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The biggest domestic development was the July consumer inflation (CPI) print. Headline and core inflation (which excludes energy and food prices) came in below our and the consensus forecasts. In financial markets, the rand exchange rate remained fairly strong through most of this week, with oil prices trading below $80/barrel, which bodes well for the near-term inflation outlook. Internationally, minutes from the July US Federal Reserve (Fed) meeting provided firm guidance that an interest rate cut is on the table for September.
A member of the SARB’s monetary policy committee (MPC) would probably tell you that a lower historic inflation print does not determine forward-looking interest rate decisions, so this week’s data is not that important. But, of course, a lower starting point matters. The fact that the electricity component of CPI was somewhat lower than the SARB’s latest forecast should help with a lower inflation profile going forward as this price increase will largely determine the annual rate of change until the next survey of electricity prices. The SARB’s (and to be fair, our) oil price forecast for 2024 also seems to be on the higher side if current price dynamics continue. Signs of weaker global demand for oil, while markets remain well supplied, have contributed to a downward move in the Brent crude price of late. The oil price, however, remains sensitive to news from the Middle East, with hopes for a ceasefire between Hamas and Israel once again fading. Coming back to the interest rate, the July CPI print reinforces our long-held view that the SARB will cut the repo rate in September. The magnitude of the cut will depend on inflation expectations (the BER survey comes out on 12 September), while the SARB will for sure “watch” the Fed decision to be announced the day before its own meeting. As we flagged last week, frontloading the easing by 50bps (instead of our current baseline of 25bps) in September would not be unwarranted, but for now, it is still difficult to tell a story of significantly more easing than the 100-125bps we have pencilled in.
Up to late on Wednesday, the rand exchange rate remained comfortably below R18/$, before losing some ground yesterday. While a somewhat weaker dollar played a role in keeping the rand stronger (indeed, the rand depreciated against the euro and pound w-o-w), sentiment towards SA is also more positive with the credit default swap (CDS) spread below 200 through last week. Lower yields of local bonds tell a similar, positive story with solid demand supporting prices – although, again, it turned around a bit yesterday. Despite a 0.5% loss yesterday, the JSE ALSI was still up by 1.7% w-o-w.
With little market-moving data on the international front, the flash PMIs releases were the most noteworthy – see the international section for the details. The Eurozone received a nice boost from the Paris Olympics lifting activity in France, but Germany once again performed poorly. In the US, beyond the flash PMI, the revision to historic nonfarm payroll data received some attention. A preliminary estimate suggests that payroll growth from April 2023 to March 2024 was overstated by 818 000 jobs. This was roughly in line with expectations and in itself did little to move markets or shift interest rate expectations, but brought the payroll data more in line with other (less upbeat) US labour market data. The minutes from the latest Fed meeting revealed that some members thought that an interest rate reduction was already appropriate in July. However, the majority felt that the cutting cycle should start in September if data continued to move as expected. Today’s Jackson Hole speech by Fed Chair Jerome Powell could shed some further light on the likely interest rate trajectory. Meanwhile, the Democratic National Convention saw Kamala Harris outline some of her first big policy proposals, many aimed at addressing the cost of living. The Economist Newspaper aptly summed these up by saying the proposals ranged from “helpful to harmless to halfbaked”. Talk about a Federal ban on price gouging has received the most attention, with even fellow Democrats critical of such a policy. Harris did not give much detail on how this would work in practice. As with any politician campaigning for election, it remains to be seen which promises will be implemented if he/she is indeed elected – for now, the race between Harris and Donald Trump remains tight.
The domestic calendar sees the usual month-end data for July on Friday and producer price inflation (PPI) for July expected on Wednesday. We see PPI tick down slightly from 4.6% y-o-y in June, although the downward surprise in CPI suggests PPI could move even lower. A more pronounced slowdown is expected in the remainder of the year, with PPI forecast to average below 3% in the fourth quarter.
The most important global releases come at the end of the week. The US publishes a second estimate of Q2 GDP growth on Thursday. We have seen large revisions to the advance estimate in the past. The PCE price data due on Friday is important for monetary policy dynamics, although it is difficult to see how even a large miss on the July figure would lead to markets pricing out a Fed cut in September. The Eurozone flash consumer inflation print for August contains more ‘new’ information to the market, with little other August data available (beyond the PMIs discussed in the international section below).
According to Stats SA, the increase in annual headline consumer inflation (CPI) for July eased to 4.6%, the lowest rate since July 2021, down from 5.1% in June. This figure came in below the consensus expectation of a slowdown to 4.8%, primarily due to softer price increases in the food category (up 4.5% y-o-y in July vs 4.6% in June) and transport (up 4.2% vs 5.5%) on the back of a decline in the fuel price. Electricity cost increases, which are surveyed in July, were also somewhat lower than expected. On a further positive note, core inflation, which excludes volatile food and energy costs, also undershot the consensus expectation. Instead of remaining unchanged at 4.5% as expected, it moderated to 4.3% y-o-y in July. On a monthly basis, headline CPI rose by 0.4%, following a modest 0.1% gain in June, with most of the upward pressure coming from increases in the housing and utilities category, particularly water and electricity (surveyed in July).
In other news, the SARB’s composite leading business cycle indicator declined for the second consecutive month, falling by 0.4% m-o-m in June after a 1% drop in May. Five of the seven available time series components showed decreases, with the decline in approved residential building plans and the narrowing of the interest rate spread being the main contributors to the downturn.
Starting in the US, the composite PMI ticked down to a four-month low but remains in expansionary territory. Manufacturing output contracted for the second consecutive month driven by sharp decline in new orders and inventories. Moreover, supplier delivery times shortened which signals that suppliers are not as busy amid weak demand. Meanwhile, business activity in the service sector improved slightly , against expectations that it would decline marginally compared to the previous month.
Across the Atlantic, UK flash PMIs were upbeat across the board. The composite PMI pushed further into expansionary terrain. The streak of positive momentum among manufacturers continued into August and reflects higher production levels coupled with an improvement in demand. In step, business activity in the service sector experienced a boost. Encouragingly, input prices (inflationary pressures) continued to moderate in the service sector, although providers have noted that wage inflation remains elevated.
The Eurozone (EZ) had a mixed bag of PMIs. The composite PMI rose for the sixth consecutive month. Worryingly, the manufacturing sector remained in contractionary terrain, reaching the lowest level for 2024, owing to subdued demand which resulted in manufacturers scaling back on inventory levels. Contrastingly, the service sector rose in August but mostly driven by strong(er) activity from France. This was likely due to the boost from the Olympic games held in Paris. However, the picture was less rosy in Germany with all PMIs coming in lower than expected.
Meanwhile, negotiated wage growth, the ECBs preferred gauge of EZ wages, slowed to 3.6% in Q2 from 4.7% in Q1. Services inflation, which has been persistently high and a concern for the ECB, could be less sticky going forward amid less upward pressure from wages. This increases the likelihood of another rate cut in the September monetary policy meeting.
Finally, the flash India composite PMI slipped relative to the prior month but still stayed well within the expansionary terrain and above its long-term average. The underlying manufacturing and service sectors echoed the sharp expansion in the overall index, signalling upbeat momentum across the board. We released a Research Note on the Indian economy and the linkages with SA earlier this week; clients can read it here.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
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, 23 Aug 2024
