Quiet domestic week with global eyes on US inflation and a ceasefire deal in Gaza

THE WEEK IN PERSPECTIVE

Lisette IJssel de Schepper

It was a very quiet domestic data week, while global market participants zoomed in on US inflation data following last week’s solid US jobs report. There was positive news about Israel and Hamas agreeing upon a ceasefire deal for Gaza. The phased deal is largely similar to what has been on the table since May, but circumstances have changed since. However, while the promise of less unrest in the Middle East would normally contribute to a decline in oil prices, the imposition of tougher sanctions on the Russian oil industry pushed up the oil price instead.

Following encouraging reports of a deal being “closer than ever” through the week, it was confirmed on Wednesday that Hamas and Israel agreed on a ceasefire deal for Gaza. While Israel has warned some details still need to be agreed upon, it should come into effect on Sunday. Very simply put, the deal would be structured in phases. The first phase would allow for the release of 33 hostages to Israel. If the truce holds, a partial withdrawal of Israeli forces and the release of Palestinian prisoners will follow, and Hamas and Israel will start a discussion about a second phase entailing a permanent ceasefire and a release of more hostages for prisoners. The final phase would involve the return of all the bodies of hostages who died and the reconstruction of Gaza under the supervision of Egypt, Qatar and the UN. Meanwhile, fighting between Russia and Ukraine continued to intensify this week. On Friday, the US imposed the most aggressive US sanctions yet on Russia’s oil industry, which pushed the Brent crude price to top $81/barrel. European countries are set to impose their sixteenth package of sanctions on Russia.

Earlier this morning, China released its Q4 GDP data. As we quipped last week, China generally ‘gets’ what it targets (around 5% in 2024), and with a faster-than-expected 5.4% y-o-y increase in Q4, full-year growth came in at 5%. This is a slight slowdown from 5.2% in 2023, but a touch faster than the consensus forecast. Chinese stock markets rose this morning.

Going against the rhetoric of late last week, Donald Trump’s economics team once again signalled that tariffs would be less extreme than promised during Trump’s campaign. Bloomberg News reported that the team was looking for a way to roll out high(er) tariffs with maximum impact (i.e. boost negotiating leverage) but minimal damage (i.e. to avoid a spike in inflation). One such way is to follow a stepped approach. Following the news reports, equity futures rose (later followed by rising stock prices when markets opened), the US dollar weakened, and Treasury yields declined. The dollar was particularly strong before the news broke, trading at a two-year high against major currencies following a boost from the solid jobs data last week Friday. Trump himself has not commented on this message and may, like he did last week, flip markets around by denying such an approach. Meanwhile, the lower-than-expected US core inflation print (headline came out in line with expectations – see the international section for more) pushed the dollar somewhat weaker still and contributed to US treasuries having their best day in months, with yields moving lower across the board. The depreciating dollar helped the rand, which strengthened to about R18.80/$, although the average for January so far is still about 60c weaker against the dollar compared to December.

As we flagged last week, if sustained, the combination of a weaker rand and a higher oil price does not bode well for SA’s inflation and interest rate trajectory. As things stand today, the fuel price is set to increase for a fourth consecutive month in February. Indeed, as financial markets have started to price fewer rate cuts by the US Fed, traders have now adjusted their expectations to just one 25bps cut by the SA Reserve Bank (SARB) this year (from three expected earlier). The first meeting of the SARB is on 30 January. While there is an argument to be made that the SARB could pause in January to see how financial market dynamics play out in the coming weeks and cut in March (or not at all), we believe there still is a window for the bank to move the policy stance closer to neutral in January and, for now, think that they could cut again in March. Inflation expectations have moved in the right direction (down), and even with the upside from the rand and oil price, the forecast is for inflation to remain around the (current) 4.5%-target. There is, however, an increased risk that the SARB (over)cautiously keeps the rate on hold in January and/or March.

Finally, on the domestic front, the general secretary of the Public Service Co-ordinating Bargaining Council sounded optimistic that unions and the government would be able to agree on a wage settlement soon. The government upped its latest offer to 5%, with the latest demand from unions around 6% (down from 12% initially). The government wants to link the next two years of pay increases to inflation (with a minimum of 4% and a maximum of 6%), which is a sticking point for the unions. For 2025/26, it is likely that they will settle at an above inflation (and inflation target) increase, which will also be more than budgeted for, with Treasury working with a 4.9% increase in the total wage bill. That said, it is conducive to continued political stability if a strike by public sector workers or protracted negotiations can be avoided.

Regarding local policy, the launch of the trusted tour operator scheme, which aims to increase tourism from China and India, was an encouraging development. Sixty-five trusted tour operators will be able to fast-track visa administration for tourists from these countries.

Note that there were no major reform developments to report on this week, but subscribers to the Business Day can read the BER’s column on the importance of municipal reform here.

