Inflation, monetary policy, recession risk, and geopolitics continue to drive global markets and provide the backdrop to this week’s Medium-Term Budget Policy Statement.
Last week, market participants moved focus to US corporate earnings releases which failed to fire up the stock market amidst strong labour market data and continued expectations that the U.S. Federal Reserve (the FOMC) will be aggressive in raising rates.
International Market Developments
More commentary from Fed officials added to the hawkish rhetoric in the background of US inflation that does not seem to be rolling over. The comments hinted that more ongoing rate hikes are required, and that monetary policy will be kept restrictive for some time.
The propensity for rising interest rates in the US will continue to impact global debt listed in USD. South African government yields will remain under pressure, as policy rate hikes in the United States will continue to put pressure on our currency.
Chinese President Xi Jinping signaled no change in direction for two main risk factors dragging down China’s economy, namely the strict Covid rules and the housing market policies. China’s housing market has experienced its longest ever slump due to policies aimed at curbing debt and financial risks. This has provided little support to an already vulnerable economy. Furthermore, this is coupled with the uncertainty brought about by China delaying major economic data releases scheduled in October, including the GDP data.
The Chinese economy struggles, hawkish central banks globally, and the Europe energy crisis will continue to weigh on commodities prices and global economic growth.
UK PM Liz Truss announced that her 6-week term at 10 Downing Street was coming to an end. UK markets have endured close to six weeks of complete chaos, including the necessary intervention of the Bank of England to stabilize the gilt market and the pensions sector. The new Chancellor Jeremy Hunt’s prompt intervention this week helped to settle fears in UK markets, when he signaled that he would ditch his predecessor’s tax cuts and set a new course so that the UK could meet its fiscal rules
The ongoing escalation of the war in Ukraine and the associated energy crisis continues to drive volatility and uncertainty in the markets, leading to market illiquidity and rising yields (via inflation risks). Participants have held back on buying bonds in the face of such uncertainty, resulting in falling bond values due to reduced demand.
Local Market Developments
The Transnet wage strike ended last week following 11 days of disruption that had threatened the country’s much needed export revenue. The persistent rotational load shedding has increased concern over SA’s economic growth in the near-term.
SA’s CPI reached 7.8% y/y in July, notably above the upper limit of the SARB’s inflation target range. This CPI release, recent weakness in the exchange rate and the likelihood of further tightening by the Fed is consistent with our call for another 75bp hike by the SARB in November.
The highly anticipated MTBPS to be tabled on Wednesday (26 October) is projected to reveal a further revenue overrun, with substantial tax receipts accrued earlier in the year, aiding further fiscal consolidation.