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The focus this week was once again on monetary policy. The US Federal Reserve (Fed) on Wednesday decided to keep the US Federal Funds rate unchanged. In contrast, two other major central banks changed their monetary policy settings unexpectedly.
The Bank of Japan (BoJ) hiked their benchmark rate to “around 0.25%,” marking the second increase this year in response a weaker yen. Meanwhile, the Bank of England (BoE) moved in the opposite direction, cutting rates for the first time since 2020. A reduction in the policy rate in the UK was on the cards, but only for later in the year.
While the US Fed kept the federal funds rate unchanged, the prevailing view is that they will cuts rates soon too, especially following comments by Fed chair Jerome Powell at the post-announcement press conference. In fact, markets are pricing in as much as 75 basis points (bps) worth of cuts by the end of the year. Our forecast (and this has been our view for a while) is that monetary policy easing can be expected to start in September. Of importance is that the Federal Open Market Committee (FOMC) is also increasingly concerned about labour market conditions. The spotlight will therefore firmly be on July nonfarm payrolls data to be released later today. In June, the US economy added an unexpectedly high 206 000 jobs. However, previous data has been consistently revised downward, with April and May employment figures combined being 111 000 lower than initially reported. Consequently, the June figure may also be revised lower. Other employment indicators have been weak, with initial jobless claims rising to 238 750 in June from 224 200 in May.
On the domestic policy front David Fowkes, member of the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) and advisor to the governors noted – at the BER conference on Wednesday - that monetary policy in SA is restrictive. This supports our call for a repo rate cut in September. The director-general of the National Treasury, Duncan Pieterse, also shared some insights, from the fiscal policy side, reiterating their commitment to stabilising debt and debt service costs. Importantly it seems that the push to address the “binding constraints” to growth is gaining momentum.
In terms of data releases, the first estimate of Q2 eurozone (EZ) GDP surprised on the upside, bolstered by external demand. Meanwhile, in China, the latest PMI data showed that activity cooled in July, especially in the manufacturing sector. Similarly, the US ISM PMI signalled further weakness in July, declining for the fourth consecutive month.
Domestically, the Absa PMI released yesterday provided a welcomed upside surprise. After remaining weak in June, the index rose above 50 in July. This indicates that Q3 started off on the front foot. Underpinning this rise was better domestic and external demand and, importantly, an uptick in respondents’ view of prospects in the next six months. It is too soon to tell if this reflects some calm following the formation of the Government of National Unity (GNU).
In financial markets, the rand traded stronger against most major currencies during the week, even against a stronger US dollar. Demand for safe-haven assets increased last week – which partly explains the better US dollar despite the more dovish stance by the Fed - off the back of rising geopolitical tension in the Middle East including the assassination on a Hamas leader in Iran. Despite escalating regional tensions, Brent crude oil prices ended the week lower. This occurred amid the decision of an OPEC+ panel to adhere to the cartel’s plan to increase production in October, despite recent data indicating weak oil demand from Asia.
The expectations for a Fed cut soon and safe-haven demand also lifted the price of gold.
Most major global bourse ended the week in the black. The JSE rose this past week to close at a new all-time high.
Due to the public holiday (Women’s Day) there will be no weekly on Friday, 9 August 2024.
It is a quiet week domestically, with Stats SA set to release only the June manufacturing data. May's figures showed a disappointing 3.2% month-on-month (m-o-m) decline. However, a strong start to the quarter, with a 5.2% m-o-m increase in April, suggests that even if June production remained flat, manufacturing output would have risen in the second quarter. The May decline was telegraphed by the Absa manufacturing PMI, which showed some improvement in June albeit still in contraction territory (below 50). Additionally, the SARB will publish the gross foreign exchange reserves for July.
Internationally, S&P Global will publish the final July PMIs for several major economies. The Caixin China Composite PMI is expected to have declined further in July, though it should remain above the neutral 50-point mark. Preliminary figures indicate that both the US and UK S&P composite PMIs rose in July. While overall price increases moderated according to the PMIs, some categories saw renewed input price pressure. The US ISM Services PMI for July will also be released, with hopes for improvement after June's sharp decline.
Staying in the US, June trade data is expected to show a smaller trade deficit than in May. Regarding its key trading partners, the deficit with China will likely widen based on trade data released by Beijing. China is also releasing its trade data (for July) next week. China's trade data is anticipated to show another robust surplus for July. Amid a struggling property market, China has increasingly relied on exports to boost its economy. A focus on exports and weak domestic demand have kept prices low. Chinese inflation, set for release next Friday, edged down in June but remained just above zero, marking the fifth consecutive month of consumer inflation. However, average consumer prices over the last twelve months have declined, prompting China’s central bank to cut interest rates last week.
Lastly, Eurozone June retail sales are expected to show improvement.
The Absa PMI increased by 6.7 points to 52.4 in July 2024, up from 45.7 in June 2024. This reflects a solid start to the third quarter following a weak May and June. The survey results show domestic and global demand picked up, filtering through to higher activity. Demand has struggled recently, and manufacturers could not exploit the stable electricity supply to its full potential. Petrol prices fell by about R1/litre in July, with a smaller decline in diesel, alleviating input cost pressure and translating to a sustained downward trend in purchasing prices. The index tracking expected business conditions in six months’ time came out positive, again, with respondents warming up to the political stability and policy certainty returning and the renewed prospects of monetary policy easing.
