Prowess Investments Market Update 6th – 13th May 2024

Last week, the Bank of England kept the bank rate on hold at 5.25% but their tone was dovish, leading investors to believe a cut might be on the cards in their June meeting, whilst the Rand has remained constrained due to a risk-averse sentiment tied to the delay in US interest rate cuts.

International Market Developments

In an unsurprising stance, the UK MPC maintained its existing monetary policy by leaving the bank rate unchanged at 5.25%, the prevailing level since August of last year. The committee’s meeting and press conference was dovish as they signaled possible cuts in the future as two members of the committee voted for a 25-basis point cut to the current rate. On balance, investors think that by June the Bank will have enough confidence to embark on a cutting cycle, with two more sets of inflation and labour market data due between now and then.

Looking ahead, investors will turn their attention to the US April CPI print due to be released on Wednesday. Inflation in the US has not behaved quite as it was expected to since the start of the year and consensus expects another monthly increase of +0.4% on the headline, and +0.3% on the core measure – essentially a continuation of the elevated inflation trend. However, FED Chair Powell, speaking at the FOMC meeting earlier this month, dismissed the idea that the Fed’s next move could be a hike, effectively putting rate cuts before the end of the year back on the table. Any below consensus reading may add fuel to the bond market rally (and vice versa, should inflation disappoint again), particularly after the slowdown in jobs growth data reported earlier this month.

Local Market Developments

The rand has remained constrained by risk-averse sentiment, with the delay in the US interest rate cutting cycle having a negative effect on Emerging Markets, their currencies and capital flows. Volatility has been significant in emerging markets, including currencies, as the Fed funds futures have seen probabilities continuously fall for an early US rate cut this year, now pulled into Q4.24.

As we get closer to election day, there are some interesting developments in the political landscape. Pollsters believe that the MK party could see low to mid single digit support in the national election, predicated on strong support in KZN. As the bulk of MK’s support seems to have come from the ANC and the EFF, this would strengthen its position in coalition negotiations. According to Rating Agency Moody’s, a coalition government is likely to make the management of South Africa’s fiscal, economic and social policy objectives more difficult.

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