Israel-Iran war intensifies as Trump still decides if the US should get involved

THE WEEK IN PERSPECTIVE

Lisette IJssel de Schepper

The Israel-Iran war dominated news headlines this week. As expected, Iran retaliated following last week’s strikes on nuclear facilities by Israel, leading to a full-blown war between the two countries. On the economic front, the US Federal Reserve (Fed) and Bank of England (BoE) had interest rate decisions this week, with both banks remaining on hold as expected (see international section). US President Donald Trump called US Fed Chair Jerome Powell a “stupid person” for not lowering the policy rate. Domestic data releases were generally positive, with inflation remaining low and retail sales performing quite well in April (see domestic section). The likely removal of the Financial Action Task Force (FATF)’s grey list would also be positive (see reform update).

So far, none of the global superpowers has directly become involved in the Israel-Iran war. Earlier in the week, Trump hastily left the G7 meeting in Canada to do “big stuff” back in Washington. Some speculated that this means that the US might get directly involved in the Israel-Iran war. Israel wants the US to help with bunker-busting bombs to strike underground nuclear bombs, but the US, so far, seems unwilling to do that, with not everyone in Trump’s MAGA camp keen to get involved. That said, Trump has reportedly approved attack plans, but is withholding final authorisation (for now). Depending on whether negotiations with Iran take place and how those unfold, Trump will decide within two weeks how to proceed.

Of the major central banks, while the Fed and BoE kept rates unchanged, the Swedish Riksbank (expectedly) and Norges Bank (surprisingly) cut borrowing rates. The Swiss National Bank (SNB) slashed its policy rate all the way to zero. The SNB warned it is willing to go lower (i.e. into negative interest rate territory) to protect the Swiss Franc, which has been strengthening at a steep pace amid a weak dollar and significant capital inflows. It sees inflation at 0.2% this year (and at 0.5% and 0.6% in the next two years). Meanwhile, Brazil continued to go against the global tide and hiked its policy rate by 25bps to 15%, the seventh consecutive increase.

In commodity markets, there is good news (higher platinum price) and bad news (higher oil price) for SA trade dynamics. Positively, the platinum price jumped to a more than 10-year high this week. The price is supported by demand from China, sustained investor interest and concerns about a deficit in the market (with demand outstripping supply). On a negative note, the oil price surged higher this week and is currently almost 20% above the price at the start of the month. Iran directly supplies about 3 million barrels of oil to the market per day – this could, technically, easily be made up by a country like Saudi Arabia, which is still voluntarily cutting back production. However, the real concern is that freight in the Strait of Hormuz gets disrupted, through which about 15% of the world’s oil and 20% of LNG travel. Oil continues to flow, but prices to charter large oil tankers sailing through the strait have already more than doubled from last week.

While the oil price reflects the escalation of tension in the Middle East, many financial market indicators seemed to have shrugged it off. That said, US futures dipped lower yesterday (markets were closed for Juneteenth). The JSE Alsi closed the week about 2% lower from the near record high levels reached last week. The rand exchange rate held up well during the week, but depreciated a little against a stronger dollar yesterday. It closed the week weaker against the dollar, euro and pound.

WEEK AHEAD: SA CONSUMER SENTIMENT FOR Q2

The biggest data release on the domestic front will be the FNB/BER Consumer Confidence Index (CCI), due on Thursday. The CCI plunged to -20 in Q1 a time of heightened uncertainty about the longevity of the Government of National Unity (GNU), Budget 1.0 (with the 2%pts VAT hike) and strained diplomatic relations between the US and China. Stats SA publishes factory gate inflation (PPI) for May, also on Thursday. After PPI was unchanged at 0.5% in April, we again expect little change in the rate in May as lower fuel prices continue to exert downward pressure on PPI. PPI is expected to climb a little higher during the second half of the year, but an average of about 1.4% for the year, it remains relatively low.

