MARKETS ON MONDAY: The release of South Africa’s Inflation rate for June and the decision by the Monetary Policy Committee to not increase the repo rate further – against market expectations of a 0.25% hike – didn’t contribute to a more bullish movement in equity, the bond and the foreign exchange rate market, writes economist Chris Harmse.
THE RELEASE of South Africa’s Inflation rate for June and the decision by the Monetary Policy Committee (MPC) to not increase the repo rate further – against market expectations of a 0.25% hike – didn’t contribute to a more bullish movement in equity, the bond and the foreign exchange rate market.
The all share index on the JSE ended the week 1.9% lower, while the Top 40 lost 1.2%. On the back of a stronger rand since the previous Friday and the MPC decision, the Financial 15 index gained 1.5% last week.
On news of a decline in South Africa’s retail trade – by 1.4% in May year on year following an upwardly revised 1.8% fall in the prior month and compared with market estimates of a 1.1% – the Industrial 25 index declined last week by more than 2.0%.
The weaker-than-expected year-on-year economic growth recorded for China in quarter two of 6.3% showed some improvement from the 4.5% recorded in quarter one, but fell short of market estimates of 7.3%. The much higher numbers, however, are against the background of a very weak Chinese economy last year due to the renewed Covid-19 outbreak and extremely strict regulations. The quarter-on-quarter growth was only 0.8% and, therefore, it is expected that the growth rate will start to slow down by the end of the year. Equity markets reacted negative on the Chinese growth numbers.
The rand exchange rate started last week on a positive note and appreciated by 34 cents to R17.84 against the dollar from the previous Friday up to last Wednesday. Since the announcement by the MPC to keep the repo rate the same, the rand depreciated to R17.98/$ in late trading on Friday.
The ALBI, a composite index containing the top 20 vanilla bonds, improved initially by 1.0% during the first part of last week on the back of the stronger rand, but lost again 0.3% last Thursday and Friday. Bonds did not react positively to the MPC decision.
The focus point of financial markets is now starting to move away from inflation and interest rates towards the possibility of countries moving into a recession during the second part of the year.
The New York Federal Reserve recession probability indicator indicates that there is a 68.2% chance of a US recession within the next 12 months. Other reliable economic indicators are also staring to indicate an expected contraction in the US economy. Retail sales in the US rose only slightly by 0.2% month-over-month in June of 2023, and are expected to turn negative within the next two months. The S&P Global US Manufacturing PMI recorded a six-month low of 46.3 in June of 2023, pointing to a second successive monthly decline. A reading of above 50 is regarded as positive for manufacturing.
This coming week, financial markets await the interest rate decision of the US Federal Reserve’s Open Market Committee (FOMC) on interest rates on Thursday. Last month the FOMC decided to keep its bank rate the same at 5.25%. The market expects an increase of 25 basis points to 5.50%. This despite the bigger than expected decrease in the US inflation rate to 3.2% and the core inflation rate to 4.8% in June. The minutes of the Fed from its June meeting indicate that the FOMC is likely to increase its bank rate two times more in 2023.
An increase in the bank rate will be negative for financial markets this week and the rand will weaken.
Also ,on Thursday the European Central Bank (ECB) is expected to increase its bank rate by 0.25% to 4.25%. On Thursday markets also await the release of the US durable goods orders and the publishing of the June data on US personal income and spending on Friday. This data will give an indication if the US economy is heading for a recession.
Locally, no economic data of note will be released.
* Chris Harmse is the consulting economist of Sequoia Capital Management.
– BUSINESS REPORT
