As expected in last week’s market report, global inflation and interest hikes by central banks had a devastating effect on share markets.
The expected 75 basis points increase in the US Federal Reserve rate by the US monetary authorities that realised last Wednesday, followed the same margin increase by the Eurozone central bank the previous week.
These hawkish stance by central banks demonstrates the fear for further inflation pressure on the world economy.
Jerome Powell, the Fed chair, reiterated these inflation fears as follows: “I think that shelter inflation (rent costs) is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. It may take some time. Hope for the best, plan for the worst.”
The US inflation number for August was worse than expected at 8.3% and still well above the inflation rate of 2% that the Fed had set as a target.
After the Fed’s meeting analysts and economists revised their projections to expectations the Fed is more likely to increase rates by at least 1 percentage points during the two remaining meetings this year.
On the back of the 9.9% inflation number for August in UK, and much higher than the 2% target, the Bank of England raised its bank rate by 0.5% from 1.75% to 2.25% last week. This hike fuels feares that the UK faces a looming recession, a falling pound, and uncertain economic reforms under new UK Prime Minister Liz Truss.
The global fears for stagflation and further interest rate hikes in the developed world had a devastating toll on South Africa. The inflation rate came down only marginally to 7.6% in August from 7.8% in July and exceeds the upper target limit of the Monetary Policy Committee’s (MPC).
The MPC, therefore, had to react specially to protect the exchange rate of the rand and hiked the repo rate last Thursday by 75 basis points.
This is the second consecutive 0.75 % hike and the sixth in a row from 3.5% in November 2021 to 6.25% (more than double) in September 2022.
In reaction, the JSE had a second consecutive week of big losses. After losing 5.5% the previous week, the all share index dropped another 4.7% last week as the index lost more than 10% in two weeks and is now 13.8% down since the beginning of the year.
The Top 40 index lost 4.7% last week, while the Industrial 25 index decreased by 4.2%. In the US share prices also had a terrible week.
The Dow Jones Industrial index closed Friday 1.62% down for the day and had lost 7.2% over the week. The index is now on a record low for the year and 17.5% down for the year to date. The S&P500 lost 1.72% on Friday, was down by 6.7% over the week and 21.2% for the year-to- date. The Nasdaq traded for the first time since 1 July, 2020 lower than 11 000 points on Friday (10 867 points) and already had lost 17.6% for the year.
Given the second sharp increase by 75 basis points by the Fed, the dollar continues to move stronger against most currencies. The rand started last week on a very weak R17.70 to the dollar, but against the expectations and after the MPC had hiked the repo rate also by 0.75% on Wednesday the currency recovered to a level of R17.52.
The rand/dollar, however, in line with most other developing exchange rates, lost some steam on Friday and traded around R17.98 on Friday evening but improved strongly again to R17.68 over the weekend.
This coming week the release of South Africa’s production price inflation (PPI) for August will be important. The PPI rate accelerated quickly over the last few months to a record decade high of 18% in July. It is expected that the increases of prices at the factory gate will have subsided to 17.6% last month.
On global markets investors’ attention will turn to the release of the final estimation of the gross domestic product economic growth rate of the US for the second quarter 2022. The second estimation had put US growth on -0.6 and a technical recession.
The announcement of the latest data on US durable goods orders, home sales and personal income and spending this week will also draw attention. In Europe, ECB chairperson Christine Lagarde’s speech on Wednesday will set the tone on the way interest rates in Europe will move for the rest of the year.
Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.
BUSINESS REPORT