The trade balance recorded a surplus of R24.23 billion (bn) in June, following a surplus of R20.09bn in May and exceeding expectations of R18.4bn. This is the largest surplus since May 2022, as imports declined by 6.5% m-o-m, while exports declined by 3.4%.
Meanwhile, SARB data showed that money supply (M3) grew by 4.2% year-on-year (y-o-y) in June, from 4.7% in May, and below the expected 4.7%. M3 measures all currency in circulation, bank deposits, and debt securities. Credit extension to the private sector was largely flat at 4.3% in June, above expectations of 4%.
According to naamsa, new vehicle sales grew by 1.5% y-o-y in July, following a sharp decline of 14% in June. This translates to an increase of 657 units from the 43 572 vehicles sold in July 2023. The July, export sales declined by 33.2% y-o-y (12 671 units), compared to the 38 132 vehicles exported in July 2023 due to adverse weather conditions in South Africa’s biggest export market (Europe). Year-to-date sales are still down more than 6% compared to the same period last year.
The US Fed decided to leave their benchmark interest rate steady between 5.25%-5.50%, in line with expectations. The Fed continues to maintain their restrictive monetary policy stance. Given their dual mandate of full employment and price stability, risks to both factors are currently being evaluated as “better balanced” in the FOMC press conference, as mentioned by the Fed Chair Powell. Moreover, there is a growing consensus, across the table, that the Fed is getting closer toward commencing with the interest rate cutting cycle which is becoming more probable for the next meeting in September. As signalled several times in the FOMC, the Fed is growing more concerned about labour conditions. That said, the upcoming jobs report(s) will, equally, be as important as the inflation prints, in reaching this outcome on interest rates and dialling back on their current monetary policy stance.
Across the Atlantic, the BoE decided to cut their key policy rate by 25bps to 5.0%. The decision to cut was a very close call with a 5-4 vote split where 4 members opted to leave it unchanged. This decision was motivated by cooling inflationary pressures, of which annual consumer inflation remained at the 2% target in June, marking the second consecutive month. However, the BoE anticipates inflation to accelerate to around 2.8% toward the end of the year as the drag from energy prices dissipates. Notably, the BoE flagged possible upside risk to prices over the medium term coming from service inflation which is higher than they had expected in the May monetary policy report.
Converse to other major central banks, the BoJ hiked their key short-term policy rate to ‘around’ 0.25% from 0%-0.1%. Moreover, the BoJ signalled a hawkish tone, mentioning that if their latest quarterly outlook forecasts materialize, then they “will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation”. The BoJ’s intervention in the currency market coupled with the expectation of interest rate hikes has contributed to a gradual recovery in the yen in recent weeks, after falling to its lowest level against the dollar since 1980.
In the US, the ISM manufacturing purchases mangers index (PMI) declined to 46.8 points in July from 48.5 points in June. This marks the fourth consecutive month that the print is in contractionary territory. Worryingly, the pace of the decline quickened in July. The new sales orders index readings as well as the production index slipped lower, signalling underlying weakness in the US manufacturing sector both on the demand and supply front.
In China, the NBS composite PMI registered 50.2 points in July, fractionally down from 50.5 points in June. The NBS manufacturing PMI remained in the contractionary zone for the third consecutive month, ticking down to 49.4 points in July from 49.5 points in June. The decline in the sub-indices was broad-based, except for the production index which slightly expanded as well as supplier delivery time index which showed deliveries have lengthened (which is positive) than the previous month. In step with the NBS, the Caixin manufacturing slipped into contractionary terrain (for the first time in 9 months) at 49.8 points in July, down 2 points from the previous month. Meanwhile, the NBS non-manufacturing PMI, in step with the composite, ticked down to 50.2 points in July from 50.5 points in June.
According to the flash estimate by Eurostat, GDP growth in the EZ registered a modest 0.3% q-o-q pickup in Q2, unchanged from Q1. The EZ economy grew more than the 0.2% expansion that was expected despite its largest economy, Germany, contracting by 0.1%. This underscores the important role Southern European countries such as Spain and Italy are playing in keeping the Eurozone economy afloat. Nonetheless, the pace in the EZ economic activity recovery, tentatively, continues to drag its feet, albeit moving in a positive direction.
Finally, the preliminary annual consumer inflation quickened to 2.6% in July, marginally higher than the 2.5% in June and above expectation that it would ease to 2.4%. This was primarily driven by the stickiness of services inflation. Indeed, core inflation, which excludes volatile food and energy prices, rose by 2.9% y-o-y in July, remaining unchanged for the third consecutive month. Overall, sticky consumer inflation coupled with uneven growth in the EZ, paints a complicated picture for the ECB policymakers regarding the path of interest rates.
CONTACT US
Editor: Craig Lemboe
Tel: +27 (0)21 808 9755
Email: cjl@sun.ac.za
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Friday, 02 Aug 2024
