Equity markets await Fed decision while the rand rallies
THE rand exchange rate recovered sharply last week against the US dollar, pound and euro. Less load shedding domestically and more and more evidence that the US Federal Reserve would probably keep its bank rate the same at their meeting and press conference this coming Wednesday also helped the appreciation of the currency.
The rand had strengthened against the dollar by 70 cents last week, trading at R18.71 against the dollar on Friday, by 71c against the euro to R20.14 and by 82c against the pound to R23.54.
On the JSE, share prices moved sideways and in a very narrow band. The all share index ended the week down by a mere 0.2%. The Industrial 25 index lost 2.0%, the Financial 15 index - as expected due to the stronger currency - gained 7.1%, while the Resources 10 lost 1.1%. On the capital market bond rates, in line with the stronger rand, improved noticeable last week. The 10 Bond decreased by 45 basis points, gaining 3.82%.
The US non-farm payrolls last week, indicating a strong increase in the US unemployment rate from 3.4% in April to 3.7% in May, are slowly turning market sentiment to the upside on changes that the Fed will no longer increase its bank rate.
Meanwhile, on Wall Street the Dow Jones Industrial index, although flat over the week, gaining only 0.16%, improved strongly since last Wednesday, gaining more than 1.0% to the close on Friday. The S&P500, as well as the tech index, the Nasdaq, followed the same pattern.
Bloomberg on Friday reported: “Most economists expect the Federal Reserve to pause interest-rate increases next week for the first time in 15 months and leave policy on hold through December, even as it confronts a resilient US economy and persistent inflation.”
On commodity markets oil prices seem to move lower despite the cut in supply by Saudi Arabia of 1 million barrels a day. Brent crude hovers around $75 (R1414) a barrel. Given the sharp appreciation of the rand, it is now expected that petrol prices are about to decrease even further at the beginning of July. The gold price had increased by 0.3% last week, while the platinum price gained 0.33% over the past five days.
This coming week, the meeting of the US Federal Reserve will be decisive. The Fed will announce its interest rate decision at its news conference on Wednesday. It is expected that the Federal Open Market Committee will keep the repo rate unchanged at 5.25%. The Fed had increased the rate 10 times at consecutive meetings, bringing borrowing costs to their highest level since September 2007.
The UK will release the third estimate of its economic growth rate during quarter one 2023 tomorrow. The US inflation rate for May will be announced tomorrow - a day before the Fed’s decision. It is expected that the increase in the CPI came down to 4.1% in May against 4.7% in April. If the figure corresponds with expectations, or even came out lower, it will be almost certain that the Fed will keep the bank rate as is on Wednesday.
The UK will release its economic growth rate for quarter one tomorrow and expectations are that the UK economy had grown by 4.0% quarter on quarter (seasonal adjusted and annualised).
China will publish its latest industrial production data on Thursday, and it is expected that factory production had increased by 5.0% over the last year. Also on Thursday, the European Central Bank will announce its latest interest rate decision, while the US will publish its retail sales numbers for May, expecting it to come down to 0.2% against the 0.4% recorded in April year on year.
Domestically, Statistics SA will tomorrow release the April numbers of South Africa’s mining production. It is expected that mining production had grown negatively by -1.8% on the previous year’s figure. StatsSA will also announce the retail sales data for April on Wednesday. Expectations are that it has decreased by -1.9%, and weaker than the -1.6% recorded for March.
We expect the rand, global and domestic equity markets, and bond rates to recover further during this coming week, especially if the Fed decides to keep interest rates on hold.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT