Globally, US President Trump confirmed that he has decided who will succeed Jerome Powell as Fed Chair, while locally, Moody’s kept its credit rating of South Africa unchanged.
International Market Developments
Markets still await the Supreme Court’s ruling on the legality of Trump’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Betting markets point to a strong likelihood that the court will rule them to be illegal. However, it now looks as though this will not be published this week. The ruling will be received against the backdrop of a weakening dollar, possibly due to speculation of joint intervention to support the Japanese Yen.
Despite headline inflation holding steady at 2.7% year-on-year in December, matching consensus estimates, a slight undershoot in core inflation relative to consensus (2.6%, consensus: 2.7%) has resulted in Treasury yields moving lower and the dollar weakening slightly on release. Typically, with a US inflation report we would look at the month-on-month changes in each category to focus on the most recent drivers of overall price changes and, unlike in many other countries, in the US these are seasonally adjusted. The Fed is still right to be concerned over tariffs though there is a time lag between tariffs being imposed and them filtering through to the consumer price data. The US FOMC is due to meet this week and is expected to cut the Fed funds rate by 25 bps. The new dot plot is expected to be largely unchanged from September’s, signalling one rate cut (25 bps) in 2026. President Trump’s pick for Powell’s replacement, whose term ends in mid-May is still underway.
US events and UK politics will probably continue to dominate global markets once again this week. On Wednesday, the FOMC will announce its policy decision, with the Fed expected to cut rates again by 25 bps.
Local Market Developments
The South African Reserve Bank (SARB) will meet on Thursday, with the balance of risks tilted towards another 25 bps rate cut, which would take the repo rate to 6.5%.
The Financial markets (the FRA or Forward Rate Agreement curve) are currently pricing in two further -25bps interest rate cuts for SA this year, with one -25bp cut being expected in Q1.26, either in January or March, and then another -25bp cut in September.
CPI inflation is expected to ease to 3.0% y/y by the end of Q1.26 in a favourable inflation environment, assisted by statistical base effects, fuel price cuts, rand strength and moderate food price inflation. The MPC is not expected to cut at each meeting in Q1.26, and if it does not cut this week, we expect it will do so in March.