ANALYSIS: Global financial markets were not surprised by yet another increase in the US Federal Reserve’s repo rate hike of 0.25% last week. What caught financial markets, economists, journalists and investors on the wrong foot was the analysis of the Fed on the prospects for the US economy, writes Chris Harmse.
GLOBAL financial markets were not surprised by yet another increase in the US Federal Reserve’s repo rate hike of 0.25% on Wednesday. What caught financial markets, economists, journalists and investors on the wrong foot was the analysis of the Fed on the prospects for the US economy.
Fed chairperson Jerome Powell expressed the view that the Fed did not expect that the US would go into a recession this year. The Fed based its view on the still-strong increase in private consumption expenditure, and that US unemployment would stay sticky on the low side, as it expected the jobless rate not to increase quickly above 4%.
These two factors indicated that the US economy was still resilient and that possible further hikes in the Fed bank rate were more likely than a cut. The analysis of the Fed seems to be on the spot, as US job data on Friday surprised all.
The unemployment rate in the US came down for the second consecutive month to 3.4 % in April, matching a 50-year low. Total non-farm payroll employment rose by 253 000 points in April, and was well below market expectations of 3.6%. The number of unemployed people decreased by 182,000 to 5.657 million, and employment levels rose by 139,000 to 161.031 million.
In reaction to the analysis of the Fed and the job numbers, equity prices on Wall Street changed around last Wednesday and unexpectedly rose sharply after three days of contraction on stagflation views after the Fed increased rates.
The Dow Jones industrial index lost 3.3% up to last Wednesday, but recovered somewhat on Friday after the job numbers and closed the week in the red. The S&P500 index also moved volatile over the five days and ended the week flat, losing 0.7%.
Expectations of another increase in the Fed’s bank rate next month weighs heavy on risk assets like equities. In Europe, the European Central Bank also increased its bank rate by 0.25% last Thursday, given the current sticky high inflation levels.
The effect of the interest rate hike by the Fed initially had a positive effect on the rand and the gold price. The currency improved strongly last Wednesday after the Fed’s decision to lift its bank rate.
The rand appreciated by 20c to R18.20 to the dollar just after the announcement. The news of the strong US employment increase pushed the rand back to trade at levels close to R18.50 on Friday.
The gold price followed the same path. On Wednesday, Gold bullion traded on its highest monthly level of R2 057. By Friday afternoon, the price of the precious metal had contracted $43 (R789) to $2 015.
On the JSE, equities also traded volatile last week. The all-share index started the week on 78,218 points, dropped by 1.2% to 77,271 points on Thursday, and then again recovered by 1.1% on Friday to end the week flat on 78,133 points.
This coming week, investors and analysts on South African markets await the release by Statistics SA of the April data for mining and manufacturing production on Thursday. It is expected that mining production had contracted by 6.2% year on year, and manufacturing production by 6.5% year on year. These numbers may indicate that the South African economy is continuing its lower growth path and may move into a recession by the third quarter.
On international markets, the dominant economic indicator that will be released this week will be the US April inflation rate. It is expected that the rise in consumer price inflation was 5.0%, the same level as in March. If the rate is lower, one can expect a positive move in share prices. A higher rate will start the discounting of yet another Fed rate hike.
In the UK, the Bank of England will announce its interest rate decision on Thursday. The market expects that the BoE will follow the Fed and the ECB and lift its repo rate by 0.25%.
* Chris Harmse is the consulting economist of Sequoia Capital Management.
– BUSINESS REPORT
