Market and economic wrap - The SARB turns hawkish and all eyes turn to the US Fed this week

Market and economic wrap - The SARB turns hawkish and all eyes turn to the US Fed this week

Related links

Is a global recession around the corner?

With several global central banks increasing their policy interest rates by more than generally expected in recent weeks, the interest rate announcement by the US Fed on Wednesday is front and centre in terms of economic developments this week. Market consensus is for another 75bps hike. However, there are some calling for a full 100bps. 

The first estimate for US real GDP for 2022Q2 will be released on Thursday and in a way the timing is unfortunate as the performance of the economy and whether the US is on course for a “soft-landing” or not is one of the key considerations for the Fed, especially given the 1.6% quarterly contraction in real economic activity we saw in 2022Q1. 

Meanwhile, the European Central Bank (ECB) raised its key policy rate by 50bps to 0.5%. This is its first hike in 11 years. The move was bigger than the 25bps signalled at its previous meeting because of the elevated inflation risks and after the Eurozone headline CPI inflation rose further to a record 8.6% y-o-y in June. A closer look at the press release stated that “a further normalisation of interest rates may be appropriate”, however this is likely to be implemented through a meeting-by-meeting basis. 

In the UK, also against the backdrop of surging inflation, Bank of England (BoE) Governor George Bailey said last week that a 50bps hike is not off the table at next week’s s BoE monetary policy meeting. If the BoE were to hike rates by 50bps, it will be the biggest move since 1995. 

In terms of our local central bank, the SARB’s Monetary Policy Committee raised interest rates by 75bps, pushing the repo rate to 5.5% and the prime lending rate to 9%. This is the biggest hike since September 2002. The decision was against the consensus view of a 50bps hike. The MPC voting behaviour signalled a much more hawkish tilt compared to their previous meeting in May. Three members voted for a 75bps hike, while one preferred 100bps and another 50bps. 

Aside from realised inflation risks, including the depreciation of the rand against the US dollar since May, the 75bps hike was fuelled by a further deterioration in inflation expectations, higher core inflation projections, and according to the SARB ‘considerable’ upside risk to the central bank’s nominal wage forecast. 

Staying on the inflation story, according to Stats SA, annual headline consumer inflation accelerated to 7.4% in June, from 6.5% in May. This is the highest reading since May 2009. Transport was once again the biggest contributor to the annual number, and this was led by higher fuel prices. 

The growing list of softer economic data releases out of the US, as well as more-aggressive-than-expected policy interest rate hikes from the ECB and the SARB were the key drivers of global and domestic asset prices. The weaker economic data from the world’s largest economy, (the US),suggested that the economy is taking strain from high inflation and rising interest rates. As a result, investors scaled back expectations for the size of future interest rate hikes by the US Fed. Looking at the market’s current pricing, the suggestion is that the Fed could start cutting the policy rate in the second half of next year, this following expected further policy tightening for the rest of 2022. 

Against this backdrop, global equities ended higher last week, with the MSCI World rising 3.21%.The less aggressive Fed rate hike expectations also supported US shares, with the S&P 500 gaining 2.5% last week. Along with the unexpected 50bps rate hike from the ECB, the scaled back Fed rate hike expectations pushed the US dollar somewhat weaker versus the euro .As a result, there was some reprieve for the local unit, which saw the rand end the week stronger, dipping below the R17/$ mark. In addition, the more aggressive SARB rate hike may have also contributed to the somewhat stronger rand towards the end of the week. Precious metal prices also had a better week, this led to the JSE All Share Index closing in positive territory on Friday, with resource shares gaining over 5% week on week. 

Until next time, take care and continue to stay safe.