WEEK AHEAD: MORE LOCAL DATA FOR NOVEMBER; TRUMP TO BE INAUGURATED

On the domestic data front, we will get a clearer picture of Q4 GDP dynamics next week when Stats SA releases mining production and internal trade data for November. While expanding compared to October last year, monthly mining production experienced a tough start to the quarter with a 3% decline. That said, if growth stays flat through the remainder of Q4 the sector could still add positively to GDP. Retail sales for November should be boosted by Black Friday spending. While the seasonal adjustment and y-o-y growth rate should account for this annual event (and this limits the magnitude of the relevant change), anecdotal evidence suggests that 2024’s Black Friday saw particularly strong retail spend. This would fit with our broader expectation of a an uptick in the momentum of consumer spending recovery in Q4 amid lower inflation, lower interest rates, improved sentiment and a temporary windfall for some consumers from two-pot savings withdrawals. The SARB will publish the leading business cycle indicator for November.

The SA December consumer price inflation (CPI) report will be released on Wednesday. We anticipate a slight increase from November’s 2.9% to above 3%, which would result in a full-year CPI average of 4.4%.

The main development next week will be the inauguration of Donald Trump as US president on Monday. During his campaign, he promised to already get a lot done in the first 24 hours in office, not in the least to end the war between Ukraine and Russia; in reality, things will likely be slower (or not happen at all). As in the past weeks, markets will scrutinise any messages about economic policies.

On the international data side, the most interesting releases will be the flash PMIs coming out on Friday. These will be some of the first data points for 2025. The Bank of Japan (BoJ) has its interest rate decision scheduled for Friday. While not certain, the BoJ (BoJ) could hike its policy rate by 25bps to 0.5% amid concerns about sustained wage growth and the impact of US policies on the Japanese economy.

DOMESTIC SECTION

Lisette IJssel de Schepper

ELECTRICITY PRODUCTION BOUNCES BACK FROM OCTOBER DIP

According to Stats SA (seasonally adjusted), electricity production rose by 0.8% m-o-m in November, following a 1.1% decline in October. On an annual basis, production was up by 6.6% relative to the load-shedding-affected November 2023. Another monthly increase would be needed for production to record its third consecutive quarterly increase in Q4.

CREDIT APPLICATIONS HIT RECORD HIGH

As per National Credit Regulator (NCR) data for 2024Q3, the number of consumer credit applications rose to a record high of 18.1 million. Rejection rates continued to decline slightly while arrears rose – especially for mortgage lending.

INTERNATIONAL SECTION

Nadia Matulich

SOFTER US INFLATION PRINT FOLLOWS STRONG JOBS REPORT

The main US data release was the consumer inflation print for December. The headline print came in line with expectations, with annual CPI accelerating to 2.9% from 2.7% the month before. However, the core CPI print – which strips out volatile food and energy prices – unexpectedly declined by 0.1%pts to 3.2% y-o-y. Earlier in the week, producer price inflation also came in lower than expected, as higher costs for goods were partially offset by stable services prices. The 0.2% m-o-m increase translates into a 3.3% annual rise.

While released last week Friday, the upward surprise in the jobs data moved markets to such an extent that it warrants unpacking. Nonfarm payrolls increased by 256 000 in December, following a (downwardly revised) increase of 212 000 jobs in November. Going against expectations for it remaining unchanged, the unemployment rate declined to 4.1%. Job creation was primarily led by health care (46k), government (33k), social assistance (24k) and retail trade (43k).

US retail sales rose by 0.4% m-o-m in December, the slowest increase since a slight decline was recorded in August (-0.1%).  The drivers of this increase are consistent with a pleasant festive season, with miscellaneous store retailers (4.3%), sporting goods, hobby, musical instruments and books (2.6%) and furniture (2.3%) showing the most significant increases.

Finally for the US, data released late last week showed a shift in consumer sentiment.  The University of Michigan consumer sentiment index had been steadily increasing from July through to December, reaching an eight-month high of 74, but dipped to 73.2 in January (preliminary) amid increased worries about future inflation. In addition, year-ahead inflation expectations increased by 0.5%pts to 3.3%, the highest reading since May and above the pre-pandemic average. Long-run expectations rose by 0.3%pts to 3.3%. The large one-month change has only been seen on two other occasions in the last four years.

UK INFLATION UNDERSHOOTS EXPECTATIONS, BUT SO DOES GROWTH

Across the Atlantic, monthly GDP rose by 0.1% in November. This was lower than expected, but it was the first expansion since August. GDP growth was primarily driven by the service sector (0.1%), particularly accommodation and food service activities. The biggest drag was the manufacturing-led decline in the production sector. Meanwhile, inflation unexpectedly slowed to 2.5% from 2.6% in December, which sparked a short-lived rally in UK bonds following last week‘s sell-off.

On the continent, Germany contracted by 0.2% in 2024, a second straight year of declining real GDP following a 0.3% drop in 2023.  This is mainly due to a drop in manufacturing (automotive industry) and construction while the service industry rose.

CONTACT US

Editor:         Lisette IJssel de Schepper
Tel:              +27 (0)21 808 9755
Email:          lisette@sun.ac.za

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Please refer to the glossary on the BER website for explanations of technical terms.

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