MARKETS ON MONDAY: Domestic markets await the decision by the Monetary Policy Committee (MPC) on interest rates on Thursday. It is expected that the MPC will increase its repo rate by 0.5%, writes Chris Harmse.
AS THE Eskom saga continues, the president cancelled his Davos economic trip. This as the South African inflation rate remains high, while financial markets are remaining strong, but tending to move sideways.
The excitement of the week was the all share index, which at one stage broke through the 80,000 point level in early trade on Friday. The index ended the week flat, losing only 45 points during the week to close on 79,288, but remains 8.5% higher since the beginning of the year.
Commodities remain a main attractive equity demand as the Resource 10 index has shot up by 10.5% for the year-to-date. Industrial shares also remain healthy and the Industrial 25 index for the first time traded above the 100,000-point level to close Friday on 100,318 points. This is 1.57% over the past seven days and 11.1% up for the year so far.
The gold price remains high and is trading well above the $1,900 (R325,188) level ($1,927 per ounce), while the rand moved quite volatile during last week from R16.82/$ the previous Friday to R17.28/$ last Thursday and closed Friday on R17.10/$.
The South African inflation rate came down only marginally in December to 7.2% from 7.4% in October (year-on-year). The biggest danger is that the three main “cost” items in the basket, namely food and non-alcoholic beverages (increasing by 12.4% year on year), housing and utilities, that includes electricity prices (increasing by 4.9% per annum, but should shot up sharply in April, given the Eskom hike) and transport (13.9% increase over the last year) may remain sticky downwards.
In this sense the US inflation rate is coming down much faster from 9.1% in June 2022 to 6.5% in December, whereas South Africa’s increase in the consumer price inflation reached its highest point of only 7.8% last July.
These movements may have a negative effect on the Monetary Policy Committee’s decision to lower the repo soon. The increase of the Eskom tariff by 18.6% will push the inflation rate up by 0.6% in April.
On global markets equity prices remains nervous and are awaiting the Federal Reserve’s meeting next Tuesday and Wednesday (Jan 31- Feb 1, 2023). Investors are also nervous on the release of the US non-farm payrolls for January on February 3.
On Wall Street shares moved indifferent last week. The Dow Jones industrial index traded down by -2.05%, against the previous Friday’s close. The S&P500 index gained only 0.3% the past five days and the Nasdaq continue to recover strongly with 2.15%.
More and more analysts are now of the opinion that given the inflation and recession risks that remain pessimistic toward the developed world, it is now time to invest in emerging markets, bonds and gold. The share indices of the emerging countries are attractive as prospects for higher commodity prices. Economic growth and exports of these countries dominate prospects.
Domestic markets await the decision by the Monetary Policy Committee (MPC) on interest rates on Thursday. It is expected that the MPC will increase its repo rate by 0.5%. The Reserve Bank will publish its latest Leading Business Cycle indicator on Tuesday and Statistics South Africa (StatsSA) will announce the producer price inflation rate for December on Thursday. It is expected that the producer price inflation rate had decreased from 15.0% in November to 13.7% in December.
On global markets investors will evaluate the release of the US gross domestic product advance growth rate on Thursday. It is expected that the US economy had grown weaker during quarter four 2022 at 2.6%, against the 3.0% in quarter three 2023. The US will also release the durable goods orders for December on Thursday and the important personal income and spending numbers during December on Friday.
Canada will announce its latest interest rate decision on Wednesday, while Germany will publish its business climate index for January on Wednesday.
* Chris Harmse is the consulting economist of Sequoia Capital Management.
– BUSINESS REPORT
