Inflation isn’t just heading down towards the central bank’s target it has pretty much reached the target, and as such indebted consumers are all but guaranteed the start of a much needed interest rate cutting cycle from September onwards.? This is the good news for South Africa, although the Rand appears to be less enthusiastic about these developments.?
These are the mid rates at 6:00 today:
Brent Crude = $76.07 per barrel
- It wasn’t a terrible day for the Rand but we definitely went against the grain yesterday with a fall to R17.93 before closing the day at R17.86, but this weakness came on a day when the Dollar Index sank to a fresh 2024 low which underlines that our price movement was peculiar to the Rand only.?
- Slight Rand weakness is a small price to pay if it means that our crippling interest rate is about to come down, and that was the inference from yesterday’s local market data.? CPI had been stuck in the mid to low 5% range since November last year and while it was trending lower in recent months its progress had been very slow.? More of the same was predicted yesterday with a drop from 5.1% to 5.0% pencilled in and so it was a pleasant surprise to see the reading come in much lower at 4.6% which is as close to the SARB’s 4.5% target it can get without actually hitting target.? I’m loathe to say that an interest rate cut in September is now 100% certain as things can always change in the next few weeks, but its as close to 100% as we can hope for.?
- Increased prospects of lower interest rates hurt the Rand as we fell to R17.93 soon after the CPI news, but with the Dollar on the back foot hopefully this weakness will be short lived.? The following is from Business Day and talks to the SARB cutting in September:? “The latest consumer inflation figures confirm that inflation is steadily winding down and settling around the Bank’s midpoint [4.5%] inflation target,” said?North-West University Business School economist Raymond Parsons. “Lower inflation trends have now developed earlier than the forecasts of the last monetary policy committee (MPC) meeting. It would now be difficult for the MPC to justify keeping interest rates unchanged in the face of the much improved inflationary outlook.”
- Luckily, while the Rand gave up ground yesterday we are still close to our best level against the Dollar in over a year, but things could definitely have been better had our CPI report not come out yesterday.? The Dollar took a double body blow yesterday sending the Dollar Index all the way down to 100.92 and this has now become a significant fall from the 106.05 that it held as recently as the 26th of June.? The latest FED minutes cemented the chances of a September rate cut given that “the vast majority” of FED members view cutting as appropriate should incoming data support the move, and the data has done exactly that since late July when the meeting took place.? ?
- But the Dollar’s biggest source of pain was the revised US labour report which gives a more accurate reading on monthly jobs created between April 2023 and March 2024.? Alongside inflation data, each monthly jobs report is easily the most important data point that shapes the FED’s policy thinking and so it raised a few eyebrows when the period in question was revised down by 818?000 new jobs which is the biggest downward revision since 2009.? This suggests that the FED’s stubborn approach to lowering rates has been based on flawed data which in turn has increased the odds of a 50bps cut next month, and as a result the Dollar took a direct hit.?
- The stage is now set for FED Chair Jerome Powell’s speech at the Jackson Hole central bankers’ symposium with Powell scheduled to speak tomorrow night.?? The market is expecting him to give a firm nod to cutting rates in September and it will also be desperate for any clues as to how big that cut might be, and whether the FED will also cut at the remaining two meetings this year.? Powell usually disappoints the market with a more cautious/considered approach, and that approach could benefit the Dollar, but let’s wait to see what he had to say.
- Local market data today sees our July producer inflation report at 11:30.
- Possible USD mid rate trading ranges in the Rand today are R17.75 and R18.05
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