FED stop equities in their tracks – US inflation will set the tone this week

The release of the US Federal Reserve’s minutes of their meeting last Wednesday afternoon showed that all members of the Federal Open Market Committee (FOMC) indicated that further interest rate hikes could lie ahead. (AP Photo/Mary Altaffer, File)

The release of the US Federal Reserve’s minutes of their meeting last Wednesday afternoon showed that all members of the Federal Open Market Committee (FOMC) indicated that further interest rate hikes could lie ahead. (AP Photo/Mary Altaffer, File)

Published Jul 10, 2023

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The publishing of the US Federal Reserve’s minutes of their previous meeting in June echoed the hawkish stance of the US FED on interest rates as was announced by its chairperson, Jeremy Powell during a press conference on 14 June 2023.

He emphasised that in determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the committee will take into account the cumulative tightening of monetary policy.

The release of the minutes of the meeting last Wednesday afternoon showed that all the members of the Federal Open Market Committee (FOMC) indicated that further interest rate hikes could lie ahead.

The minutes led to share prices contracting on Wall Street since last Wednesday.

The release of the US non-farm payrolls for June on Friday evening, after the close of the JSE, was as expected, with the US unemployment rate coming down slightly to 3.6% against the 3.7% registered in May 2023.

The economy created 209 000 new jobs in June 2023, much lower than the revised 306 000 jobs in May, but below market forecasts of 225K.

It is the lowest reading since December of 2020, but remains more than twice the 70 000 to 100 000 new jobs needed per month to keep up with growth in the working-age population.

This unemployment rate supports the FOMC stance that interest rates will increase further to absorb the inflation effect of growing wages.

Equity markets in the US moved lower last week in reaction to the FOMC minutes and the job data. The Dow Jones industrial index ended the week 1.6% lower, after it lost 1.7% since the FED’s minutes release on Wednesday.

The S&P 500 index lost 1.2% since last Wednesday and the NASDAQ was down by 1.1%.

The hawkish tone by the FOMC minutes has led to one of the biggest contractions of equities on the JSE this year. The ALSI on Thursday lost 1796 points (2.4%) while the Rand broke through the R19.00/$ level again.

The steady but firm increase in the prices for metals, and the recovery of the Rand on Friday helped equities to recover again on Friday.

For the week, the ALSI lost 1.6%, but is still 2.4% up for the year-to-date (y-t-d). The Industrial index lost 1.2% over the last seven weekdays but remains strong for the year-to-date, gaining 13.5%.

The Financial 15 index also managed to remain healthy and increased last week by 1.9% and is still 4.0% up for the year-to-date.

The resources 10 index remains flat last week, down by a mere 0.2%, but has lost more than 15% since the beginning of the year, as world demand for commodities decreased on depression fears and higher global interest rates.

The Rand closed Thursday at R19.09/$ and recovered on Friday to close on $18.84/$. The currency is still R2.12/$ lower than the R16.72/$ a year ago.

This coming week, financial markets await the release of the US inflation rate number for June on Wednesday. The inflation rate for May 2023 came down to 4.0%. It is expected that the rise in the US CPI will come down to 3.1% during June. This now with in only 1.1% from the 2% target of the FED.

It may lead to the FED keeping rates the same when they meet on 25 July 2023.

The UK will publish its unemployment rate for May 2023 on Tuesday.

Locally, STATSSA will release the mining production data for May 2023 on Wednesday. Gold mining production in April had grown 27% year-on-year and expected that the May growth rate will only be marginally lower on 26.0%.

Chris Harmse is the consulting economist of Sequoia Capital Management

** The views expressed do not necessarily reflect the views of Independent Media or IOL.

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