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This week was all about monetary policy. The biggest global event was the US Federal Reserve (Fed) kicking off its interest rate easing cycle with a bigger-than-initially-expected 50bps cut. Barely six weeks ago Fed chair Jerome Powell said such a move was not on the table. Indeed, some argue the 50bps is an admission by the Fed that it should have started its cutting cycle earlier. Locally, the SA Reserve Bank (SARB) was more prudent, and despite considering a 50bps cut, it opted to lower the repo rate by 25bps.
With the first cut in four years, the SA repo rate will go down to 8% and the prime rate to 11.5%. The decision to lower the policy rate was supported by an improved inflation outlook, with the SARB now assessing the risks to the outlook to be balanced after signalling upside risks in July. The SARB is somewhat more optimistic about economic growth during the second half of the year (with a 1.1% forecast for 2024), but despite a slight upward revision, it still sees medium-term growth below the long-term average. Clients can click here for our comment Ready, set and cut, but the SARB remains careful to trip covering the decision and forecast implications in more detail.
Other major global central banks also had meetings this week. Before the Fed, Indonesia’s central bank made a surprise cut to its policy rate. This was the first cut in more than three years and not anticipated in advance. The Bank of England (BoE), meanwhile, kept its policy rate unchanged. This was in line with expectations, with the BoE still worried about sticky services inflation. The central bank said it should be able to cut rates ‘gradually over time’ and is expected to continue its cutting cycle later this year. Turkey also kept its rate unchanged (at a whopping 50%) for a sixth month, despite some gains on the inflation front - to be sure, inflation remains extremely high at around 52% in August and the bank wants to see more improvement before easing policy.
Financial markets were volatile around the Fed decision. The gold price, for example, shot up to a record-high of about $2 600/oz just after the decision but fell back to its recent level of around $2 500/oz when markets digested Powell’s message that 50ps would not be the new pace going forward. Still, global stock markets rallied following the decision with the US S&P 500 closing at a record high on Thursday. The local JSE ALSI was up by 2.6% w-o-w.
Following the outsized Fed cut, the rand exchange rate strengthened to just below R17.40/$ before the SARB decision and remained firm following the announcement. Indeed, it is perhaps worth noting that the SARB’s assumed starting point (R18.04/$) of its forecast is significantly weaker than the level it was trading at the time of the statement, but the rand can, of course, be volatile. A sustained stronger rand could be one reason for the SARB to cut by more than 25bps in November.
On the economic data front, domestic trade figures showed retail and wholesale trade slipping slightly in the first month of the third quarter. Coupled with the implementation of the two-pot retirement system, the slight easing of the local monetary policy stance is likely to take some pressure off the struggling consumer during the final months of 2024 (especially if the SARB follows through with another cut in November). The uptick in the FNB/BER Consumer Confidence Index in Q3, released earlier this week and available here, was another encouraging sign. The 10-point jump in the CCI over the last six months (and 20-point increase since mid-2023) signals a pronounced improvement in consumers’ willingness to spend and bodes well for the outlook for consumer spending for the remainder of the year.
Meanwhile, the prolonged outage of both generation units at Koeberg nuclear station has resulted in a surge in Eskom’s reported usage of open-cycle gas turbines (OCGTs)—see Figure. When in operation, the units combined generate about 1900MW (or just under two stages of load-shedding…) of power. With more OCGT usage, other unplanned outages being lower than last year, and residual demand being lower, Eskom has managed to avoid load-shedding.
In a public-holiday-interrupted week on the domestic front, the most interesting releases come mid-week. The SARB is publishing its leading business cycle indicator on Wednesday, while Stats SA is due to release producer price inflation (PPI) and the Quarterly Employment Statistics (QES) on Thursday. The QES provides an update on formal non-agricultural employment and is based on an establishment survey. The earlier-released household-based Quarterly Labour Force Survey (QLFS) suggests that formal non-agri employment declined on a quarterly basis. Unfortunately, the relationship between the two labour sources is not always close, so it remains to be seen how it will come out in the QES. Going on the historical trend, temporary employment required for the 29 May election may also create some additional volatility in the data. In line with the slowdown in consumer inflation for the month, PPI is set to dip in August. We see annual PPI below 4% before slowing further during the remainder of the year. The string of fuel price declines plays a large role in the moderation in PPI (headline averaged 6.7% in 2023, we expect 3.8% for 2024).
Globally, markets are now starting to take positions on the size of the Fed’s next move. The Fed signalled that another 50bps would not be guaranteed, but if we see disappointing labour market data, this might tilt the Fed to remain dovish. Next week, however, we will see important price data on Friday and a final estimate on Q3 GDP in the US. The usual batch of flash PMIs from across the globe for September will also be keenly watched. The German print will be of particular interest after the Bundesbank warned this week that the economy could shrink once more in Q3.
