The unexpectedly higher increase in the repo rate by 0.50% by the Monetary Policy Committee (MPC) of the SA Reserve Bank last Thursday brought about concern amongst the public, economists and market analysts.
The rand initially depreciated strongly against the US dollar, pound and euro just after the announcement of the increase in the repo rate. This latest rate hike is the 10th consecutive increase in interest rates since November 2021 and was raised in total by 4.75% (more than double) from 3.75% 18 months ago since the policy tightening began.
The rand almost immediately lost forty cents to R19.77 to the dollar after the announcement and traded for the first time higher than R24 against the pound. The currency, as expected, however, started to recover on Friday and should return to the pre-repo rate announcement levels during the coming week, as foreign investors are chasing higher rates.
The main concern weighing hard on the currency is if the US also increase rates at their next meeting that will be held on June 13 and 14. It looks like if the MPC expected such a scenario and the committee proactively increased its repo rate by 0.5%.
Equity prices on the JSE in contrast moved mostly in the opposite direction last Thursday and mostly followed international trends. After a sell-off mostly last Monday to Wednesday, buyers returned to the market last Thursday as rand hedging shares became favourable.
The all share index on the JSE, after losing 3.0% the first three days of the week, recovered by 1.3% up to the Friday close. The Industrial and Top40 indices followed the same pattern. These movements in equities on the JSE is in line of most other bourses in the world.
In the US, the Dow Jones industrial index lost 1.3% last week, the S&P500 was marginally higher by 0.2%, the Euro Stoxx lost 1.3% and in Hong Kong the Hang Seng index traded down by more than 4.0%.
This coming week all eyes will be on the release of the US non-farm payrolls for May 2023. The job data for April that was released at the beginning of last month played a leading role in the decision of the US Federal Reserve to raise its bank rate the following Wednesday. The unemployment rate came down to a 50-year low of 3.4%, while the hourly wage rate increased by more than 4.0% on a year ago.
The market expects that the US unemployment rate increased only marginally during May 2023 to 3.5% and that the economy had added 180 000 new jobs to the job market. If these numbers are better than expected, a further increase in the Fed rate can be expected. In Europe, the EU will also publish the euro-area’s unemployment rate for April. The major European countries will release their latest inflation rate data.
In South Africa, the announcement on Wednesday of the new vehicle sales for May will draw attention, as well as the release of the first quarter balance of trade numbers by the SA Reserve Bank this coming Thursday.
We expect that the rand, global and domestic equity markets, and bond rates will remain volatile due to expectations of the US non-farm payrolls will give indication towards the direction the Fed will move at their next meeting in two weeks’ time.
Chris Harmse is the consulting economist of Sequoia Capital Management.
BUSINESS REPORT