US inflation data is not good news for the repo rate, Rand

All eyes will be on Federal Reserve Chairman Jerome Powell to see when he expects to cut interest rates. File

All eyes will be on Federal Reserve Chairman Jerome Powell to see when he expects to cut interest rates. File

Published Mar 18, 2024


Last week again proved that if the world economy sneezes the South African economy and financial markets catches a cold. The news last Wednesday that the US inflation rate data were higher than expected and still sticky to come down, was not good for the Rand exchange rate.

US core inflation during February decreased by only 0.1% to 3.8% in February and higher than the expected 3.7%. The US Federal Reserve (Fed) uses core inflation, together with the Personal Consumption Expenditure (PCE) index as targets to control inflation.

The Fed set a target for each to come down to 2.0%. The latest PCE index in January increased to 120.81 points from 120.31 points in December of 2023 - the highest level of the index since 1959.

Following the news the previous week that the US unemployment rate also remains less than 4.0% (3.9%) during February, with wage growth still above 4.0% per annum, investors and analysts not only expect that the Fed will keep its bank rate unchanged at their meeting this coming Wednesday, but also at its next meeting in May 2023.

The Rand exchange rate, after appreciating strongly to R18.56 against the dollar on Wednesday (from R18.72 the previous Friday) turned around after the US inflation data was released and closed Friday at R18.76.

Over the same time the price for Brent Crude oil has increased sharply from $82.75 (R1553) per barrel to $85.45 per barrel on Friday. The weaker Rand and sharp increase in the oil price increased the expectations of another increase in fuel prices at the beginning of April. Consumers also must pay the carbon fuel levy increase of 11 cents per litre for petrol and 14c per litre for diesel, effectively from April 3, 2024.

Given the expectations of no decrease in the Fed’s Bank rate during the Federal Open Market Committee’s next two meetings, share prices on the JSE also came under pressure since the middle of last week.

The All Share Index gained 1.0% during the first part of last week, but after the US inflation rate announcement lost 1.2% till the close on Friday to close 0.3% down on its previous Friday’s level.

The gold price followed the same way as the Rand /$ and the JSE. During the first part of last week, bullion increased to a new record high of $2 182.50 per ounce, but since turned around sharply to close Friday $23 down on $2 159.50.

The weaker Rand helped industrial shares - given dual listings- as the industrial board gained 0.4% last week. The decrease in commodity prices, despite a weaker Rand, contributed to the Top 10 resource index trading down by 1.5%.

The weak currency as well as expectations that the Fed will keep its bank rate the same, at the end of its meeting this Wednesday, pushed the financial board (FIN15) down by 3.0% last week.

On Wall Street, equities moved weaker last week. The Dow Jones industrial Index ended the week almost flat, 0.1% higher, but recorded a 1.25% decrease since last Wednesday after the inflation numbers came out.

The S&P500 followed the same trend, losing 1.2% since last Wednesday, whereas the Nasdaq lost 1.7% since last Wednesday.

This coming week local markets will await the release by Statistics South Africa of the inflation rate for February on Wednesday. The market expected that the increase in the consumer price index would remain at 5.3%.

Also, on Wednesday StatsSA will publish the retail sale numbers for January. It is expected that sales at retailers had increased by 3.4% over the last year and shows that economic growth is likely to be marginally stronger in 2024.

On global markets, financial markets await the US Fed conference on Wednesday on its interest rate decision. It is expected that it will keep its Bank rate at 5.5%. The tone of the speech by Fed Governor Jerome Powell is what markets are interested in. Will the Governor give any indication of when a cut in rates can be expected?

The Federal Market Open Commission (FOMC) will also announce its economic projections for 2024. Its forecast of the US economic growth, unemployment, inflation, and personal consumption expenditure will set the tone for the FOMC’s take on interest rates.

Elsewhere, market interest will also be on the release of the UK inflation rate on Wednesday, and retail sales on Friday. The Bank of Japan’s interest rate decision on Tuesday and the announcement of its inflation rate for February on Friday will also draw attention.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.