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Lisette IJssel de Schepper
Donald Trump convincingly won the US presidential election. It was not nearly as close as most pollsters and number crunchers had expected, with Trump even winning the popular vote. The Republicans also got control of the Senate, which gives Trump more leverage to implement changes to tax and spending plans. Control of the House of Representatives is still unsure, but it will likely tip in favour of the Republicans, too. Flying under the radar of the US election was the effective collapse of the German coalition government, with a snap election possible in March. Meanwhile, on the monetary policy front, the US Federal Reserve (Fed) and Bank of England (BoE) delivered their expected 25bps cuts, with a slight hawkish tilt. The Fed cut was ‘priced in’ and markets were more interested in what Fed Chair Jerome Powell would say about the implications of a Trump presidency on the economy and monetary policy.
For financial markets, one of the advantages of Trump's convincing win was that the lingering uncertainty around the outcome (and the acceptance thereof) did not materialise. Uncertainty measures fell back, and markets fully focused on what a Trump victory means for the economy. Indeed, as it became clear that Trump would win the presidential election, the US equity market (futures) rose sharply, with banking shares and Elon Musk’s Tesla being clear outperformers. Banking stocks are set to benefit from less expected M&A regulation under a Trump presidency. Bitcoin rose to record highs (Trump is a fan), while US bond yields rose to their highest level since July. Chinese stocks and the yuan came under pressure, with fears that Trump’s policies will hurt that economy. The dollar strengthened across the board with the euro slumping (German politics did not help, of course) and emerging market currencies being sold off – the Mexican peso slumped by 3.5% when the news broke.
The rand was initially not spared, but came back quite nicely later in the week and managed to strengthen by more than 2% from last Thursday against both the dollar and the euro. In addition to the knee-jerk reaction following Trump’s victory, the concerns voiced by rating agency Fitch about the economic and fiscal projections presented in last week’s Medium Term Budget Policy Statement may have added to the local woes early in the week. Worryingly, SA's CDS spread (a measure of sovereign default risk) has been on a steady increase through October after a welcome decline following the election. To be sure it remains well below pre-election levels, when a lot more local political risk was ‘priced in’, but the trend is in the wrong direction.
The stronger dollar meant that oil and gold prices declined – although oil was still up w-o-w from last Thursday. Looking ahead, Trump’s “drill, baby, drill” policy could actually lead to lower oil prices over time if US supply ramps up (by even more). It will be interesting to see how Musk’s pro-solar and battery stance will come into play. Trump has said he will, again, pull out of the Paris climate agreement.
It is important to remember that Trump has no ‘magic wand’. Only time will tell which of his promises will be implemented, and even then, implementation will also take time. On immigration, Trump is expected (and able) to move rather swiftly. On trade, procedural issues could delay the implementation of his ‘promised’ across-the-board tariff, but he could move quicker on targeting China. Over the short term, business sentiment may benefit from expectations of less regulation going forward – but lingering uncertainty around trade may outweigh this.
In terms of the impact on the real economy in SA, only time will tell if there will be much difference. SA is a small, open economy and very much dependent on the whims of the global economy. Should a Trump presidency boost US growth prospects, this should ‘theoretically’ be positive for SA. But if the drivers of US growth are protectionist- and inward-driven policies, the spillovers will not be the same as in the past (and some argue that the negative impact of higher tariffs will outweigh the positive impact of less tax on US growth in the first place). However, an infrastructure-heavy growth spurt could be positive. Importantly, if the Chinese economy suffers as a result of Trumps policies, it could lead to lower demand for SA exports with negative implications for domestic growth. In fact, there is real concern that Trump may support policies that could directly hurt SA (AGOA and trade tariffs in general are top of mind) – but he might also think he has bigger fish to fry than to worry about Africa.
Indeed, in the geopolitical space, you might see a further widening of the gap between ‘the West’ and the rest (China in particular), and SA may be pushed to such an extent that it struggles to maintain its ‘non-aligned’ stance. Trump could be less delicate with the situation in the Middle East and has been vocal that he does not support further aid to Ukraine. What could be bad in the short term, could be better in the long term, or be really, really bad… The global backdrop is likely to be more uncertain than it would have been under a Kamala Harris scenario, but the world should be better prepared for Trump’s chaotic style of policy-making during his second term compared to the first.
