Prowess Investments Market Update 13th – 20th May 2024

Last week US CPI data prints affirmed a sticky inflationary environment, with no sign of interest rates cut on the horizon.  While locally, markets await the local CPI print ahead of the MPC’s interest rates announcement at the end of May.

International Market Developments

Last week, CPI inflation for April came in at 3.4%, barely matching expectations, while the core was at 3.6% y/y. The last reading for March saw CPI miss expectations, with both headline CPI and core rates of inflation rising by 3.5% and 3.8% y/y respectively, proving the reality that CPI inflation has been sticky.

Over the past few months, the narrative from Fed officials regarding the timing of rate cuts has been cautious. Three hotter-than-expected CPI inflation prints have driven concerns that interest rates may need to be held at current levels for longer than anticipated to ensure that inflation returns sustainably to target. CPI inflation has now been stuck above 3% since June 2023, resulting in concerns that the interest rate cuts may be further off than first thought. With another disappointing print, the markets are now further pushing out expectations for US rate cuts, with the curve fully pricing in a 25bp cut only at the November meeting.

Within the CPI release, it was no surprise to see energy prices to the fore, with a rise in fuel prices a significant factor driving inflationary pressure. Meanwhile, shelter prices were again stubbornly high, rising by 0.4% on the month. Taken together, shelter and gasoline prices accounted for over 70% of the monthly increase in the headline measure. This came as no surprise given escalating tensions in the Middle East that have resulted in a rise in crude oil prices.

Local Market Developments

South Africa’s Reserve Bank (SARB) will next decide on its interest rate stance on 30th May, with the recently published Monetary Policy Review by the SARB giving a clear view of the Central Bank’s inflation and interest rate views. The Reserve Bank foresees a slow drop off in its target inflation measure, the CPI inflation rate, over the course of this year and next, only reaching 4.5% y/y towards the end of 2025.

SARB re-iterated that it will not cut SA’s interest rates until CPI inflation remains around 4.5% y/y. This week we have the April SA CPI due on Wednesday. It is expected to come in at 5.3% y/y, matching the increase in March. Core CPI is expected at 4.7% y/y in April, from 4.9% y/y in March.

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