The market turned bullish for South African equity, bond and foreign exchange markets with positive sentiment towards commodity prices, especially precious metal prices, as well as the lower-than-expected inflation rate in the US.
This as the annual inflation rate in the US decreased for a ninth consecutive month to 5% in March 2023, the lowest since May 2021. The rate dropped sharply from 6% in February and was below market forecasts of 5.2%.
Global equity markets started to move more bullish as the dollar rebounded and investors continued to adjust their expectations for monetary policy and the economic outlook. It is, however, still expected that the US Federal Reserve is likely to increase its repo rate by 25 basis points next month although there are increasing expectations it could pause the tightening cycle.
On the JSE the all share index increased by 2.3% last week and had gained 5.2% over the past month. Since the beginning of the year the index has increased by 7.1%.
The rand exchange rate, after losing 20 cents to R18.47 against the dollar last Wednesday, improved strongly since the announcement of the US inflation number. The rand ended the week stronger on R18.07. It is expected that the rand will continue to appreciate against most currencies over the next few months as precious metal prices remain bullish and foreign portfolio capital inflows improved.
The gold price moved in negative correlation with market sentiment that favours the end of US interest rate hikes. Gold bullion started last week at $1 991 (R35929) per ounce and increased sharply to $2 040 as markets initially expected that the Fed may still increase rates in May.
After the release of the lower-than-expected inflation number, bullion as a haven for investors lost steam on Friday and tumbled back to R2 004 on Friday evening. Gold, however, remains bullish as its price is still up by 5% over the past 30 days and10.65% higher since the beginning of the year.
On Wall Street, US equities and bonds also started to slip again on Friday as more and more investors are still worried of a possible hike in the Fed rate at the beginning of May. US bonds yields surged this week as worries about the banking sector abated and traders upped wagers that at least one more interest rate increase could be in store from the Federal Reserve this year. The S&P 500 ended the week 0.7% higher given the strong surge at the beginning of last week.
This coming week investors and analysts will await the publication of the latest inflation rate for South Africa by Statistics South Africa (StatsSA) on Wednesday. The increase in the CPI was 7.0% in February and led to the SA Reserve Banks’s Monetary Policy Committee increasing the repo rate by 0.5%. It is expected that inflation rate remained at 7% in March.
Upward pressure due to the sharp increase in oil prices and the 18.6% electricity price hike on April 1 do hold serious risks for the inflation rate in months to come. And if the Fed does raise its benchmark rate again next month, a further increase in the local repo rate is more likely to follow. South Africa’s retail sales for February 2023 will be released on Wednesday. It is expected that sales had decreased by 0.8% over the last year.
On global markets, the UK will release its inflation rate for March 2023 on Wednesday. It is expected that the rate only came down marginally from 10.4% in February to 10.2% in March. There is a lack of important data for the US this week and it is expected that markets will still be divided on the possibility of further US interest rate hikes.
Chris Harmse is the consulting economist of Sequoia Capital Management.
BUSINESS REPORT