Prowess Investments Market Update 3rd – 10th June 2024

Last week, markets witnessed the first stages of the cutting cycle, after the European Central Bank cut rates by 25bps. Meanwhile locally, ongoing political uncertainty has continued to weaken the Rand.

International Market Developments

The Governing Council of the European Central Bank (ECB) brought its policy rates down by 25bps to 3.75% (4.00% previously). The news was in line with the expectation of economists and marked the first interest rate cut by the ECB in 5 years. The ECB noted that price pressures have weakened and that inflation expectations have declined across all horizons. The central bank highlighted however that inflation and wages are still elevated with respect to its target.

In the US, the Federal Open Market Committee announces its next policy decision on Wednesday. The markets expect the bank to keep interest rates unchanged, with the Federal funds target range maintained at 5.25-5.50%, where it has been for nearly a year. The markets do not have enough confidence in the inflation outlook just yet to dial back to within target but expect the Fed to have embarked on its loosening cycle by the end of the year. The markets will focus on the accompanying statements to judge if there is any softening in tone.

Local Market Developments

The Government of National Unity (GNU) was announced by President Ramaphosa last week as the vehicle which will be used to govern the country following the ANC’s loss of an overall majority.  In the days following South Africa’s national election, the rand has fallen back towards R19.00/USD, reflecting investor uncertainty around which political parties will participate in the GNU and drive economic policy going forward.  SA’s benchmark bond has also seen some weakness in its yield post-election given market concerns over high borrowing and deficits.

Headline GDP fell by 0.1% in the first quarter of 2024 when measured on a quarter on quarter seasonally adjusted (qqsa) basis, following Q4.23’s 0.3% qqsa (revised) lift, and is reflective of the fragile economic environment which continues to be plagued by several challenges. The reading was below consensus expectations, which had been for a marginal 0.1% increase. Indeed, load shedding was still elevated during the first quarter of the year, weighing on economic activity, while key logistical challenges remain, hindering activity and export potential.

Leave a Reply

Your email address will not be published. Required fields are marked *