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It was a jam-packed week, both on the political front and in terms of economic data releases. The US presidential debate dominated international headlines. Meanwhile, locally, there were hints of political (or, more specifically, GNU) instability. This was mainly related to President Cyril Ramaphosa’s decision to publicly sign the Basic Education Laws Amendment Bill (BELA) into law today. Following the announcement, DA leader John Steenhuisen requested an urgent meeting with Ramaphosa, as many DA supporters oppose parts of the bill. The public signing of BELA mirrors the controversial signing of the NHI Bill before the election.
The move also underscores the ANC's dominance and portrays the DA as lacking influence. If the DA refuses to be involved with the bill and instead chooses to exit the GNU, the ANC would need support from other opposition parties, such as the MK party or the EFF, to pass laws—ironically, a scenario the DA has long warned against.
ActionSA has also disapproved of Ramaphosa’s decision, further complicating the situation. Adding to the tension, the DA's Siviwe Gwarube as the current Minister of Basic Education will be forced to implement a policy she does not support. Concerns have also been raised that, because the previous ANC-majority parliament passed the bill, the newly elected parliament has not had the chance to vote on it.
Public opinion on BELA is divided. Some praise its focus on child protection, while others see it as concentrating power within the government instead of empowering school governing bodies.
In the US, Vice President Kamala Harris and former President Donald Trump faced off in their first (and possibly only) pre-election debate. Harris sought to prove her candidacy after Biden’s struggles in the last debate and indeed her own lacklustre debate performances in the past. Both Harris and Trump largely avoided policy discussions. However, Mr Trump made statements and promoted theories that were eventually debunked by the debate anchors (i.e. shown to be false). In the end, according to a CNN flash poll, 63% of viewers believed Harris won the debate. According to the same poll, Trump was still considered better for the economy. Interestingly, despite Harris's apparent win most voters (82%) said that the debate had not changed their minds. A separate survey done by Trafalgar Group and Insider Advantage among the seven swing states (Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin) showed that the race between the two candidates remains close. As such it is still too tight to call as these states will decide the election outcome in November.
Potentially as influential (maybe even more so) a development happened after the debate when musical artist Taylor Swift announced her endorsement of Kamala Harris. Swift is arguably the world's most famous musician, and her endorsement could sway young(er) voters.
On the economic data front, Chinese trade data pointed to weak domestic demand, which could endanger the country’s growth target. Domestically, SA manufacturing data released by Statistics South Africa (Stats SA) showed a strong recovery in July, which the Absa PMI telegraphed. Conversely, mining production declined for the second consecutive month in July. On a more positive note, SA’s one and two-year-ahead inflation expectations fell in the third quarter, which will be welcomed by the South African Reserve Bank (SARB). Elsewhere, US inflation cooled as expected, strengthening the argument for a US Federal Reserve (Fed) interest rate cut. Also on monetary policy, the European Central Bank (ECB) cut its deposit rate for the second time in three meetings.
There was minimal movement in financial markets this past week as investors geared up for week ahead. The S&P 500 posted gains, likely due to investors moving away from interest-bearing assets as the Fed prepares to cut. Across the Atlantic, the UK’s FTSE and Germany’s DAX declined slightly. SA’s JSE Alsi mirrored its European counterparts, declining by 0.6% week-on-week (w-o-w).
The rand lost some ground against all major currencies last week, particularly the US dollar (which strengthened against the euro). The slight depreciation was in step with movements in other emerging market currencies.
In commodities, despite OPEC extending production cuts of 2.2 million barrels per day to November and oil production shutdowns in the U.S. Gulf of Mexico, crude oil prices fell below $70/bbl due to demand concerns, especially from China. Recent data showed China's crude imports from January to August 2024 dropped 3.4% year-on-year (y-o-y), countering analysts' past expectations of strong demand growth from China. Global demand forecasts have subsequently been lowered for this year and next. While the price drop is welcomed (from an inflation perspective), geopolitical risks remain. US Secretary of State Antony Blinken hinted that the US could lift restrictions preventing Ukraine from using Western-supplied long-range weapons against Russia, following meetings with UK Foreign Secretary David Lammy and Ukrainian President Volodymyr Zelensky in Kyiv. News of Iran's delivery of missiles to Russia has influenced this debate.