If Trump's policies prove to be inflationary, as some fear and is why Treasury yields ticked up, it could have implications for monetary policy in the US and the dollar, with a weaker rand, higher inflation, and higher SA interest rates a possible outcome. However, this will take time to filter through and unless the rand exchange rate settles at a much weaker level over the near term and impacts our inflation trajectory, it should not derail our upcoming rate cuts. Of course, one could worry that Trump meddles with monetary policy in the US, with a real possibility that he replaces Powell down the line, but (as with most things) it remains to be seen whether he will go that far and what the actual impact will be – and even if there is a change, it will be slow. On the fiscal front, if government debt continues to expand quickly under Trump with no effort made to reign it back, this will add a general nervousness to the markets over time, which, ironically, may lead to more demand for ‘safe’ US assets, again hurting EMs like SA.
In what would have been headline news in any other week, the German Chancellor Olaf Scholz fired his finance minister and announced a vote of confidence in January. This could lead to snap elections in March. The opposition wants the vote of no confidence sooner rather than later (as in next week). Meanwhile, French politics also remain shaky, which does leave a bit of a void in the core of Europe if one thinks about ‘standing up’ to Trump in the global geopolitical theatre. To be sure, if Trump goes ahead with his trade tariff policies, it will hurt an already struggling Europe (the US is running a trade deficit with the block, which Trump does not like).
Other “would-be” headline events in another week were a slew of monetary policy decisions -most notably the Fed. While dialling back on the pace of easing, as expected, the Fed cut for a second consecutive month. Fed chair Powell was tight-lipped about the impact of Trump on monetary policy, but the statement mentioned that risks to achieving the Fed’s inflation and employment goal remain roughly in balance. In the Q&A, Powell said that it was too early to judge the substance of Trump’s economic policies and that it would remain data-dependent. In Europe, the BoE cut for a second time this year (although not consecutive), but was not explicit about further easing going forward. Also in line with expectations, Sweden’s Riksbank cut by 50 basis points while its neighbour Norway held rates steady at a 16-year high. In the emerging market space, Brazil increased the policy rate by 50bps to 11.25%. This was the second straight increase, following a 25bps hike in September.
Finally, we need to mention the continued post-election violence in Mozambique. Following the announcement that the ruling party candidate, Daniel Chapo, won by a landslide on October 24, the country has been mired by unrest. A week-long strike called for by the opposition presidential candidate has brought activity in the country to a standstill. SA has since closed the Lebombo port of entry. This could have significant knock-on implications for SA. According to the Minerals Council SA, about 10% of SA’s coal and more than 50% of chrome exports went through Mozambique in 2023 – most of this trucked. While there are a few weeks’ worths of chrome inventory at the Maputo harbour, Grindrod has since suspended all cargo operations in the Maputo and Matola ports in the interest of safety. It is difficult to predict when the unrest could subside, with a soon-expected ruling by the Constitutional Court about the validity of the election results being a potential flashpoint for an escalation.
Stats SA will release the 2024Q3 Quarterly Labour Force Survey (QLFS) on Tuesday. In addition to providing an update on quarterly job growth, the household survey will also include an estimate for the Q3 unemployment rate. The Q2 print was poor, with a quarterly decline of 92 000 jobs and 158 000 people joining the unemployed, resulting in a 0.6%pts increase in the unemployment rate to 33.5%. SA’s labour data is sometimes difficult to gauge and can be volatile, but we would be surprised to see a surge in employment in Q3. Stats SA will also publish manufacturing and mining production data for September. Quarter-closing monthly data is always of interest to get a better understanding of full quarter GDP dynamics. Manufacturing output fell in August following a solid July, with September largely determining whether the quarter would see an increase or not. The increase in the Absa PMI in September suggests that we are likely to see a positive print, which would be a boon to GDP. The mining production data would need to be very positive in September for it to expand on a quarterly basis.
On the international front, there is consumer and producer inflation data for the US. While unlikely to derail the Fed’s cutting trajectory, surprises in the CPI print could cause some market volatility. We will also see Q3 GDP data for the UK and Japan. Both countries are likely to see growth momentum slow, but remain in positive terrain. The usual batch of Chinese frequency data is due early on Friday morning. The PMIs for October should provide some encouraging signs of improvement in China, but whether that will translate to official data yet remains to be seen – although this week’s export data was very positive (see international section below for more).
The latest S&P Global and Absa PMI reports for October show similar trends, with both indexes dipping slightly while remaining above the critical 50-point mark. The S&P PMI fell to 50.6 from September’s 13-month high of 51, while the Absa PMI eased to 52.6, down from a revised 53.3 in September, which marked a strong close to Q3.
