By Chris Harmse
Events after the hawkish stance by Fed chairperson Jerome Powell during his Jackson hole speech on August 26, where he warned that the US would continue to raise interest rates till the inflation rate was back to 2%, sent shivers through world equity markets and boosted the dollar to record strong levels against the euro and the pound.
These predictions of him weighed heavily on the stock and exchange rate markets last week, after the US inflation rate for August was released.
The markets expected a drop in the CPI rate to 8%, from 8.5% in July. The inflation rate for August, however, came in on 8.3%.
Remembering the warning by Mr Powell and anticipating an increase in the FED rate this coming week of a third consecutive 0.75% or even one hundred basis points, the fifth in a row this year was discounted in the markets since the beginning of last week.
As a result, share prices across the world tumbled since last Monday. On Wall Street the Dow Jones Industrial Index dropped 7.7% during the week and is now trading 15.5% down for the year.
The S&P 500 index lost 4.7% last week as the Nasdaq decreased by 5.5%. On the JSE share prices also had a devastating week. The ALSI traded down by 5.5%, the Top 40 index lost 5.2% and the Industrial 25 index decreased by 4.5%.
In anticipation of the FED’s expected increase in its bank rate this coming Wednesday, the dollar has strengthened sharply against the rand. The currency traded weaker by 50 cents last week from R17.24/$ the previous week to R17.64/$ at the close on Friday.
This is the currency’s worst level this year and 177 cents or 11.15 percent weaker than the R15.87 at the beginning of 2022.
Apart from the US’s worse-than-expected inflation data, the UK and the EU also announced their inflation rate numbers for August last week.
The Eurozone inflation rate accelerated to a new high of 9.1%. The UK inflation rate in August unexpectedly edged down to 9.9% against 10.1% in July. The Bank of England is expected to follow the FED this week by increasing its bank rate also with between 0.5% and 0.75%.
The European Central Bank last week already had lifted its main rate by 0.5%. This is the biggest rate hike since 1995.
Despite the sharp depreciation of the rand, against the US$, the relative lower Brent oil price still indicates that the petrol price was over recovered by 124 cents a litre between September 2 and September 16, pointing towards a lowering of the petrol price at the beginning of October.
The price for diesel, however, is under-recovered by 43 cents a litre as of last Friday.
This coming week the release of South Africa’s inflation rate for August on Wednesday will draw attention.
Given the decrease in fuel prices and a relative stronger rand in August, it is expected that the CPI rate came down from 7.8% in July to 7.5% in August.
The Monetary Policy Committee (MPC) of the Reserve Bank will meet from Tuesday and its interest rate decision will be announced on Thursday. Financial markets expect that the MPC will raise its repo rate by 0.75% to 6.25%. This will be the second consecutive 0.75% increase by the MPC and will increase the banks’ prime rate up to 9.5%.
Globally all eyes will be of the Fed’s meeting starting on Tuesday. Given the higher-than-expected inflation rate number for August, it is expected that the FED will raise its bank rate between 0.75% and 1%.
The Fed will also publish its economic projections this coming Wednesday.
Chris Harmse is an economist at CH Economics (Pty) Ltd and lecturer at the School of Commerce at Stadio University.
BUSINESS REPORT