According to Stats SA, headline consumer price inflation came in at 4.4% y-o-y in August. This is the lowest inflation print since May 2021 and below the 10-year average of 5.1%. Moreover, core inflation has eased to 4.1% y-o-y in August. Month-on-month, CPI inflation printed only a slight increase of 0.1%.
The main contributors to the August annual inflation number were housing and utilities (increasing by 4.8% y-o-y, + 1.1 %pts), miscellaneous goods (7.0% y-o-y, 1.0 %pts), and food and non-alcoholic beverages (4.7% y-o-y, 0.9 %pts). Two sub-categories in food and non-alcoholic beverages are experiencing exceptional upward price pressure. The first is the milk, eggs, and cheese sub-category, where egg prices (in particular) are still increasing by more than 20% y-o-y following avian influenza about a year ago. We expect disinflation in egg prices to kick in from October as base effects come into play. Secondly, the sugar, sweets and dessert sub-category is also facing price pressure stemming from higher international cocoa prices, which affect the prices of chocolate slabs and chocolate bars.
Stats SA’s real retail trade sales grew by 2% y-o-y in July 2024 – the fifth month of annual growth. General dealers were the largest contributor to annual growth, which experienced 4.4% growth, adding 1.8% pts to the overall figure. Meanwhile, real wholesale trade continues to be gloomy, contracting by 3.2% y-o-y in July 2024. This follows annual declines of 6.5% in May and 10.2% in June. Important for quarterly GDP dynamics, both retail (-0.2%) and wholesale (-0.1%) contracted on a monthly basis in July, but these slight declines can be offset by stronger growth during the remainder of the quarter.
Real motor trade sales increased by 0.3% y-o-y in July, following two months of steep annual contractions. Lower fuel and accessories sales were offset by an increase in used vehicle sales. Encouragingly, purchases rose for a second consecutive month on a m-o-m basis, albeit that the growth rate slowed from 5.3% to 1%.
Tshidiso Mofokeng
After much anticipation, the US Fed decided to lower the federal funds rate range by 50bps to 4.75% - 5.0%. Fed Chair Powell mentioned that the risks to achieving their dual mandate were “roughly in balance”. The latest Summary of Economic Projections (SEP) revealed modest revisions from the June SEP for real GDP growth. However, the unemployment rate is now expected to peak at 4.4% over the next two years (up from 4.2%). This highlights that the downside risks to employment have increased, while the upside risks on inflation have subsided. Notably, the Fed’s latest dot plot shows additional rate cuts not only in 2025 and 2026 but also in the current year. Ten officials pencilled in 100bps or more of cuts for 2024 – for now, we think two more 25bps cuts are likely. However, incoming data, as well as how the economy evolves and the balance of risks, could see the Fed adjusting its policy stance by either easing at a slow(er) pace or pausing in upcoming FOMC meetings.
Meanwhile, annual retail sales slowed from an upwardly revised 2.9% in July to 2.1% in August. On a monthly basis, retail sales ticked up by a modest 0.1% in August after gaining 1.1% in the prior month. This comes against expectations that retail sales would decline, providing further evidence that US consumer spending remains resilient.
Across the Atlantic, a majority of 8-1 members in the MPC voted to leave the BoE’s policy rate unchanged at 5%, in line with expectations. With the BoE embarking on a ‘gradual’ path of policy normalisation, guidance toward a likely November policy rate easing was signalled. With real wage growth remaining elevated, service inflation continues to be sticky. The upcoming budget speech in October will be important in the BoE calibrating their growth and inflation forecasts, which will be available at the next MPC meeting in November.
Annual consumer inflation remained steady at 2.2% in August, according to the Office for National Statistics. This was driven by upward price pressure from the transport category (underscored by volatile airfares, mainly flights to European destinations) which countered the downward price pressures from motor fuel, restaurants and hotel prices. On a monthly basis, consumer inflation rose 0.3% in August from 0.2% in the prior month. Core inflation quickened from 3.3% y-o-y in July to 3.6% in August, due to the rebound in service inflation.
The ZEW economic sentiment indicator sharply declined from 19.2 points in August to 3.6 in September, well below market expectations. Concerningly, this is the third consecutive month of declining sentiment, and it continues to fall at a steep pace.
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 Stats SA and the SARB. Below is an example of some of the detailed data that can be found on price trends. The surge in potato prices towards the end of 2023 is significant, but while potato chips and crisps prices also ticked up, the increase in their inflation rate was less pronounced. We will be showcasing selected data for the rest of September.
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, 20 Sep 2024
