South African rand slips, inflation fall drives bigger rate cut optimism

British Pound

Reuters: British inflation jumped by more than expected last month to rise back above the Bank of England's 2% target and underlying price growth gathered speed too, showing why the BoE is moving cautiously on interest rate cuts. Consumer prices rose by an annual 2.3% in October, pushed up almost entirely by an increase in regulated domestic energy tariffs, after a 1.7% rise in September which was the first time the inflation rate had fallen below the BoE's target since 2021. Sterling strengthened by almost a third of a cent against the U.S. dollar after the data was published before giving back most of that rise. Interest rate futures priced in a slightly slower pace of rate cuts and bond prices fell.

The BoE's most recent forecast and a Reuters poll of economists had both pointed to a weaker CPI reading of 2.2%. James Smith, research director at the Resolution Foundation think tank, said a rise had been expected as last year's energy price falls dropped out of the annual calculation and the price cap increased in October. "But the clean sweep of higher headline, core and services inflation has delivered a triple dose of bad news for families and policymakers alike," he said. The increase took inflation to a six-month high and represented the biggest month-to-month rise in the annual CPI rate since inflation peaked in October 2022.

Services inflation - which the BoE views as a key measure of domestically generated price pressure - rose to 5.0% in October from 4.9% in September, the Office for National Statistics said, in line with BoE and market expectations. But core inflation, which excludes energy, food, alcohol and tobacco prices, picked up to 3.3% from September's 3.2%, bucking market expectations for a fall. The BoE said this month it expected headline inflation to tick up to 2.4% and 2.5% in November and December. Price growth is likely to approach 3% in the second half of next year, it says. Some private-sector economists think inflation will rise close to 3% in early 2025.

The BoE has said the first budget of Britain's new government will probably add to inflation next year and U.S. President-elect Donald Trump's threat to impose sweeping import tariffs adds to uncertainty about the outlook. Monica George Michail, an associate economist at Britain's National Institute of Economic and Social Research think tank, said interest rates might stay elevated for longer. "This outlook reflects forecasted inflationary pressures stemming from the recently announced budget, in addition to heightened global uncertainty, particularly surrounding the Trump presidency," she said.

The new government of Prime Minister Keir Starmer has promised to speed up Britain's economic growth but has come under fire from employers for the higher employment taxes that they will have to pay from April next year. The BoE has said that could lead to higher prices as well as job losses. Chief Secretary to the Treasury Darren Jones said the government was trying to reduce the impact of the higher cost of living, including with a latest increase in the minimum wage, "but we know there is more to do."

Mel Stride, the Conservative oppositions' would-be finance minister, said the government's fiscal watchdog had already been predicting higher inflation as a result of the budget. "What is worrying about today's announcement is that inflation is running ahead of expectations and official forecasts state these figures are not expected to improve," he said. There is also upward pressure on prices from the jobs market where many employers face a shortage of candidates.

Data last week showed British pay grew at its slowest pace in more than two years in the three months to the end of September. But BoE Chief Economist Huw Pill said wage growth was stuck at levels that were too high for the central bank. Investors on Wednesday were pricing around 60 basis points of BoE rate reductions by the end of 2025, equivalent to between two and three cuts, down from about 65 basis points of cuts expected by investors before the inflation data.

Two-year British government bond yields, which are sensitive to interest rate speculation, rose by around 4 basis points. Governor Andrew Bailey on Tuesday stressed the BoE's message that borrowing costs are likely to come down only gradually. There were signs of some weaker inflation pressures in the pipeline. Prices charged by factories for their goods fell by 0.8% in the 12 months to October, the biggest drop since October 2020 during the COVID pandemic.

US Dollar

Reuters: The U.S. dollar stood broadly firm on Thursday as traders awaited more clarity on U.S. President-elect Donald Trump's proposed policies and sought to second-guess the prospects of less aggressive interest rate cuts from the Federal Reserve. After stalling for three sessions, the greenback was back on the march higher, with investors lifting the dollar index measure against its key rivals closer to a one-year high of 107.07 hit last week. The dollar has rallied more than 2% since the Nov. 5 U.S. presidential election on bets Trump's policies could reignite inflation and temper the Fed's future rate cuts.

At the same time, traders are sizing up what Trump's campaign pledges of tariffs mean for the rest of the world, with Europe and China both likely on the firing line. "It's hard to short the USD right now," given that investors are also increasingly weighing the possibility that the Fed might not cut rates next month after all, said senior market analyst Matt Simpson at City Index. That sentiment was driven by sharp swings in market pricing, which currently sets the odds of a Fed rate cut at its December meeting at just under 54%, down from 82.5% just a week ago, according to CME's FedWatch Tool.

A Reuters poll showed most economists expect the Fed to cut rates at its December meeting, with shallower cuts in 2025 than expected a month ago due to the risk of higher inflation from Trump's policies. Separate comments from two Fed governors Michelle Bowman and Lisa Cook on Wednesday gave little clarity about the Fed's path forward, with one citing ongoing concerns about inflation and another expressing confidence that price pressures will continue to ease. The dollar index held steady at 106.56, up from a one-week nadir hit in the previous session.

The euro was nearly flat at $1.054725 after slipping 0.5% on Wednesday, back toward last week's low of $1.0496, its weakest against the dollar since Oct. 2023. "The Russia-Ukraine conflict is heating up, which is further denting sentiment towards the euro alongside the prospects of trade tariffs," another "bullish cue" for the dollar index given the euro's heavy weighting, City Index's Simpson said. Ukraine fired a volley of British Storm Shadow cruise missiles into Russia on Wednesday, the latest new Western weapon it has been permitted to use on Russian targets a day after it fired U.S. ATACMS missiles.