On the international front, the flash PMI figures from Europe and the US will be in focus. The Fed’s favoured measure of price changes is due on Friday. The backward-looking indicator remains key for monetary policy. However, given the uncertainty about the impact of tariffs still to come and the fact that the Fed meeting has just passed, it is likely to be less significant to markets than usual.

REFORM TRACKER

Roy Havemann

GREY LIST REMOVAL LIKELY IN OCTOBER

The FATF announced on 13 June that SA has substantially completed all 22 action items that were contained in the Action Plan adopted when South Africa was grey listed in February 2023. An on-site visit will take place before the next FATF Plenary, and, if the outcome of the visit is positive, the FATF will delist SA from the grey list at its next Plenary in October 2025. Preparations for the on-site visit have commenced. The removal will substantially reduce the regulatory burden placed on financial services firms and other entities when undertaking cross-border transactions, and it is positive overall.  

REPOWERING PROJECTS AT COAL POWER STATIONS

Eskom has confirmed a 5 GW pipeline of “repowering” projects across six coal power station sites—Komati, Grootvlei, Arnot, Camden, Hendrina, and Kriel—as part of its Just Energy Transition (JET) strategy. These include a mix of solar PV, battery energy storage systems (BESS), wind, and gas-to-power developments, aiming for commercial operation by 2030. For example, Komati will host 122 MW of solar and 150 MW of BESS, while Arnot will feature 800 MW of solar, 200 MW of BESS, and 168 MW of wind. Developed in partnership with the private sector, these projects aim to reduce Eskom’s emissions by 40% by 2030. Meanwhile, Eskom is also exploring technologies to help remaining coal plants meet emissions standards. 

The transition is being supported by international funding, notably a recently approved update to SA’s Accelerating Coal Transition investment plan by the Climate Investment Funds (CIF), unlocking up to $2.6 billion. Eskom, the primary recipient, will use the funds to accelerate repowering and repurposing at sites like Camden and Grootvlei. The repurposing includes initiatives like microgrid assembly, agrivoltaics, skills training, and small business development to promote economic diversification in affected communities. A recent  Presidential Climate Commission (PCC) report stressed the importance of better planning before decommissioning to ensure smoother transitions and community engagement. 

DOMESTIC SECTION

Katrien Smuts

INFLATION REMAINS SUBDUED IN MAY, OFFERING SLIGHT RELIEF TO STRAINED CONSUMERS

According to the latest release from Stats SA, headline CPI inflation stayed below 3% in May. The annual rate of increase was unchanged at 2.8% in May, while the monthly inflation rate slowed to 0.2%, down from 0.3% in April. The largest contributions came from food and non-alcoholic beverages, which rose by 4.8% y-o-y, contributing 0.9% pts to headline inflation, and housing and utilities, which increased by 4.5% y-o-y, adding 1 %pt. The rise in food inflation was primarily driven by higher meat prices. However, while the recent foot and mouth disease outbreak has put pressure on red meat prices, it is not the sole driver. Prices had already been trending upward for several months, and some analysts suggest the impact may be short-lived. Outbreaks often lead to export bans, which can increase local supply and place downward pressure on domestic prices. In addition, the ban on poultry imports from Brazil, due to an avian influenza outbreak, is expected to be temporary and limited to affected areas. While Brazil is a key poultry supplier to SA, the impact is also only expected to be short-lived.

In contrast, transport prices registered 4.8% y-o-y deflation, primarily reflecting a 14.9% y-o-y decline in fuel prices in May.

RETAIL SALES RISE IN APRIL, BUT MOTOR TRADE DECLINES ONCE MORE

Stats SA’s latest retail trade sales data showed another solid performance in April, with sales rising by 0.9% m-o-m and 5.1% y-o-y. The main driver of growth was the general dealers category, which increased by 5.3% y-o-y, contributing 2.3% pts to the overall growth. Strong gains were also recorded in textiles, clothing, footwear, and leather goods, which rose by 12.5% y-o-y (+2.1%pts). Hardware (-3.5% y-o-y; - 0.3%pts) and food, beverages and tobacco in specialised stores (-1% y-o-y; -0.1%pts) weighed on growth.

