Equity markets on the JSE continued to recover last week. This despite the hawkish tone of the US Federal Reserve on the prospects for interest rates in the US.
The Fed announced at a press conference last Wednesday that it keeps its bank rate at its current level of between 5.25% and 5.5%. The Fed hinted that it is done raising interest rates, but made it clear that it is not ready to start cutting, with a March move lower increasingly unlikely.
The Fed emphasised that it had no intention in cutting rates while core inflation was still above the central bank’s target of 2.0%. US core inflation came down to a two-and a-half year low of 3.9% in December 2023, down from 4% in the prior month and just above market forecasts of 3.8%.
The core inflation seems to remain sticky and has decreased slowly from 4.1% in September.
US and global equity markets initially took the news unmoved, but then dwindled downwards on comments by the Fed’s chairperson, Jerome Powell, that a cut in March was highly unlikely.
The Dow Jones Industrial Average traded down more than 300 points in the session after the announcement while Treasury yields plunged. After the announcement of the job numbers for the US in January, the US markets improved strongly on the back of a resilient economy, despite high interest rates. The S&P500 ended Friday 1.07% higher, gaining 1.34% during the week.
On the JSE the All Share index (ALSI) tumbled last Monday in anticipation of the news that the Fed was likely to keep rates on hold. The index traded down by 1%, or 750 points. Although the market recovered somewhat on Tuesday, the index lost another 0.3% after the Fed’s decision. The ALSI ended the week with 0.8% in the red.
In reaction to the Fed’s decision, investors piled into gold as a safe haven. Bullion increased by more than $36 (R680) per ounce to $2 05.
In reaction the rand improved strongly during the first four days last week and traded on Friday morning with the market opening at R18.56 against the dollar, against R18.76 the previous Friday.
In late trade on Friday, after the release of the US non-farm payrolls for January, the rand depreciated strongly with 32 US cents to R18.91.
The US economy added 353 000 jobs in January, much above market expectations of 180 000. The revised figure for December also shot up from 216 000 to 333 000 new payrolls. This resilient job market led to the US unemployment rate remaining at 3.7%.
Together with the news that the US economy had grown by more than 3% during quarter four in 2023, markets on Friday starting to discount that US rates will probably remain at their current levels beyond March and even for the next six months.
This coming week local markets will await the announcement on Wednesday by the SA Reserve Bank (SARB) of the value of South Africa’s gold and foreign reserves. It is expected that the gold and foreign reserves will increase from $62.5 billion in December to R63bn in January.
The sharp increase in the rand value of the reserves by almost R500bn became a point of attention as some feel that the SARB must use this increase to help the government to relieve its budget deficit and debt.
On Thursday Statistics South Africa will release the manufacturing production data for December, and President Cyril Ramaphosa will deliver his State of the Nation Address in Cape Town on Thursday.
On global markets, many developed countries will announce various Purchasers Managers Indices and their latest unemployment and foreign trade numbers.
Chris Harmse is the consulting economist of Sequoia Capital Management