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US President-elect Donald Trump did what he does best this week and moved financial markets through social media and a wide-ranging press release later in the week. Following announcements by his team that could be interpreted as ‘going soft’ on his tariff plans (and the dollar weakening as a result), he went all in on a social media post, which caused markets to turn and once again worry about the potential impact of tariffs. His plans to ‘buy’ Greenland also featured, with Trump refusing to rule out a military invasion to seize the region if needed for national security purposes. He did say he would not use military but rather “economic force” to pressure Canada into what he wants. At the same time, he doubled down on his argument that the US must reclaim the Panama Canal. All this, and he is not even president yet. One thing is certain: it will be a volatile couple of years, and volatility is generally not good for small, open/emerging economies like SA.
The domestic data releases were disappointing. While new vehicle sales continued their three-month streak of positive annual sales growth, monthly sales declined in December. Manufacturing production contracted monthly and annually in November. This was foreshadowed by a dip in the November Absa PMI. Worryingly, the Absa PMI—released this week—fell further in December. The S&P Global PMI also pointed to a loss of momentum at the end of the year.
In a blow to the local manufacturing sector (with knock-on implications for the rest of the economy), ArcelorMittal SA (AMSA) announced it would proceed with the winding down of all of its longs steel business by the end of Q1. While receiving some support after warning about the challenges faced by the production processes in November 2023, AMSA said this was not sufficient to overcome the underlying structural constraints. These include the worsening steel market, unaffordable energy and logistics costs in SA, and rising low-cost steel imports from China. Coke-making operations at Newcastle will be scaled back to reflect the lower demand following the closure of the local plants. AMSA estimates that 3 500 direct and indirect jobs will be affected.
The lack of momentum in manufacturing production and the reasons for AMSA’s decision to close its longs business underscore that SA remains a challenging place to do business. While there is goodwill and confidence in a better future (reflected in the positive expected business conditions reading of the latest PMIs despite current weakness), we need to make real progress on the structural reform front to ensure that the cyclical push expected over the short term translates into sustained economic growth required over the medium term. Unfortunately, the latest financial statements from Eskom and Transnet were uninspiring (see the Reform Tracker below for more).
A sell-off in government bonds saw yields rise across the globe in what has been dubbed a return of bond market activism. Markets are worried about sticky inflation, the impact of Trump’s policies and rising government debt. Of course, higher yields complicate a government’s ability to bring debt down even more. Amid concerns that the economy is facing stagnation, the UK is feeling the brunt of the sell-off, with 10-year yields rising to the highest level since the global financial crisis (4.93%). The 30-year yield rose to the highest level since the late 1990s. In addition, other ‘safe’ bonds, such as those issued by Germany and Japan, are also seeing higher yields. In the US, traders are ‘concerned’ that faster economic growth means less/no rate cuts while Trump’s plans to borrow freely and cut taxes hurting the fiscus. The minutes from the December US Federal Reserve meeting, released this week, indicated that most members find it an appropriate time to slow the pace of easing amid upside risks to inflation. The expectation of fewer rate cuts has resulted in US treasury yields rising above 4.7% for the first time in nine months. Fund managers are warning that the repricing may go further (i.e. yields may go higher). Local bonds also sold off, with the 10-year yield rising by 13bps from last Thursday.
Currency market developments were affected by the same reasons that worried bond traders. Following the initial slump (after markets thought Trump eased his stance on trade measures), the dollar outperformed. The pound hit a one-year low against the greenback, while the Chinese currency slumped to a 16-month low. The People’s Bank of China (PBoC) has announced that it will launch its largest sale of offshore bills to support the renminbi to soak up liquidity and make betting against the currency outside China more expensive. Simply put, the central bank is intervening to prop up the currency (or at least prevent a further slide). Of course, a weaker currency does help China on the export front with competitiveness, and Trump has frequently mentioned that the weaker Chinese and Japanese currencies are a problem for the US. A weaker currency ‘works’ for a country like China, which has seen virtually no cost price pressure (even declining factory prices); for SA, it is unfortunately not as simple as a weaker rand also pushes up import costs. The rand slipping to a seven-month low and edging closer to R19/$ is, therefore, also not good news. The rand is about R1/$ weaker than this time last month. The steepest decline in the rand came mid-week following a report that Trump is considering declaring a national economic emergency, which would allow for universal tariffs. Worryingly, SA’s CDS measure (a measure of sovereign default risk) rose to the highest (i.e. worst) level since mid-August.
Meanwhile, the Brent crude oil price rose above $76 for the first time in three months. However, unless the oil price rises significantly more, or the rand slides even weaker, these developments should not derail the SA Reserve Bank (SARB) from implementing another 25bps cut later this month – but they will be sure to stress the upside risks stemming from this.
The domestic calendar is quiet, with the only notable release being electricity production data for November on Thursday. Globally, it is slightly busier with a big release scheduled for later today: the US nonfarm payrolls data. Amid renewed Trump/tariff-induced uncertainty about the US Fed’s interest rate trajectory, employment and inflation data releases from the US could potentially have outsized market implications when the data comes out against expectations. For December’s data, the expectation is that monthly job growth slowed, but the unemployment rate to remain unchanged at 4.2%. Next week’s US consumer inflation data is expected to show a deceleration in price pressure on an annual basis, but monthly momentum is predicted to be unchanged at 0.3%.
