Just one week after the month-end meeting of the Federal Open Market Commission (FOMC) where market analysts and economists felt that the US interest rate cycle is at its highest point, Chairperson of the Federal Reserve Jerome Powell turned the apple cart over during his speech last Wednesday and Thursday.
Powell spoke at an annual conference hosted by the IMF suggesting that the turning point is not necessary a given as the press and analysts anticipated the previous week. Other Fed officials in various speeches reiterated last week with a cautious tone that interest-rate hikes might still be on the table as inflation remains above the central bank’s 2%.
The US inflation rate for October will be released this coming Wednesday, with expectations for core CPI to rise 4.1%, year-over-year, the same level as the previous month.
Fed officials are concerned that upside risk surprises could undo some of the recent retreat in Treasury yields, and strong upward movement in US stock prices.
In reaction to this change in mood from Fed officials, equity prices moved in contrast of the previous week back to negative numbers.
The dollar also turned around and appreciated against most currencies as commodities and precious metals were sold off and investors looked at the USA as the haven.
On Friday, futures discounted that the chances are 90% that FOMC will hold its benchmark funds rate steady at its next December 12–13 meeting, and chances of rates staying on pause following the FOMC’s January 30–31 meeting are 80%.
Most equity markets last week lost most of their gains of the previous two weeks, whilst most currencies suffered against the US dollar.
Analysts and economists are adamant that there remains a chance for a US recession early next year.
The main concerns are that consumer savings are declining, while high interest rates hurt companies with loans to refinance. There are views that there still exists a 60% chance of at least a quarter-point Fed rate cut by next June.
These two streams of sentiment increase uncertainty on stock foreign exchange and bond markets. The latest retail sales that will be announced this coming week became an important determiner for equities and bonds.
In reaction to this nervousness of a more hawkish stance of the FED, the rand lost almost all of its gains of the previous week.
On Friday the currency traded on R18.68 against the dollar after it appreciated the previous week from levels around R18.90/$ to R18.25/$.
On the JSE, equities followed suit as the ALSI lost 2% last week, as especially the resources board suffered as the RES10 index contracted by 6.6%.
China’s risks of contracting economic growth are deeper than markets seem to realise, while a property downturn was seen as its biggest threat to GDP growth.
Precious metals and other commodities experience the greatest risks from both the US interest rate uncertainty and lower growth prospects in China.
On precious metals markets the gold price traded down last week by $59 (2.9%) per ounce to end the week on $1 936 per ounce from $1 992 per ounce the previous week. Brent oil also suffered big losses last week as it at one stage recorded a spot price of lower than $80 per barrel against $85 per barrel the previous week.
In the US, the Dow Jones Industrial Index traded up for the week by 0.65% after a strong recovery on Friday by 1.2% as investors became bullish.
“A continued high level of unfilled job openings and solid private sector balance sheets support our view for a ‘softish’ economic landing,” UBS’ David Lefkowitz wrote in a Friday note. The S&P500 index was up by 1.4% and the NASDAQ gained 2.8%.
According to the South African Central Energy Fund (CEF) consumers can expect an early Christmas gift. On Thursday last week the price for petrol was over-recovered by R1.23 per litre and the price for diesel by R1.99 per litre. A sharp decrease in fuel price is expected to have a strong downward impact on the inflation rate over the last two months of 2023.
This week local markets will await the release of the unemployment rate in Q3. It is expected that the economy created less jobs in July to September, pushing the unemployment rate higher from 32.6% to 32.8%.
Statistics South Africa will publish retail sales data for September on Wednesday, and it is expected that sales at the retail stores had contracted by -0.7% in September, against -0.5%.
On global markets, there will be the announcement of the US latest inflation rate on Tuesday and retail sales on Wednesday. These two main indicators will set the movement on equity, bond, and foreign exchange markets for the rest of the week.
Chris Harmse is the consulting economist of Sequoia Capital Management.