GLOBAL MONETARY POLICY AGAIN IN FOCUS AS BOJ TIGHTENS, BOE CUTS

The Week in Perspective, written by Craig Lemboe

The focus this week was once again on monetary policy. The US Federal Reserve (Fed) on Wednesday decided to keep the US Federal Funds rate unchanged. In contrast, two other major central banks changed their monetary policy settings unexpectedly.

The Bank of Japan (BoJ) hiked their benchmark rate to “around 0.25%,” marking the second increase this year in response a weaker yen. Meanwhile, the Bank of England (BoE) moved in the opposite direction, cutting rates for the first time since 2020. A reduction in the policy rate in the UK was on the cards, but only for later in the year.

While the US Fed kept the federal funds rate unchanged, the prevailing view is that they will cuts rates soon too, especially following comments by Fed chair Jerome Powell at the post-announcement press conference. In fact, markets are pricing in as much as 75 basis points (bps) worth of cuts by the end of the year. Our forecast (and this has been our view for a while) is that monetary policy easing can be expected to start in Sveptember. Of importance is that the Federal Open Market Committee (FOMC) is also increasingly concerned about labour market conditions. The spotlight will therefore firmly be on July nonfarm payrolls data to be released later today. In June, the US economy added an unexpectedly high 206 000 jobs. However, previous data has been consistently revised downward, with April and May employment figures combined being 111 000 lower than initially reported. Consequently, the June figure may also be revised lower. Other employment indicators have been weak, with initial jobless claims rising to 238 750 in June from 224 200 in May.

On the domestic policy front David Fowkes, member of the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) and advisor to the governors noted – at the BER conference on Wednesday - that monetary policy in SA is restrictive. This supports our call for a repo rate cut in September. The director-general of the National Treasury, Duncan Pieterse, also shared some insights, from the fiscal policy side, reiterating their commitment to stabilising debt and debt service costs. Importantly it seems that the push to address the “binding constraints” to growth is gaining momentum.

In terms of data releases, the first estimate of Q2 eurozone (EZ) GDP surprised on the upside, bolstered by external demand. Meanwhile, in China, the latest PMI data showed that activity cooled in July, especially in the manufacturing sector. Similarly, the US ISM PMI signalled further weakness in July, declining for the fourth consecutive month.

Domestically, the Absa PMI released yesterday provided a welcomed upside surprise. After remaining weak in June, the index rose above 50 in July. This indicates that Q3 started off on the front foot. Underpinning this rise was better domestic and external demand and, importantly, an uptick in respondents’ view of prospects in the next six months. It is too soon to tell if this reflects some calm following the formation of the Government of National Unity (GNU).

In financial markets, the rand traded stronger against most major currencies during the week, even against a stronger US dollar. Demand for safe-haven assets increased last week – which partly explains the better US dollar despite the more dovish stance by the Fed - off the back of rising geopolitical tension in the Middle East including the assassination on a Hamas leader in Iran. Despite escalating regional tensions, Brent crude oil prices ended the week lower. This occurred amid the decision of an OPEC+ panel to adhere to the cartel’s plan to increase production in October, despite recent data indicating weak oil demand from Asia.

The expectations for a Fed cut soon and safe-haven demand also lifted the price of gold.

Most major global bourse ended the week in the black. The JSE rose by 2.6% this past week to close at a new all-time high.

Read the domestic and international sections in the rest of the publication here.

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