Over the weekend, China will release December inflation and trade data, but the main focus will be on the GDP growth data for Q4, which is expected early next Friday morning. The pace of growth would have to accelerate for Beijing to hit its ‘about 5%’ target after an average of 4.8% was recorded during the first three quarters of the year. While authorities introduced a string of policy measures to stimulate the economy in the last weeks of the year, it remains to be seen whether the impact thereof was sufficient and quick enough. That said, Chinese authorities generally ‘get’ what they target.
Eskom’s recently released financial results for FY2023/24 (1 April 2023 to 31 March 2024), a period of intense load-shedding, are disappointing. Despite a R76bn government bailout that year, Eskom incurred a loss of R25.5bn before tax (FY2023: R34.6 billion).
However, unaudited results for the first six months of FY2024/25 (1 April 2024 to 30 September 2024), during which there was no load-shedding and diesel usage was slashed, show “remarkable improvement”, according to Eskom. The utility is even forecasting a profit for the full FY2024/25.
Of course, this hinges on it achieving an energy availability factor (EAF) of 70% by March 2025 (from around 62% now), coupled with significant tariff increases. Eskom CEO Dan Marokane warned ominously during the results presentation that an inadequate tariff path would constrain Eskom’s ability to expand infrastructure and “may also necessitate further reliance on government support beyond March 2026.”
In short, Eskom is still a long way from being placed on a sustainable footing where it no longer relies on state bailouts or usurious tariff increases. Structural reforms to liberalise the energy sector must be deepened and accelerated.
Transnet released its unaudited interim financial results on New Year’s Eve for the six months ending September 2024, revealing that desperately needed reforms to the country’s ports and rail network are struggling to gain traction amid a host of operational challenges.
Transnet believes it “has made progress, with early successes in stabilising its operations, improving financial performance, and addressing infrastructure challenges.” However, the interim financial loss of R2.16bn in 2024 was bigger than the comparable figure of R1.6bn in 2023. This was mainly because of operational slippage in the container port division, which partially offset a small 3.2% increase in rail freight volumes.
Container volumes declined to 2.12 mil twenty-foot equivalent units (TEUs) vs 2.14 mil previously. Transnet blamed weaker demand, a lack of equipment and adverse weather. The results underscore the urgent need for fresh investment in port infrastructure. Unfortunately, the process of securing a private port operator to manage Durban’s Pier 2 Container Terminal has floundered in the courts.
Transnet Freight Rail volumes rose to 78 Mt from 75.6 Mt over the equivalent period in 2023. Though the constant fall in volumes of key exports, including coal, has been arrested, at this glacial rate of improvement, Transnet will fall far short of its whole-year freight rail target of 170Mt for 2024/2025. (In 2023/2024, rail volumes increased to 151.8Mt from 149.5Mt previously.)
The Recovery Plan’s goal is for rail volumes to recover to 226Mt by the end of 2026, restoring Transnet’s performance to the level of five years ago. Anything less will threaten jobs along the supply chain. The bottom line is that Transnet is performing below the government’s Recovery Plan and well below the volumes required to support an economic recovery.
The two PMIs for December were disappointing. The S&P Global PMI, measuring activity across the private sector, dipped to just below 50 after four months in expansionary terrain. More worrying, the Absa PMI, tracking activity in the manufacturing sector, fell for a third month. Activity weakened amid lower domestic and export demand. While both PMIs still point to optimism about business conditions moving forward, the slowdown at the end of the year bodes ill for Q4.
Domestic new vehicle sales did experience a strong end to the year and saw a 2.5% y-o-y increase in sales in December – the third consecutive annual increase. However, on a monthly basis, seasonally adjusted sales dipped lower relative to November, but still rose on a quarter-on-quarter basis. For the full year, vehicle sales were about 3% lower than in 2023 and remain below pre-COVID levels. This was largely due to a very weak first quarter. Despite doing better towards the end of the year, exports were down by more than 20% from 2023 in 2024.
According to Stats SA, factory production declined by 2.6% y-o-y in November 2024. On a seasonally adjusted basis, production was down by 1.1%, virtually offsetting the 0.8% monthly gain in October and leaving it down from Q3 on a quarterly basis. December’s print will need to come in strong to prevent a q-o-q contraction, and the above-mentioned dip in the Absa PMI in December suggests that this is unlikely.
Source: BER, Stats SA
Flash estimates from Eurostat indicate that annual inflation in the Eurozone accelerated slightly to 2.4% in December, up from 2.2% in November. Energy inflation registered its first positive reading since July, removing its earlier dampening effect on overall inflation. This upward trend in energy inflation is expected to persist as base effects fade. Meanwhile, services inflation inched higher to 4% in December, compared to 3.9% in November, marking the highest annual rate among all subcomponents. This increase likely reflects rising wages and is expected to continue adding upward pressure on inflation.
Meanwhile, the Eurozone composite PMI increased to 49.6 in December from 48.3 in November. Despite the rise, this marks the second consecutive month below the critical 50-point threshold, signalling contraction. While the services PMI climbed to 51.6 in December, the manufacturing PMI dropped further to 45.1. Activity in the Eurozone's three largest economies—Germany, France, and Italy—declined in December.
Data from the National Bureau of Statistics (NBS) showed that China’s consumer price index (CPI) inflation remained subdued at 0.1% y-o-y in December. Food prices fell by 0.5% y-o-y, but this decline was offset by modest increases in non-food and services inflation, both of which rose by 0.1% y-o-y. For the full year, China’s CPI inflation averaged just 0.2%. This outcome falls short of what authorities would like to see, with stimulus measures implemented throughout the year not sufficient to boost demand or inflation.
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, 10 Jan 2025
