South African equity prices recovered somewhat last week on the back of a stronger rand and the lower-than-expected inflation data.
Statistics South Africa released the consumer price index numbers for July 2023 last Wednesday. The annual inflation rate fell to 4.7% - the lowest increase in the index year-on-year in two years. The July rate is much lower that 5.4% in June and below market forecasts of 5%. The rate is now almost on the mid-point unofficial target of 4.5% set by the Monetary Policy Committee (MPC).
Expectations that the MPC of the SA Reserve Bank may not increase the repo rate at their meeting next month had led to equity prices, bond rates and the rand moving positively. The currency improved over last week with 40 cents against the dollar to R18.62 to the dollar on Friday. Against the pound, the rand appreciated by 30 cents to R23.43/ £ and against the euro the rand recovered by 25 cents to R20.10/ €.
Despite the steady decrease in the oil price to just higher than $63 (R1173) per barrel ($66 per barrel the previous Friday) and the stronger rand, fuel prices are likely to increase strongly from next Wednesday.
On Thursday the price for 95 petrol was still R1.62 and the price for diesel R2.77 under covered. Even if the rand continues to appreciate and the oil price decreases this coming week, it seems that a big shock awaits motorists next month. It may help substantially for possible lower prices at the beginning of October.
On the JSE, share prices remain under pressure. The all share index traded 1.03% higher over the past five days and is now 4.6% down for the month and only 1.6% higher for the year-to-date. Resources recovered last week, with the Resi 10 index gaining 1.9%, but is still 24.1% lower than at the beginning of the year. On the Industrial board, the IND25 index lost 1.25% for the week, but still trades 12.6% higher for the year.
Due to the stronger rand and expectations that the repo rate might not increase further, financial shares (FIN15) traded 3.2% higher last week. On the capital market the All-Bond Index (ALBI) gained 2% last week. The index is now a steady 6.4% higher for the year.
The question remains on what the MPC will decide at its next meeting starting on September 21. It may decide not to start to cut interest rates due to upside risks on the rand if the US decided to increase its bank rate. US inflation remains under pressure and the non-farm payrolls to be released on Friday may also contribute towards an increase in rates at the Fed’s next meeting, starting on September 19. Financial markets will remain nervous over the next three weeks.
In the US, share prices last week continue to move lower. The Dow Jones Industrial index traded down by 0.5% and is now 3% down over the last month. The S&P500 index gained slightly, by 0.5%, for the week but trades lower over the last month by 3%. The Nasdaq increased by 1.8% higher last week, but is down by 3.8% over the last month.
This coming week, financial markets await the release of the US non-farm payrolls on Friday. It is expected that the US unemployment rate will remain at 3.5% during August and that the job market added 170 000 jobs during the month.
Domestically the SA Reserve Bank will release the M3 Money supply data and credit awarded to the public by the banking sector on Tuesday. Absa will announce the latest purchasing managers index (PMI) on Friday. The US will publish the July numbers on personal income and spending on Thursday. In Europe the ECB will release the eurozone inflation rate for July.
Chris Harmse is the consulting economist of Sequoia Capital Management