US September cut seems likely, will it help tempt the SARB to cut by more?

THE WEEK IN PERSPECTIVE by Lisette IJssel de Schepper

The last two weeks have been fairly volatile for financial markets. Just after the release of our last Weekly (2 August), contrasting sets of US employment data triggered a market meltdown. Investors were piling back into bonds amid concerns about the US falling into a recession, while stock prices slumped – although they have now more than recovered their losses. Following this week’s US CPI print (see international section below), markets are fairly sure that the US Federal Reserve (Fed) is set to cut its policy rate by 25bps in September. Some are even calling for 50bps, but we do not see that as likely. Indeed, following the fairly solid US retail sales data released yesterday, recession fears abated which implies fewer rate cuts. Stocks surged, while bond prices dipped after the release.

This week saw more monetary policy easing across the globe. New Zealand cut its policy rate sooner than expected, with the surprise announcement weighing on the local currency. The Philippines cut its rate for the first time in four years. However, it must be noted that amid all the easing, Norway announced what was dubbed a hawkish hold. The announcement to keep the interest rate at a 16-year high was expected, with the central bank worried about the weakening currency and inflation remaining above target. Closer to home, the Namibian central bank cut its policy rate by 25bps. Because of the currency peg to the rand exchange rate, Namibia often tracks SA’s monetary policy, but when economic conditions and/or the inflation trajectory differs, policies have diverged somewhat in the past. To be fair, and the Namibian central bank governor said as much when announcing the change, the SA Reserve Bank (SARB) is expected to cut its rate by a similar margin at its next meeting – although we think there is a possibility of a steeper cut from the SARB (see the week ahead section below).

On the global data front, a data dump from China presented a fairly bleak economic picture for July. Low confidence continues to weigh on consumption and investment. The weak Chinese data and consequent concerns about steel demand contributed to the iron ore price slumping (even) lower.

Locally, the data was mixed. The unemployment rate ticked back up above 33% in 2024Q2. Meanwhile, after manufacturing output eeked out slight quarterly growth on the back of a very strong performance in April, this week’s data confirmed that mining production is set to contract q-o-q. Sales by retailers and wholesalers, fortunately, did better on a quarterly basis, although the consumer remains under pressure. In all, the latest high-frequency data confirms that the economy is unlikely to have slipped into a technical recession in Q2 after the unexpected Q1 contraction, but quarterly GDP growth is set to remain subdued despite the absence of load-shedding. Our survey suggests that some ‘wait-and-see’ behaviour before and after the national election held back production and demand in Q2, so growth could turn decidedly more positive in Q3. The upturn in the July Absa PMI was an encouraging start in that regard.

An interesting development on the local political front was yesterday’s announcement that EFF deputy-president Floyd Shivambu (and some others) will move to the MK party. Internationally, the political conversation is largely dominated by the upcoming presidential election in the US. Kamala Harris has now picked her running mate, Tim Walz. This Democratic ticket seems to be receiving more voter support than Joe Biden’s attempt for reelection did, but it remains a tight race between Harris and Donald Trump. Harris is set to announce some of her plans for the economy later today. There was some focus on Japan too, where unpopular prime minister Fumio Kishida said he would step down in September after three years at the helm. At this stage, it is not clear who will take over from Kishida, but the new PM will have to navigate a largely disgruntled electorate and will, unlike most of the rest of the world, not have monetary easing to help soothe sentiment but instead faces the prospect of even higher interest rates. ?

Meanwhile, the final round of wage talks at the SA Local Government Bargaining Council (Salgbc) is taking place this week. Further from home, but with potential ripple implications through the global economy should a strike occur, negotiations between US dockworkers, and terminal operators and ocean carriers continue. Recent statements suggest that parties remain far apart. A strike could disrupt deliveries to US businesses (with demand picking up ahead of the Christmas season) and cause sluggishness through global trade routes.

In financial markets, the rand briefly dipped below R18/$ yesterday. The better performance of the rand in recent days has largely been driven by US interest rate expectations and a renewed appetite for somewhat riskier assets. Also positive for the global inflation outlook was that the Brent crude oil price edged below $80/barrel on Wednesday. Locally, product price dynamics are even more favourable, with the petrol and diesel prices set for a further decline next month. Expectations of somewhat higher demand should the Fed indeed start cutting interest rates, saw the crude price rise again yesterday. However, the price remains well below July’s average. Hope for a ceasefire agreement in the Middle East has contributed to the relatively steady oil price of late. A ceasefire is not just important to stabilise the situation in Gaza, but would also alleviate fears of the conflict spilling over to the wider region.

Also worth mentioning is Ukraine’s continued incursion into Russian territory with the Ukraine this week launching what it describes as the war’s largest drone attack on Russian airfields.

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

CONTACT US

Editor: Lisette IJssel de Schepper

Tel: +27 (21) 808 9777

Email: [email protected]

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