The Federal Open Market Committee (FOMC) dominated financial market news last week, as they opted to keep the federal funds rate unchanged. Investors also kept a close eye on the dot-plot released by the FOMC for indications of when they can expect rate cuts in the US. Locally it was a quite week as far as data releases are concerned but some volatility was observed in the bond markets as news of a Government of National Unity emerged.
International Market Developments
The Federal Open Market Committee (FOMC) decided to keep its policy rate unchanged at its June meeting. Despite recent inflation reports showing positive signs of progress, the strong inflation figures from the first quarter led policymakers to revise their expectations for policy easing in 2024. In March, the median expectation among FOMC officials was for a reduction of 75 basis points this year. However, the June projection indicates only one 25 basis point cut. Additionally, the projections for core Personal Consumption Expenditures (PCE) inflation have been slightly increased. The relative strength of the U.S. economy, compared to Canada and the European Union where central banks have begun to ease their policies, has made a resurgence in inflation a more likely scenario. This economic resilience has also given the Federal Reserve the flexibility to wait before making any changes to its policy rate.
Local Market Developments
News of the formation of a Government of National Unity (GNU) was welcomed by investors as evidenced by the rally in the local bond market. The leader of South Africa’s Inkatha Freedom Party (IFP) confirmed that his party has agreed to form part of a government of national unity that includes the African National Congress (ANC) and the biggest opposition party, the Democratic Alliance (DA). The drop in yields comes as the government has maintained a disciplined approach to bond issuance, and there has not been a sudden spike in the value of bonds it sells at regular auctions. It is worth noting that foreign investors have contributed to the stronger bond market as they got up to 65% of the bond allocation at weekly auctions, indicating their confidence in the local political dynamics.
Looking ahead, local CPI inflation data for May will be released on Wednesday. Investors are largely expecting the headline reading to remain unchanged at 5.2% year-on-year. A modest petrol price increase of 37c/litre will have added slight upwards pressure to the reading. However, a more substantial petrol price cut implemented in June, will subsequently have provide consumers with some relief.