US Fed has dominated financial markets since mid-November

The overall worry of FED staff, according to the minutes of the November 14 meeting, that the US economy is bound to move into a recession in 2024. File image.

The overall worry of FED staff, according to the minutes of the November 14 meeting, that the US economy is bound to move into a recession in 2024. File image.

Published Jan 9, 2024


Financial markets locally and globally recovered strongly during November and December. The announcement by the Federal Reserve on November 14, 2023, that the FED would probably lower its bank rate by at least three times in 2024, as well as the increase in US unemployment in November, boosted share and bond markets worldwide.

South Africa followed the bullish momentum to the end of 2023.

However, growing concern of the effect of high interest rates during 2023 on the US economy turned equity markets around strongly since January 2, 2024.

As a result, the rand exchange rate remains under pressure, trading between R18.30/$ and R18.80/$.

On the JSE, the ALSI gained 5 260 points from November 13, 2023 to December 31. This is an increase of 7.3%. The industrial index ended the year higher with 14%. Since the last FED meeting, Financials (FIN15) have shot up by 6.6%, ending the year 15.12% in the green.

Unfortunately, despite a sharp increase in the gold price (11.2%), platinum and other commodity prices had a bad year last year. The Bloomberg Commodity price index had shed around -11.0% during 2023. On the JSE, the Resource 10 index traded -18.7% over last year.

Despite a year of expected disappointing economic growth in South Africa (predicted at a mere 0.8% in real terms), when the repo rate was increased by 100 basis points from 7.25% to 8.25%, 332 load shedding days, electricity prices that were increased by 18.5% and food inflation recorded 9.0% per annum at the end of November, equity prices performed exceptionally well.

The dichotomy once again proves that South African share prices are not a function of domestic economic variables. The US interest rate, unemployment and retail sales, as well as equity prices in China, played a dominant role.

Notwithstanding the more dovish outlook by Jerome Powell, the US FED chairperson, at the press conference in November, equity markets turned around for the worst since the beginning of 2024.

The main reason remains the hawkish tone that the FED members took at the last meeting, suggesting that although interest rates will move downwards in 2024, the effects of the restricted monetary policy in 2023 will be felt extensively.

Dwindling retail sales, higher unemployment and lower economic growth remain a growing concern.

The overall worry of FED staff, according to the minutes of the November 14 meeting, that the US economy is bound to move into a recession in 2024, turned market sentiment on world equity markets dramatically around since the beginning of January 2024.

In the US, share prices have contracted strongly since January 2. The Dow Jones Industrial index lost 0.71%, the S&P 500 index traded down by -1.90% during the first week of the month, while the tech loaded NASDAQ index fell by -4% over the first four days of trading.

The US non-farm payrolls for December, released on Friday, indicate that the economy added 216 000 new jobs during the last month of 2023. This is more than the 180 000 new jobs that was expected.

The US unemployment rate remains at 3.7%, and only 0.2% higher than the 3.5% recorded for December 2022. The figure is also much lower than the 4.2% target set by the FED and will contribute to the FOMC to keep rates unchanged at their first meeting later this month, January 30 and 31, 2024.

Markets now await the US inflation rate data for December that will be released tomorrow and will remain volatile and weak in weeks to come.

On the JSE, share prices followed US equity movements. The ALSI lost -3.08% last week, Industrials traded down by -1.4%, the FIN15 index dropped by 3.02% and the Resources 10 index shredded -6.18%. (Late yesterday afternoon, the ALSI was trading 0.78 percent lower).

It seems that January does not expect the same bullish movement as during November and December and a downward correction could be on the cards.

This coming week, local markets await the release of South Africa’s manufacturing production data for November 2023. It is expected that factory activity had decreased by -0.7% for the month, but had increased by 1.3% since the previous November.

On global markets, the US inflation rate will be released on Thursday and expectations are it had increased by 3.2% in December against 3.1% in November (year-on-year). Core inflation is expected to have eased to 3.8% in December from 4.0% in November. This is much higher than the 2.0% target set by the FED.

Chris Harmse is the consulting economist of Sequoia Capital Management.