The backlash of the US Federal Reserve (Fed) meeting the previous Wednesday still haunts global equity markets. The good news of abstaining from increasing interest rates further only lasted a few minutes, as it was overshadowed by the Fed’s remark (the bad news) that interest rates would not be lowered this year.
Almost in the same breath the Fed then continued with its hawkish stance (aggressiveness) that the changes are good for another two bank rate hikes in 2023 (the ugly news).
Share markets started to discount this news from the previous Friday. The all share index on the JSE moved somewhat sideways from the previous Thursday, but since last Monday, after the public holiday, started to weaken during each day of trading last week.
The all share index lost almost 4000 points (5.0%) last week to end at 74 582 points on Friday. This level is now only 1355 points, or 1.85%, higher than the opening stance at the beginning of the year.
On global markets, bourses followed the same trend. In the US, the Dow Jones industrial index lost 2.8%, and is now only 1.8% higher for the year-to-date. The S&P 500 index lost 2.1%. In Germany the DAX lost 2.8% last week, the Nikkei was down by 3.0%. In Asia emerging markets shares also took a hiding. The Hang Seng in Hong Kong lost 5.15% over the week, the Shanghai index lost 1.5%, and in Australia the ASX was down for the week by 2.2%.
The Bank of England raised its repo rate last week by 0.5% to 5.0% - the 13th consecutive hike. In the eurozone the European Central Bank (ECB) increased its interest rate last Wednesday by 0.25%, bringing the rate on main refinancing operations to 4% - the highest level since the 2008 financial crisis. These increases also contributed to the ongoing negative sentiment on global stock markets.
The ugly news also had a big effect on the rand exchange rate. The rand depreciated against the dollar since the hawkish stance of the Fed with 60 cents from R18.16 against the dollar to R18.76 at the close on Friday.
Against the euro, the rand lost 53 cents over the past seven trading days to R20.328 and against the pound, the currency has weakened with 56 cents to R23.84.
South Africa’s inflation rate came down to a 13-month low of 6.3% in May 2023, down from 6.8% in April and below market forecasts of 6.5%. This rate is now much closer to the upper limit of the SA Reserve Bank’s target range of 3% to 6%. The question remains if the Monetary Policy committee (MPC) has the room to manoeuvre at their next meeting next month either to keep the repo rate, just like the Fed the same, or even to cut by 0.25%.
It might be too risky for the MPC to cut now leading to a sharp depreciation of the rand, fuelling further import inflation, especially on food and fuel. We still forecast a cut in the repo rate during the fourth quarter.
This coming week, the European Central Bank (ECB) President Christine Lagarde will deliver her speech today on the ECB interest rate stance. Tomorrow the US will release its durable orders for May 2023. It is expected that was negative for the first time in a long time at -1.0%, after it had grown by 1.1% in April 2023. On Wednesday the Fed chairman Jerome Powell will deliver its monetary policy speech.
The release of the US jobless claims data on Thursday also will be of importance as it bears mostly on the US non-farm payrolls for June to be announced at the beginning of next month.
On Friday the Eurozone will announce its unemployment rate for May 2023, expecting it to have remained on 6.5%. The US will publish the personal income and spending data for May, and it is expected that both had decreased, from 0.4% to 0.3% and 0.8% to 0.2% (year-on-year) respectively.
On Thursday Statistics South Africa will release South Africa’s production price inflation rate. It is expected that the prices at the factory gate level have increased by 7.2% over a year ago and sharply down on the 8.6% level in April 2023.
We expect that as last week, the rand, global and domestic equity markets will remain under pressure.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT