US inflation turned financial markets bullish. Will the MPC lower the repo rate?
The release of the US inflation rate for June 2023 last Wednesday confirmed to the market the bullish turnaround that had already started last Monday.
The market expected that the rise in the US consumer price inflation (CPI) would come down to 3.1% during June. This would be only 1.1% from the 2.0% target of the US Federal Reserve. It may lead to the Fed keeping rates the same when they meet on July 25. The actual rate published last Wednesday indicated that annual inflation rate in the US slowed to 3% in June. This is the lowest rate since March 2021 and well below the 4% in May.
The US core inflation rate (the rise in consumer prices, excluding volatile items such as food and energy) in June came down to 4.8% in June, from 5.30% in May, although it is still well above the Fed target of 2.0%. The trend is also stronger downwards as expected a month ago. The core inflation rate is the rate that the Fed uses as an inflation target.
The better-than-expected US inflation rate ignited most financial markets across the globe. In South Africa, the equity market reacted much more positively than in the US, and the foreign purchases of shares and bonds on the JSE increased. The all share index jumped by more than 4.0% last week and recorded strong increases every day. This increase pushed the index up to 6.44% higher for the year-to-date.
The Top40 index improved by more than 5.0% over the past seven trading days and has gained 8.5% since the beginning of the year. Despite the stronger rand, the Resources 10 index jumped 8.01% over the last week alone.
The rand/exchange appreciated strongly against the major currencies last week in anticipation that the highest point of the current interest rate cycle is reached. Against the US dollar the rand improved by 80 cents from R18.88 against the dollar the previous Friday to R18.10 at the close on Friday. Against the pound, the currency gained 60c last week to R23.73 on Friday and against the euro the rand improved over the past week by 40c to R20.34 on Friday.
Foreign buying of South African shares and bonds also contributed to capital market rates improving strongly last week. The JSE All Bond index (ALBI) improved by 4.41% last week and is now 10.43% up over the last year.
Equity markets in the US moved bullish last week on the better-than-expected inflation data. On Wall Street, the Dow Jones Industrial index gained 2.4% last week. The S&P 500 index improved by 2.5% and the Nasdaq by 3.4%. On global markets the Euro Stoxx 50 index traded 4.0% higher for the week, and the MSCI world index increased by 2.0%.
This coming week, financial markets await the release today of the economic growth rate of China for quarter two 2023. It is expected that the Chinese economy has recovered fully from the last Covid-19 pandemic and grown by 7.3%, against the annualised quarter one growth rate of 4.5%.
On Tuesday it is the turn of the US retail sales for June, which will give an indication if the US economy is moving towards a recession. On Wednesday Statistics SA will publish South Africa’s inflation rate and retail sales for June. The increase in the CPI is expected to be 5.6%, against the 6.3% in May 2023. This will be the first time since April 2022 that the inflation rate will be lower than the 6.0% upper level of the SA Reserve Bank’s inflation target.
The question remains if the Monetary Policy Committee (MPC) will have the guts to lower the repo rate at their meeting that starts on Tuesday and the rate announcement on Thursday afternoon. The market expects that the MPC will leave the rate unchanged on 8.25%. The UK will also announce their latest retail sales and inflation rate figures this coming Wednesday and Thursday.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT