The decision last Thursday by the SA Reserve Bank’s Monetary Policy Committee (MPC) to aggressively increase its repo rate by 0.5% to 7.75% came as a shocker.
The MPC warned that “risks to the inflation outlook, however, are assessed to the upside”. It also said: “The rand has generally weakened over the past year. Recent weeks have seen further sharp depreciation and then some reversal as sentiment shifted abruptly in the wake of policy decisions in some major advanced economies.”
The MPC mostly refers to interest rate increases in the US and Europe.
Although equity markets contracted somewhat on Friday, the positive momentum of the past seven working days remains in reaction to higher commodity and precious metal prices.
On the JSE, the All Share Index ended Friday 0.71% lower, with the Resource 10 Index (-1.8%) and the Metal and Mining Index (-2.4%) giving up most of their gains earlier in the week, mostly due to the much stronger rand.
For the week, the All Share Index gained 1.9%. However, the JSE ended March much weaker, losing 2.1%, in correlation with most global stock markets, as a new world banking crisis looms.
Negative global sentiment towards shares started at the beginning of the month, after the non-farm pay rolls had shown that US unemployment remains low on 3.5% (against the US Fed’s target of 4.2%). This was followed by the hawkish sentiment of the US Federal Reserve, increasing its bank rate by 0.25%, with indications that more rather than less increases are on the way. The US inflation rate came in on 6.0%, still far above the Fed’s target of 2.0%.
These three major global economic indicators fuelled overall negative market sentiment for stocks around the world. However, equities started to recover over the past week on expectation of US economic growth rate data that was released last week.
The American economy expanded during the fourth quarter of 2022 with an annualised 2.6%, slightly less than initial estimates of a 2.7%, and 2.0% for 2022 as a whole. This implies that the US economy is still far from moving into a recession. On Wall Street, the Dow Jones Industrial Index gained 2.8% last week, and ended March flat, down by only 0.03% during the middle of the month, mostly in reaction
The rand exchange rate reacted positively on the MPC’s decision to increase the repo rate more than expected, proving that the secondary target of the Reserve Bank to protect the foreign value of the currency is bearing fruit. Since the announcement of the increase in the repo rate on Thursday afternoon, the currency appreciated by 30 cents, from R18.03 to the dollar to R17.73 on Friday afternoon. The same pattern emerges against the Euro (R19.27) and Pound (R21.92).
This coming week, investors and analysts will await the publication of the Absa Purchasing Managers Index (PMI). The main interest in financial markets will be the release of the US non-farm payrolls for March 2023 on Friday.
The US unemployment rate came down only marginally, from 3.5% in January 2023 to 3.6% in February 2023. The job market created 311 000 new jobs in February. It is expected that 240 000 jobs were created in March, keeping the unemployment rate on the same level (3.5%).
If these data are correct, financial markets will discount yet another increase in the Fed’s bank rate later in April. This data is expected to put equity markets under further pressure.
Chris Harmse is the consulting economist of Sequoia Capital Management.
BUSINESS REPORT