South African financial markets took a breather last week after three consecutive weeks of robust growth.
Despite the news that the producer price inflation rate (PPI) during July increased by 4.2% – down from 4.6% in June, and lower than market expectations of 4.3% – the equity, bonds and foreign exchange markets did not react positively on expectations that the Monetary Policy Committee (MPC) will lower its repo rate next month.
It seems that the lowering of interest rates in the US and in South Africa is now already discounted in asset prices. Markets are now gearing towards the magnitude of these increases, betting on if the US Federal Reserve and the South African MPC will decrease by 25 or 50 basis points.
The release this week of South Africa’s economic growth data for quarter two will also draw attention.
On the JSE, the All Share Index ended the week flat, losing only 444 points, or 0.5%, down on the previous Friday. In the same manner, the rand exchange rate traded for most of last week between R17.70/$ to R17.83/$ at the close on Friday.
These sideways movements were also present in world stock markets. On Wall Street, the Dow Jones Industrial Index ended last week higher by only 362 points (0.88%), while the S&P500 Index ended only eight points (0.15%) up over the past five days.
This despite the news that the US Private Consumption Expenditure price index (PCE) rose by 2.5% in July, in line with expectations, sending a strong signal that the Fed should cut its bank rate two weeks from now. During intraday trade on Friday, however, the Dow Jones index hit a new record-high level on this inflation data, together with strong earnings from tech companies, which boosted buying sentiment.
Apart from the PCE data, financial markets now await the release this Friday of the non-farm payrolls for August. The sudden sharp increase in the US unemployment rate to 4.3% in July had a devastating effect on share markets at the beginning of August, with fears that the US economy may go into a recession soon.
Various other economic indicators, such as US retail sales, which increased by 1.0% in July (0.3% expected), and spending on durable goods (up by 9.9% during the first six months), boosted equity markets during August.
Locally, equity markets await the release on Thursday of South Africa’s economic growth rate data for quarter two. It is expected the SA Reserve Bank will announce that the economy had grown in real terms by 1.6% year-on-year (y/y) and by 0.2% quarter-on-quarter (q/q). The lack of load shedding and improved manufacturing output will be the main causes for this sharp turnaround from the 0.5% y/y growth and -0.5% q/q growth during the first quarter.
Equity markets and the rand are expected to move positively this week, with the JSE testing new record levels.
It is also expected that the Central Energy Fund will announce a sharp drop in fuel prices from Wednesday, September 4. Up to Friday, the prices for petrol 95 and petrol 93 ULP were over-recovered by 96 cents and 89 cents, respectively. The price for diesel 0.05% was over-recovered by 78 cents. The expected cut in fuel prices will be the fourth consecutive month decrease. It will mean that a 95 UPL litre in Gauteng will cost the consumer R22.15 cents a litre. This is R3.34, or 13.0%, less than the R25 .49 that was the retail price in May 2024.
If the MPC lowers the repo rate by 0.5% during this month, it means that a consumer with a house bond of R1 million should pay around R1500 less per month as well. These two expected events will boost household disposable income by a large margin.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT