Global inflation and load shedding weighs on rand, however shares on the JSE at record highs
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On Wednesday, news that the US inflation had moved above the 6.0 percent level (6.2 percent) during October 2021, much higher than the expected 5.8 percent and 0.8 percent higher than the 5.4 percent level in September, came as a shock to markets.
This strong increase was mostly due to the 30 percent year-on-year increase in energy costs, and especially gasoline that had increased by 49.6 percent. In Europe, the same pattern emerges as the Euro Area inflation jumped to 4.1 percent in October, up from 3.4 percent in September.
Rising energy costs as well as supply shortages that persist caused the CPI to continue to rise. Changes for increasing of interest rates in the US and the Euro area are growing by the day. This also follow in the footsteps of the announcement by the Fed the previous week to scale down the purchasing of bonds to only $15 bn (R228.1 billion) per month.
These inflation announcements, as well as the movement of Eskom to phase four of load shedding for most last week, had put the Rand under severe pressure. Last Wednesday alone, the currency appreciated against the US$ by more than 40 cents from a level close to R15.00/$ to almost R15.50/$.
The weaker Rand and the “favourable” Medium Term Budget Policy Statement by the Minister of Finance Mr Enoch Godongwana boosted equities on the JSE and helped the rand stabilise at stronger levels on Friday.
The Minister had announced that the Department of Finance expects the South African economy to grow by 5.1 percent in 2021.and much higher than the 3.6 percent forecast of the main budget in February. The super cycle in commodity prices and exported not only had boosted this much more favourable increase, but also is expected to push up expected revenue up by R244 billion for the revised 2021/2022 book year.
This helped the government to finance the expected increase of R222 billion so that the expected total gross loan debt/GDP is lower on 69.9 percent against the 70.7 percent mark announced in February. The Minister also announced that no State-Owned Enterprise would get no extra bailout money from the state this coming year, and that gave room for the Minister to extend the R350 special Covid-19 grant, finance increased spending by the municipalities on infrastructure as well as the rollout of the Covid-19 vaccine.
The R350 per month grant is also not extended after February 2022, and Cabinet will have to decide on a follow-up grant. The Minister also stressed that the private sector would be more involved in creating renewable energy. This is a total change in ANC policy.
On the financial markets, as a save heaven, the prices for gold and platinum turned around and has increased sharply. The gold price gained $46 to $1860 on Friday. This is the metals highest price since the middle of May 2021, when it reached $1880. Platinum gained $44 to $1080, its highest price in three months. The sharp increase in the Rand prices of almost all commodities last week had boosted the Resources 10 index on the JSE as it gained 5.4 percent over the previous Friday level.
Leading by retailers and Rand hedgers, the Industrial 15 has increased by 3.7 percent and had burst easily through the 90 000 level (92 953) to trade on a record level for 2021. This increase had helped to push the ALSI up to 69921 (3.1 percent) over the week and also records its highest level for 2021 and is now 17.7 percent higher since the beginning of the year.
Domestically this coming week, investors will concentrate on the release of South Africa’s CPI inflation rate on Wednesday. It is expected that the inflation rate had increased from 5.0 percent in September to 5.1 percent during October. The Monetary Policy Committee (MPC) of the Reserve Bank will hold their final meeting for the year starting on Tuesday and will end with a press release on Thursday. It is expected that the MPC will give some indication if it intends to increase interest rates soon.
On global markets, Japan will announce its GDP growth rate for Q3 today. China, the US, and GB will release their retail sales for October, Various important US housing data will also be released. The UK will also publish its latest unemployment data.
Dr Chris Harmse is an economist at CH Economics.
*The views expressed here are not necessarily those of IOL or of title sites.
BUSINESS REPORT ONLINE