3% in May. Falling food prices contributed to the slowdown with beef prices down by 13.4%, while fruit prices fell by 8.7% and fresh vegetable prices by 7.3%. The producer price index (PPI) declined by 0.8% in June, following a drop of 1.4% in May. Deflationary risk remains, and it is expected that when the Communist Party meets next week, President Xi Jinping will unveil new policies to stimulate domestic demand. China has relied on the export market for growth, given the muted domestic demand.

China's trade surplus rose to $99.05bn, up from $69.80bn a year ago and exceeding the $85bn expected. This is the largest surplus since July 2022, driven by an 8.6% increase in exports and a 2.3% decrease in imports. The latter can again be ascribed to weaker domestic demand. The latest reading means that in the first half of 2024, China achieved a massive trade surplus of $435bn, with growth in exports (3.6% y-o-y) exceeding that in imports (2.0%).

In the Eurozone, Germany’s consumer inflation (CPI) came in at 2.2% in June, the same as the reading in May and in line with expectations.

UK MONTHLY GDP CAME IN TWICE AS FAST AS EXPECTED

The UK economy grew by 0.4% in May after the economy had stagnated in April and registered growth in the year's first three months. The expansion was driven by continued growth in the services sector and a rebound in construction and manufacturing. The better-than-expected outcome poses an upside risk for the full-year outcome. However, solid service consumption raises the risk of higher services CPI, and the general strong growth complicates the decision to cut interest rates this month.

CONTACT US

Editor:         Lisette IJssel de Schepper
Tel:              +27 (0)21 808 9777

Email:          lisette@sun.ac.za

 

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