Equity markets on the JSE continued their sharp contraction last week. The current more bearish movement is mostly due to global market sentiment that the US Federal Reserve (Fed) is unlikely to lower its bank rate during its first two meetings ending on January 30 and March 20.
The stickiness of US core inflation, as well as strong employment and US retail sales, which rose more than expected in November, indicate the US economy is still on solid ground and the risk for even higher inflation has increased.
These sentiments boosted the US dollar against most emerging market currencies and put the rand under renewed pressure. The currency depreciated last week by 41 cents, from R18.64 to R19.05 against the dollar.
This not only put pressure on domestic petrol prices, but also on total imports, especially food. In this regard, domestic inflation will be under renewed pressure in months to come. It will also play a negative role towards the Monetary Policy Committee (MPC) decision on the repo rate at its next meeting, starting this coming Tuesday, with the decision to be announced at a press conference this Thursday.
It is expected that given the current risks to the inflation rate and the much weaker rand, the MPC will keep its repo rate at the current level of 8.25%.
On the JSE, the All Share Index last week lost a further -1.7%, and trades -5.7% down for the year to date, and -9.0% lower than a year ago.
The Industrial board moved -1.1% lower over the past week and is trading -3.6% off for the year so far. Resources remain under pressure and were down by -2.2% over the past seven days, and tumbled by -11.2% for the first two weeks in January.
On the back of the much weaker rand, Financials also took a hiding last week. The FIN15 decreased by -2.0% during the week and is now -4.5% lower than the beginning of the year.
In the US, share prices continue to strengthen, given the unexpected resilient economy and better prospects for company earnings as the earnings season kicked off.
The Dow Jones Industrial index steadily increased last week by 0.6%, and trades 0.4% higher since the beginning of the year. The S&P500 ended last week 1.1% higher and gained 2.04% over the year-to-date (ytd). The tech-rich Nasdaq Composite Index shot up by 2.03% last week and is now 3.7% higher over the first three weeks of 2024.
The yield on the 10-year US Treasury note jumped to 4.1% on Friday, its highest in over a month, driven by strong economic data, which reduced the likelihood of immediate interest rate cuts by the Federal Reserve.
This coming week, local markets will await the interest rate decision by the Monetary Policy Committee (MPC) on Thursday.
The release by Statistics South Africa of South Africa’s inflation rate for December on Wednesday will be of importance. It is expected the increase in the Consumer Price Index during the last month of last year was 5.3% (year-on-year), against the annual rate of 5.5% recorded in November. This will give an average inflation rate for the whole of 2023 of 5.9%, and below the upper level of the inflation target.
StatsSA will also announce the latest producer price inflation data (PPI) on Thursday. It is expected that prices at the factory gate increased by 4,3% in December (y/y), lower than the 4.5% recorded in November (y/y).
On global markets, the European Central Bank (ECB) will announce its interest rate decision also on Thursday. On Thursday, the US will publish its durable goods orders for December, as well as its preliminary estimate of the US gross domestic product growth rate in quarter four (Q4) 2023.
It is expected the US economy had grown by 2.3% in Q4, proving it is currently resilient and not approaching a recession. On Friday, the US will also release the important income and spending figures for December.
Chris Harmse is the consulting economist of Sequoia Capital Management.
BUSINESS REPORT