Both indexes benefitted from a reduction in input costs, largely driven by lower fuel prices. Encouragingly, forward-looking indicators remained robust and in expansionary territory. However, the employment indexes are a soft spot. Although firms report a modest improvement in consumer demand, it has yet to translate into meaningful job growth. Sustained increases in consumer demand will be essential to drive broader employment gains.
Stats SA’s electricity production and consumption data for September were released on Thursday. The data reveals that both electricity production and consumption were up. Electricity generated (produced) increased by 8.6% on an annual basis, with the seasonally adjusted numbers reaching just over 20 000 gigawatt-hours in September. Electricity distributed (consumed), meanwhile, lifted by 6.1% on an annual basis. The total volume distributed in September amounted to 17 661 gigawatt-hours. Positive for Q3 GDP was the 2.9% q-o-q increase in electricity generated – the second q-o-q uptick amid the extended absence of load-shedding.
SA’s gross foreign reserve holdings were down by $605 million in October from their all-time high of $63.6 billion in September. The decline was mainly due to foreign exchange reserves being almost $1.2 billion lower, while an increase of $548 million in gold reserves provided some offset to the overall decline.
We have recently launched the beta version of the BER Data Playground. To showcase the data available on the Playground, we will regularly publish a chart in the Weekly.
SA’s electricity generation operates largely on a "just-in-time" basis - this is due to constrained storage capacity within the country. Recently, sustained operational stability in the grid has enabled SA to resume significant electricity exports of excess supply. These exports are primarily to countries within the Southern African Power Pool (SAPP). Mozambique is the primary export partner, receiving 70% of these exports, followed by Botswana at 10% and Zimbabwe at 7%1. As a result, energy exports have surged to their highest level since March 2020, reaching 1 307 GWh for the month of September 2024. This highlights the improved reliability of SA’s power generation in recent months, supporting the nation's regional energy commitments despite structural challenges.
1 https://www.dmre.gov.za/Portals/0/Resources/Publications/Reports/Energy%20Sector%20Reports/SA%20Energy%20Trade%20Report/2023-South-African-Energy-Trade-Report.pdf
Late last night (in SA time), the US Fed announced it would lower the benchmark rate target range to 4.5-4.75%. The second consecutive cut was expected, and the decision was unanimous. The Fed judged inflation as still “somewhat elevated” and is slightly more pessimistic about the labour market. The central bank did not provide specific guidance on what would happen with the interest rate going forward, stressing its data dependence. Generally, more cuts are expected but the uncertainty around Trump’s impact on the economy makes calling the level of terminal rate more tricky (i.e. when the Fed will stop easing)
Earlier in the day, the BoE cut the base interest rate by 25bps for a second time this year. In the September meeting, the Monetary Policy Committee (MPC) had decided to keep rates unchanged, a cautious move following the rate cut in August. The committee commented that they had to wait for more inflation data and to be sure that inflation would stay closer to the target - September inflation came in at 1.7%, dipping below the 2% BoE target. The vote in the MPC was eight-to-one, and the magnitude of the cut was in line with expectations. Following the decision, the pound strengthened a touch, and the 10-year government bond yield was stable at 4.55%. Looking forward, the BoE warned that there is an increased probability of more inflationary pressures following Donald Trump’s victory in the US elections.
The official JPMorgan Global Manufacturing PMI showed that the contraction in the global manufacturing sector continued in October, with the reading coming in at 49.4 points from 48.7 in September. New orders declined further in October, while production volume stabilised at September levels. International trade declined, and employment decreased for a third consecutive month. Logistical issues remained, and this led to problems with supplier delivery times. In the Eurozone, manufacturing remains subdued. Spain is an exception, driven by strong local demand. However, there are capacity constraints, and the backlog has increased. The turnaround in the Chinese manufacturing sector contributed positively to the 0.7-point gain in the index.
Adding to the positive news from China, its trade surplus unexpectedly widened in October, coming in at $95.27 billion (bn) compared to the $81.71bn in September, and significantly above expectations for a $75.1bn trade surplus. Exports increased by 12.7%, while imports declined by 2.3%. International manufacturers requiring Chinese-produced materials likely front-loaded orders in anticipation of further tariffs from the US and the EZ. Since China is Australia's biggest trading partner, the Aussie dollar strengthened against the US$ on positive news regarding the trade balance and the recovery in the manufacturing sector.
Editor: Lisette IJssel de Schepper
Email: lisette@sun.ac.za
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Friday, 08 Nov 2024