Despite another steep annual decline (-6.5% y-o-y), wholesale trade sales perked up by 0.9% m-o-m. Motor trade sales, however, declined by 1% m-o-m (and -0.9% y-o-y).

While the muted inflation print provides some welcome relief and April retail sales showed the consumer has some strength, the question is how long this can be sustained. Real incomes are squeezed amid unchanged personal income tax brackets, a pending electricity tariff hike in July, and an increase in the fuel levy. Next week’s FNB/BER CCI will provide an update on consumers’ willingness to spend.

INTERNATIONAL SECTION

Damian Maart

US FED KEEPS RATES STEADY WHILE RETAIL SALES COME IN BELOW EXPECTATIONS

As expected, the Fed kept the interest rate unchanged on Wednesday. Powell noted that despite favourable inflation and labour market outcomes in recent months, the impact of tariffs on consumer inflation is still expected to feed through to prices in the coming months, with the extent of this impact still highly uncertain. This prompted the committee to maintain its current policy stance. Looking ahead, the Fed stated it would be prepared to adjust its monetary policy stance should risks materialise that could hinder the achievement of its dual mandate.

Retail sales declined more than expected in May, with a 0.9% m-o-m drop recorded. This was, to some extent, due to a decline in purchases of the type of goods consumers stocked up on in earlier months ahead of anticipated tariff increases: The contraction in sales was most pronounced in motor vehicles and parts (-3.5% m-o-m), followed by building materials and garden equipment suppliers (-2.7%) and petrol stations (-2%).

THE BANK OF ENGLAND HOLDS RATES STEADY AT 4.25%

The BoE has opted to remain in restrictive territory, keeping the policy rate unchanged at 4.25%. Three members of the Monetary Policy Committee (MPC) voted for a 25bp cut, while the majority (six) favoured holding rates steady. The decision reflects ongoing concerns around persistent wage and price pressures, alongside heightened geopolitical uncertainty. This comes as consumer inflation eased to 3.4% y-o-y in June, from an officially acknowledged overstated inflation rate of 3.5% in May. Nonetheless, the MPC has signalled a “gradual and careful approach to the further withdrawal of monetary policy restraint”, with future moves contingent on how economic conditions evolve.

Across the North Sea, wage growth in the Eurozone slowed to 3.4% y-o-y in 2025Q1, down from 4.1% in the previous quarter. This deceleration, combined with low economic growth and a benign inflation outlook, is likely to support another policy rate cut.

The ZEW Economic Sentiment Index, a leading indicator of economic expectations, surged for a second consecutive month. In Germany, expectations rose sharply by 22.3 points to 47.5 in June. A notable improvement in the current economic situation was also recorded, with a 10-point increase, the strongest since April 2023. Similarly, sentiment in the Eurozone climbed by 23.7 points to 35.3, while the assessment of current conditions improved by 11.7 points to -30. Optimism around economic conditions and expectations is largely driven by increased consumer activity and expectations of more infrastructure and defence spending.

CHINA’S INDUSTRIAL PRODUCTION SLOWS DOWN WHILE RETAIL SALES SURPRISE TO THE UPSIDE

China’s industrial production growth rate hit a six-month low of 5.8% y-o-y in May, from 6.1% in April. The slowdown was driven by a decline in manufacturing production growth (6.2% vs 6.6% in April. However, retail sales in China surprised to the upside in May, posting a 6.4% y-o-y growth rate, well above the expectations of a slowdown from 5.1% in April to 5%. The sale of consumer goods (excluding automobiles) rose by 7% y-o-y (vs 5.1% in April). The boost in retail sales is likely due to a tariff-induced redirection of export goods to the domestic market given the significant slowdown in export growth in May (4.8% y-o-y vs 8.1% in April)

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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