Among SA’s export commodities, the gold price registered a weekly gain of 1.7% to hit a closing record high. Bullion was buoyed by further confidence that the US Fed will cut interest rates next week. Gold offers a more attractive return as yields related to US rates decline. Platinum also had a positive week, increasing by 4% w-o-w.
Next week will be dominated by inflation data and monetary policy decisions. On Wednesday, we will get the release of UK, SA and EZ CPI reports. For the latter, preliminary figures already showed a significant fall to 2.2% from 2.6% in July. This easing would have been a key factor in the ECB’s decision to cut interest rates yesterday. Japanese inflation data for August will be released later in the week.
Regarding monetary policy, the Fed meets on Wednesday. The latest consumer inflation print showed a further easing in price pressures. This, coupled with last week’s labour data showing a slowdown, has led to markets pricing in as a certainty that the Fed will cut next week, for the first time since 2020. Consensus is for a 25bps reduction after a slight acceleration in shelter inflation put to bed speculation that the Fed would cut interest rates by 50bps. Indeed, before the CPI release, markets were pricing in a 30% chance that the Fed could cut by 50bps; this declined to 13% after.
Attention then turns to the Bank of England (BoE) on Thursday. Unlike their American counterparts, BoE officials are expected to keep interest rates steady after cutting by 25bps at the start of August. Real wage (nominal wages minus inflation) growth is still uncomfortably high. Services inflation also remains sticky – likely linked to robust wage growth. There is also uncertainty over the accuracy of some of the labour data. The BoE will likely pause to also not appear fully committed to an aggressive cutting cycle and it will also allow them to assess the government’s Budget speech in October and its implications for inflation, if there are any. Finally, the BoE will only update its growth and inflation forecasts in November adding to the list reasons why any changes to the Bank rate will likely only occur in November.
Later in the day, it will be the SARB’s turn. The SARB MPC is expected to cut the repo rate by 25bps. There is a risk that the SARB could decide to frontload cuts and reduce the repo rate by 50bps, but this seems a less likely scenario. Inflation has come down significantly in recent months. In July, headline CPI was at 4.6% y-o-y, likely easing to 4.5% in August (we’ll know on Wednesday). Core inflation was even lower in July. One- and two-year ahead inflation expectations, however, remain above the SARB’s target.
Finally, on Friday, the Bank of Japan (BoJ) is expected to leave its call rate unchanged after a hike in July. The BoJ has lifted rates twice this year, and markets expect one more hike at the end of the year.
Other non-monetary international releases include Germany’s September ZEW economic sentiment index, US August retail sales, Japan’s August trade balance and the UK’s August retail sales. Domestically, Stats SA will release the July retail, wholesale trade and motor trade sales figures.
We will soon release a new feature on our website, the “BER data playground”. This feature will allow users to view, track and compare various datasets from Statistics South Africa (Stats SA) and the South African Reserve Bank (SARB). Below is an example of some of the data that can be found related to the residential property sector. As can be seen, of South Africa’s most populous provinces, residential property growth in Western Cape house prices outpaced Gauteng and KwaZulu-Natal in most months over the past decade. We will be showcasing selected data for the rest of September.
After slumping by a (downwardly) revised 5.5% y-o-y in June, manufacturing production surprised to the upside in July. According to Stats SA, factory output rose by 1.7% y-o-y, beating expectations of a modest 0.7% y-o-y increase. The largest positive contributor was food and beverages (up 9.5% y-o-y, adding 2 percentage points, %pts). In contrast, production of motor vehicle parts and accessories weighed the most on output (down 12.1% y-o-y, -1.3% pts). On a seasonally adjusted (sa) basis, production rose by a solid 2.1% m-o-m in July, following a 0.4% m-o-m decline in the prior month. This rebound was foreshadowed by the July Absa PMI, which signalled a strong start to the third quarter after a weak May and June.
