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Rand and equities nervous on Budget and inflation data

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MARKETS ON MONDAY: More and more evidence is building up in favour of US interest rates staying high for longer, writes economist Chris Harmse.

File picture: Reuters

MORE and more evidence is building up in favour of US interest rates staying high for longer.

The hawkish sentiment is growing that the US Federal Reserve (Fed) will abstain in lowering its bank rate at its next meeting in March.

This follows the sharp increase in US non-farm payrolls that kept US unemployment rate on 3.7%, and well below the “target” of the US Federal Reserve rate of 4.2%, as well as the worrying increase in wages by 4.6% year on year in December.

This news saw the rand to the dollar depreciate quickly from R18.51/$ to R18.90/$ on February 2, 2023.

The release of US core inflation rate data last week, amplified this sentiment even further. US core inflation in January remained on 3.9% and was higher than the expected 3.7%. US non-farm payrolls as well core inflation remains sticky.

In reaction to the US sticky core inflation data the rand depreciated further to R19.13 to the dollar last Wednesday.

Stronger resource prices and a return of investors to South Africa’s equity markets however had a positive effect on the rand during the latter part of last week. The currency traded on Friday afternoon at R18.88/$.

Equity prices in the US traded down last week in reaction to the inflation data and anticipation that the US Fed may even not lower its bank rate at least before June 2024. The S&P 500 ended Friday 0.5% lower for the week and remains nervous.

On global markets, gold bullion traded down strongly last week, from $2,035 (R38,473) to $2,005 per ounce on Friday. Despite this movement the Resource 10 index and financials shares recovered last week.

The All Share index ended the week 0.3% higher, financial shares (FIN15) gained 1.0% and the Resources 10 index had shot up by 2.5%. Industrial shares remain under pressure as the Industrial Index decreased by -1.26%. On the capital market, the 10-year bond rate increased by 2.3% last week on the negative US inflation rate data.

This week local markets, apart from the Budget speech on Wednesday, will await the announcement by Statistics South Africa (StatsSA) on Tuesday of the unemployment rate for the fourth quarter of 2023.

The SA Reserve Bank (SARB) will publish its composite leading business cycle indicator in South Africa for December also on Tuesday. The index fell by 0.4% month-on-month in November 2023. A slight improvement to -0.2% is expected.

StatsSA will release the inflation rate for January on Wednesday. It is expected that the consumer price index had increased by 5.2%, marginally higher than the 5.1% recorded for December 2023. The rate will not play a major role in the SARB’s decision on the repo rate.

The next meeting of the SARB’S Monetary Policy Committee’s is on March 27, 2024 and the US inflation rate for February and the Fed’s decision on its bank rate will give the direction of the MPC next month.

On global markets, the release of the Federal Reserve Open Market Commission (FOMC) minutes of its January meeting will give direction to world markets. The tone of the meeting is more important than the decisions taken itself. Japan will publish its balance of trade figures on Wednesday.

* Chris Harmse is the consulting economist of Sequoia Capital Management.

– BUSINESS REPORT

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