Prowess Investments Market Update 20th – 27th May 2024

Last week, the Federal Open Market Committee (FOMC) released its May 1st meeting minutes. The minutes were broadly hawkish, weaking the Rand. Locally, this is a historic week as SA goes to the polls on Wednesday, with the SARB set to deliver its rates decision the day after elections.

International Market Developments

The release of the Federal Open Market Committee (FOMC) meeting minutes for May 1st has led to a weakening of the South African rand, which had been strengthening earlier in the month. The minutes revealed concerns among FOMC members about persistent inflation, with little progress being made towards the 2% target. This has dampened market expectations of an imminent rate cut cycle in the US. The lack of significant progress on inflation returning to target was a dominant theme in the minutes and has halted the rand’s recent progress towards R18.00/USD. Markets read the minutes as suggesting a delay in the start of the rate cut cycle, with the minutes highlighting that “high interest rates may be having smaller effects than in the past.”  Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2% or reducing policy restraint in the event of an unexpected weakening in labor market conditions.

Local Market Developments

April CPI inflation surprised on the downside with headline CPI easing for the second straight month to 5.2% year-on-year in April from 5.3% in March, as lower food and core inflation offset a rise in fuel inflation. Food and non-alcoholic beverages (NAB) inflation eased to 4.7% year-on-year in April from 5.1% in March in a broad-based manner. Core inflation fell sharply from 4.9% year-on-year in March to 4.6% in April. However, fuel inflation increased to 9.0% year-on-year in April from 6.2% in March.

Looking ahead, the general elections this week will be the primary domestic focus. South Africa’s national and provincial elections are due to take place on Wednesday May 29th. The SARB Monetary Policy Committee (MPC) is due to deliver its rate decision on Thursday afternoon where its largely expected to keep the repo rate unchanged at 8.25%. The details of the MPC statement will be closely read as investors continue to look for signals on when the MPC may begin easing rates.

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