There was less positive news in the mining sector as production declined by 1.4% y-o-y in July, following a downwardly revised 3.6% y-o-y drop in June. The biggest drag came from iron ore (-19% y-o-y, shaving off 2.8% pts) while manganese ore (up 27%, adding 2% pts) and chromium ore (+23.3%, +1% pts) made positive contributions to the annual figure. On a monthly basis, mining production (sa) shrunk by 0.9% in July after a 1.7% contraction in the prior month.
In Q3, average expectations for headline CPI inflation for 2024 declined to 5.1% in 2024Q3, from 5.3% in 2024Q2. Over the 2025 to 2026 forecast horizon, analysts, business people and trade unions now expect inflation to average 4.8%. This was mainly driven by analysts who expect the lowest inflation rate over the entire forecast horizon. At 4.8%, average five-year ahead inflation expectations were marginally lower than the 4.9% expected in Q2. In contrast, household inflation expectations moved to their highest level this year in Q3, ending the downward trend that started in the middle of 2023. Households’ one-year expectations rose from 6.4% in 2024Q2 to 6.9% in 2024Q3, while their five-year expectations increased from 9.7% to 10.6%, the highest since the second quarter of 2023. For the full report, click here.
The ECB announced a widely anticipated 25bps rate cut on Thursday. Underpinning the (unanimous) decision was the expectation that inflation in the EZ will be within the 2% target in 2025 (the latest, preliminary, August print saw consumer inflation at a three-year low of 2.2% y-o-y). Importantly, the ECB also lowered its growth forecast for 2024 to 0.8%, from 0.9% earlier on the back of weaker domestic demand.
Office for National Statistics (ONS) data on Tuesday showed that the UK unemployment rate eased to 4.1% in the three months to July - coinciding with market expectations - following a 4.2% print in June. The report also showed that the number of people claiming jobless benefits increased by only 23 000 in August compared to 102 300 in July. Meanwhile, average earnings, excluding bonuses, rose by 5.1% y-o-y in July compared to 5.4% in June. This was aligned with market expectations. Monthly GDP growth showed no growth in July, below market expectations. However, GDP is estimated to have grown by 0.5% in the three months to July 2024 compared with the three months to April 2024.
Bureau of Labor Statistics data showed that annual consumer inflation (CPI) fell to 2.5% y-o-y in August from 2.9% in July, slightly below the consensus forecast of 2.6%. The Chicago Fed President, Austan Goolsbee, said that the Fed has some tolerance for an upside surprise in inflation as the longer arc indicates that inflation is coming down in the long term, but they will keep a close look at the labour data. The lower-than-expected headline inflation outcomes bolters the case for a more significant reduction in the federal funds rate next week although at this stage markets are still strongly leaning toward a (more conservative) 25bps cut.
Official data by the National Bureau of Statistics showed that China’s CPI grew by 0.6% y-o-y in August, following increases of 0.2% and 0.5% in June and July, respectively. The faster inflation rate in August was due to high temperatures and heavy rainfall, leading to a seasonal rise in consumer prices. On a monthly basis, CPI rose by 0.4% in August, slightly below the 0.5% in July with food prices up by 3.4% (contributing 0.6%pts). The high summer temperatures lifted fresh vegetable prices by 18.1%, mushrooms (9.8%), fruits (3.8%), and eggs (3.3%) – altogether contributing just under 0.5%pts to monthly CPI. Meanwhile, the PPI decreased by 1.8% y-o-y in August, worse than the 0.8% drop seen in July and the 1.4% consensus expectation.
Editor: Craig Lemboe
Tel: +27 (0)21 808 9755
Email: cjl@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, 13 Sep 2024
