Stagflation issues – ack of domestic demand combined with higher inflation – continue to haunt share and bond markets across the world, writes Chris Harmse.
By Chris Harmse
STAGFLATION issues – lack of domestic demand combined with higher inflation – continue to haunt share and bond markets across the world.
On Friday the European Central Bank (ECB), as expected increased its lending rate across the Eurozone by a record increment of 0.75 percent to 1.25 percent. This announcement by the ECB followed in the footsteps of the US Federal Reserve’s similar decision last month to increase its bank rate by the same margin.
This movement now puts pressure on the Bank of England to follow suite this week in lifting its lending rate also by at least 75 basis points. The UK remains under bigger pressure as its inflation rate had increased to 10.1 percent in July of 2022, up from 9.4 percent in June. This is now the highest reading since February 1982.
The UK, US and the EU will release their inflation rate numbers for August this week. It is expected that the UK inflation rate has increased even further to 10.6 percent, mostly due to higher gas, fuel and food prices. It is forecast that the Eurozone inflation rate has advanced from 8.9 percent in July to 9.1 percent in August. The increase in the US CPI for August is expected to come in on 8.1 percent, down from 8.5 percent in July.
This is still far away from the Federal Reserve target of 2 percent and will only support the view of the Federal chairperson Jerome Powell that the Fed will continue to maintain higher levels of interest rates (and even increase it further) till the US inflation rate had subsided to the 2 percent level. Therefore, financial markets expect that the Fed will lift its bank rate by at least 0.5 percent at the end of their meeting next week September (20-21).
The interest rate increases and fears for continuing hikes in months to come had put equity prices across the world under volatile pressure, while the dollar continues to remain strong. On Wall Street stocks ended the week higher after an uncertain volatile movement during the first four days. The Dow Jones Industrial index gained 1.3 percent over the week, the S&P500 was 1.9 percent higher and the Nasdaq recovered by 1.3 percent.
The considerable lowering of fuel prices last Wednesday, the continuous decrease in the oil price and a relative stable rand exchange rate, contributed to a strong recovery on the JSE last Friday.
The all share index lost 1 percent during the first four days of the week, but recovered sharply on Friday, trading 2.15 percent up for the day alone. This strong recovery left the index on 68 708 points on Friday, an improvement of 2 percent over the week.
Resources had a record daily increase the last six months of 4.3 percent on Friday, while the Top 40 index gained 2.5 percent. The question now remains if equity prices will continue to remain bullish this week, given the announcement of the UK, US and euro zone inflation numbers, and the expected interest rate hike by the Bank of England.
The prospects of yet another sharp decrease in fuel prices at the beginning of October, and stronger rand by the end of the month, improve the changes that the Monetary Policy Committee of the Reserve Bank may not increase its repo rate by more than 50 basis points at their next meeting.
Currently the petrol price is 197 cents over recovered since the last announcement by the Central Energy Fund at the beginning of September. The price for diesel, however, is under recovered by 54 cents per litre as on last Friday.
This coming week the release of South Africa’s mining production numbers on Tuesday and its retail figures on Wednesday will draw attention. Globally, as mentioned above, the release of the latest inflation rates (August) for the UK, Eurozone and the US will give direction to the markets in anticipation of possible further interest rate hikes, starting by the Fed next week. The US retail sales, jobless claims and oil and gas reserves will also be of importance.
* Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.
– BUSINESS REPORT