The dollar gave up some gains against the yen, down 0.33% at 154.91 yen, although the Japanese currency remained under pressure. The currency pair rose above the 156 mark last week for the first time since July, stirring worries that Japanese authorities may again take steps to shore up the yen. The focus will be on Bank of Japan Governor Kazuo Ueda, who is scheduled to speak at a financial forum in Tokyo on Thursday after leaving the door open for a December rate hike in balanced remarks at the start of the week.

Investors will be looking for any stronger indication that a year-end rate hike is in the cards, with market pricing nearly evenly split amid the yen's recent decline back toward the 38-year-lows touched in July. Sterling was up 0.07% at $1.2656. Data on Wednesday showed British inflation jumped more than expected last month to rise back above the Bank of England's 2% target, supporting the central bank's cautious approach on interest rate cuts. Elsewhere, bitcoin reached a record high of $95,016 on Wednesday, underpinned by a report Trump's social media company was in talks to buy crypto trading firm Bakkt. Bitcoin has been swept up in a blistering rally in the past few weeks on hopes the president-elect will create a friendlier regulatory environment for cryptocurrencies.

South African Rand

Reuters: South Africa's rand slipped on Wednesday against a buoyant dollar, despite inflation dropping to its lowest level in more than four years, and as investors geared up for a policy announcement by the central bank on Thursday. At 1501 GMT, the rand traded at 18.1350 against the dollar, about 0.5% weaker than its previous close. Trade in the local currency has been volatile as investors sought safe-haven assets amid escalating tensions between Russia and Ukraine and as the dollar benefited from Donald Trump's U.S. election win.

October inflation cooled to 2.8% from 3.8% in September, Statistics South Africa data showed on Wednesday, one day before the South African Reserve Bank will announce its final monetary policy decision for the year. Inflation has only been below 3% in a handful of months in the past two decades. The SARB aims for the 4.5% level, the midpoint of its 3% to 6% target range. Economists polled by Reuters expect the central bank to reduce the repo rate by 25 basis points on Thursday.

"With South Africa's inflation falling to 2.8%, its lowest since June 2020, expectations for a 50 basis points cut by the SARB have increased, heightening the rand's vulnerability," said Zain Vawda, market analyst at MarketPulse by OANDA. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed about 0.8% up. South Africa's benchmark 2030 government bond was stronger, with the yield down 6.5 basis point to 9.045%.

Global Markets

Reuters: Asian equities fell on Thursday after AI darling Nvidia disappointed investors with a subdued revenue forecast, while the dollar firmed and bitcoin hit a record high in anticipation of U.S. President-elect Donald Trump's proposed policies. Prevailing geopolitical concerns following the escalating conflict in Ukraine earlier this week led safe-haven assets higher, including gold and government bonds. The spotlight though was on earnings from the world's most valuable firm Nvidia, which projected its slowest revenue growth in seven quarters, sending its shares lower. Nasdaq futures slipped 0.47%, while S&P 500 futures eased 0.3%.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.23%, with tech heavy Taiwan stocks down 0.5%. Japan's Nikkei fell 0.7%. George Boubouras, head of research at Melbourne-based K2 Asset Management, said the market reaction to Nvidia's earnings was partly a result of very high expectations for each quarterly result. "While they delivered impressive revenue growth and momentum, the market clearly wants more." Charu Chanana, chief investment strategist at Saxo, said Nvidia earnings were a clear indication that the momentum in AI was only extending, with supplies being the bigger headwind rather than demand. "The structural AI tailwind could continue to be a key driver for equities into the next year."

Elsewhere in Asia, stocks in China opened a shade lower, while Hong Kong's Hang Seng fell 0.22% at the open as the market remains range bound even as some global funds follow domestic money into market segments sheltered from tariffs. Investor focus will also be on Indian conglomerate Adani Group after U.S. prosecutors said on Wednesday that Gautam Adani, billionaire chair of the group, has been indicted in New York over his role in an alleged multibillion-dollar bribery and fraud scheme. Dollar bond prices for Adani companies fell sharply in early Asia trade on Thursday.

The dollar has been on the rise since the U.S. election in early November on anticipation that proposed tariffs of the incoming Trump administration will likely be inflationary and keep rates higher for longer. The dollar index, which measures the U.S. currency against six rivals, was at 106.56, not far from the one-year high of 107.07 it touched last week. The index has risen more than 2% since the Nov. 5 election. The prospect of the Federal Reserve having to temper its rate cut cycle has also boosted the dollar. Markets were pricing in the Fed lowering borrowing costs by 25 basis points next month at 56%, down from 82.5% just a week ago, according to CME's FedWatch Tool.

Two Federal Reserve governors on Wednesday laid out competing visions of where U.S. monetary policy may be heading, with one citing ongoing concerns about inflation and another expressing confidence that price pressures will continue to ease. The rise in the dollar has led the Japanese yen back into intervention territory, leading to verbal warnings from officials. On Thursday, the Asian currency strengthened a bit and was last at 155.04 per dollar. Bitcoin has been on a tear since the election as the Trump administration are expected to relax regulations and be crypto friendly.

The world's largest cryptocurrency, bitcoin, soared to touch a record of $95,040 in early trading and was last at $94,787. In commodities, supply concerns triggered by escalating geopolitical tensions amid the ongoing war between Russia and Ukraine led oil prices higher. Brent crude futures for January rose 0.5% to $73.17, while U.S. West Texas Intermediate crude futures for January gained 0.5%, at $69.11. Gold prices were on the rise for fourth straight session on safe asset demands. Spot gold rose 0.15% at $2.654 per ounce.

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