South African and global financial markets await the decisions of the Federal Reserve Open Market Commission (FOMC) on its decision on interest rates in the US this coming Wednesday.
The SA Reserve Bank’s Monetary Policy (MPC) will announce its decision on the repo rate on Thursday. The markets expect in both cases that the two central banks will keep rates unchanged, although some uncertainty and nervousness prevail. Inflation data for most developed countries, as well as their interest rate decisions will also be releasing this coming week.
In the US, consumer inflation increased more than expected in August to 3.7% from 3.2% in July - higher than the 3.4% that was expected. The sharp annual increase in gas and other energy prices mostly contributed to the sharp turnaround in prices at shop level. If one strips the effect of energy and food prices from the inflation basket then the core inflation rate indeed came down from 4.7% to 4.3% and down for the fifth consecutive month. The core inflation rate is the variable that the FOMC uses as a benchmark for inflation and monetary policy.
The FOMC has set a target of 2% for core inflation. Unemployment in the US also jumped more than expected from 3.4% to 3.7% in August, showing that the US economy is slowing. The lower core inflation and higher unemployment rate data may just convince the FOMC to keep its bank rate unchanged at the end of its meeting on Wednesday.
Domestically, the MPC will have to analyse the possible effects of another interest rate hike on Thursday, as well as the current upside risks of the inflation rate. It is expected that the South African inflation rate will start to feel the pressure of the sharp increases in fuel prices and the much more weaker rand exchange rate. These movements may warn the MPC that inflation may turn around sharply over the last part of 2023.
If the FOMC raises its bank rate on Wednesday, the MPC will have no choice but to follow with also an increase in the repo rate. The risk of a further depreciation of the rand may force the MPC to follow the FOMC closely.
The rand exchange rate started to improve strongly at the beginning of last week, appreciating from R19.20 to the dollar at the close the previous Friday to R18.82 last Thursday, but traded for most of Friday above R19.00, closing at R18.98.
On the JSE equity prices traded mostly higher last week in anticipation of the FOMC keeping its bank rate unchanged due to the lower inflation rate number that is lower than 5%. The all share index managed to end the week 1.27% higher than the close of the previous Friday.
Industrials traded higher by 0.9% over past week. The banking sector remained nervous and lost 2.7% over the week. The Resource 10 index improved strongly by 8.0% since last Wednesday and ended the week 8.7% higher as most commodity and precious metal prices increased steadily.
US stock markets await the crucial next meeting of the FOMC, announcement on interest rates next Wednesday. The main three indices on Wall Street remained flat. The Dow Jones industrial index ended 0.09% lower, the S&P500 traded down by 0.7% and the Nasdaq ended the week 1.3% in the red.
This coming week Statistics South Africa (StatsSA) will release the inflation (CPI) rate data for August on Wednesday. It is expected that the annual increase in the CPI will be 4.9%, up from the 4.7% recorded for July 2023.
StatsSA will release the retail sales numbers for July also on Wednesday. It is expected that the annual sales at retail shops in real terms had decreased by -0.7%. The MPC will start their second last meeting for the year on Tuesday and will announce its interest rate decision at a news conference on Thursday. On global markets the FOMC of the US will announce its decision on interest rates on Wednesday.
Markets expect that the committee will not change its current bank rate. The UK, EU and Canada will release their inflation rates for July on Wednesday. The Bank of England will announce its interest rate decision on Thursday. The US will publish its oil and gas reserve stock data on Wednesday and it is expected that the oil reserves had decreased by another 2.5 million barrels over the last week, putting further pressure on the oil price.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT