MARKETS ON MONDAY: The combination of the strong increase in the oil price as well as the sharp depreciation in the rand are bad news for the fuel prices at the beginning of September, writes economist Chris Harmse.
THE RELEASE of the US inflation rate for July showed an increase from 3.0% in June to 3.2% in July. Although this was below forecasts of 3.3%, it marks a halt in the 12 consecutive months of declines, due to base effects. A year earlier, inflation had started to fall from its peak of 9.1%. This base effect on itself indicates that the US inflation rate will continue to rise during the latter part of the year.
The oil price increased sharply from $74 (R1,402) per barrel at the beginning of July to $87 per barrel on Friday. Food prices are expected to start to rise quicker. In the US currently, due to base affects, fuel prices year-on-year are decreasing. The sharp increase will turn this around to positive effect.
The core inflation rate (inflation minus prices for fuel and food) stayed the same at 4.8% in July. The core inflation rate is the target for the US Federal Reserve (Fed).
The Fed had set a target of 2% for the core inflation rate. In this sense equity, bond and foreign exchange markets last week started to discount another hike by the Fed of its bank rate at their next meeting in September.
On the JSE, except for last Thursday, share prices continue to decrease. The all share index fell by 1.17% over the past seven trading days since the announcement of the US unemployment rate of only 3.4% in July. This jobless rate also indicates that another hike in the Fed’s bank rate is on the cards. The all share index is now 1.6% over the past six months, but still 6.44% higher since the beginning of the year.
The combination of the strong increase in the oil price as well as the sharp depreciation in the rand are sad news for the fuel prices at the beginning of September. At this stage (August 11) the price for 95 unleaded petrol is already R1.26/litre under recovered and the price for diesel is under recovered by R2.52/litre. This may increase even more if the trend of oil price increases and the depreciation in the rand continue.
The effect on the inflation will be devastating and may lead to more than one interest rate hike before the end of the year.
The sharp increase in the international oil price is also expected to push the US economy eventually into a recession.
On Wall Street, share prices traded lower last week. The Dow Jones industrial index moved sideways last week and increased by 0.5%, but since the news on the higher inflation rate on Wednesday the index lost 1.0%. The S&P 500 index traded 0.6% down for the week, but since Wednesday shed 1.3% and the tech index the Nasdaq lost 2.7% last week. Developing market equities seem to remain under pressure.
This coming week, financial markets await the release of the US Federal Reserve’s July meeting minutes on Wednesday. The minutes will give insight into possible further rate hikes. US retail numbers for July that will be released on Wednesday will provide direction towards a US recession. US manufacturing data and building permits for July will draw attention. In the UK, the unemployment rate on Tuesday and inflation on Wednesday, both for June will be of interest.
Domestically, Statistics SA will release South Africa’s unemployment rate for quarter two on Tuesday. It is expected that the jobless rate will increase from 32.9% in quarter one to 33.2% in quarter two. South Africa’s retail sales for June will be announced on Wednesday and it is forecast that it has decreased by 1.4% from a year ago.
* Chris Harmse is the consulting economist of Sequoia Capital Management.
– BUSINESS REPORT
