Prowess Investments Market Update 12 February – 19 February 2024

Last week, US inflation numbers came in hotter than expected, sending bond markets into a sell-off as investors peeled back their expectations of Fed rate cuts. Locally, the focus this week will be on the 2024 budget speech, scheduled to be delivered by Finance Minister Enoch Godongwana on Wednesday.

International Market Developments

The annual inflation rate in the US fell back to 3.1% in January 2024 following a brief increase to 3.4% in December. Although headline CPI inflation declined relative to the December print, it exceeded consensus estimates that had looked for a sharper fall to 2.9%. The January increase was driven by high oil prices driven by supply fears on the back of the ongoing crisis in the Red Sea. There was some deflation in goods prices, while services inflation was higher. Core CPI rate, which excludes volatile items such as food and energy, stood at 3.9% in January, unchanged from the prior month and above market forecasts of 3.7%. Inflation was higher than expected, resulting in bonds selling-off as investors pulled back on their expectations of Fed rate cuts. 

Looking ahead, the Federal Open Market Committee January meeting minutes are due out on Wednesday. These minutes are expected to offer insight into why Fed Chair Jerome Powell and other policymakers lack the confidence to begin cutting rates in March. Investors will examine these minutes carefully, especially as inflation data was favorable ahead of the January meeting.

Local Market Developments

Finance Minister Enoch Godongwana is scheduled to table Budget 2024 in parliament on Wednesday. There is naturally a concern about whether the government might turn to populist fiscal decisions in an election year, potentially exacerbating SA’s already fragile fiscal position. However, the Budget is more likely to underscore the significant pro-poor spending already in place and underway. This commitment was highlighted in President Cyril Ramaphosa’s State of the Nation Address (SONA), delivered earlier in the month, to “extend” and “improve” the social relief of distress grant as a long-term aim rather than an immediate target. Any slippage in FY23/24 from the prior year budget is likely to come from slight delays in reining in non-wage spending to counteract the wage bill increases following last year’s public sector wage settlement.

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