US interest rates and the general elections: Markets are nervous
|Published
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
After two weeks of strong bullish movements in most financial markets across the globe, uncertainty has crept in since the middle of last week. This was mostly in reaction to the release by the US Federal Reserve of the minutes of its Federal Open Market Committee meeting, held April 30 to May 1, 2024.
“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the committee’s two percent objective,” the summary stated.
The words that the equity, bond and emerging economies foreign exchange markets did not want to hear, were: “Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate.” This after various data over the past month, such as the unemployment rate and wage growth, showed that inflation remains sticky.
On Wall Street, the Dow Jones industrial index almost gave up all its winnings of the previous two weeks as the index lost 2.1% over the past five days. This is 850 points lower than the record level of 40 000 points that the index reached the previous Friday (May 17).
The S&P500 index stayed flat, gaining only 0.25% last week, although the index reached a new record level on Friday. New orders for manufactured durable goods in the US rose by 0.7% month-over-month in April 2024, and much higher than market expectations of a 0.8% decrease. It is also the third consecutive monthly progress in durable goods orders, pushing up further inflationary expectations.
Markets on the JSE also started to move cautiously after Statistics South Africa announced that the consumer price inflation rate in April decreased only marginally, from 5.3% the previous month to 5.2%.
This figure indicates that the Monetary Policy Committee (MPC) will not lower the repo rate at their meeting this coming week. The All Share Index ended Friday sideways, gaining 0.45%, but losing -0.5% for the week. This after the index gained more than 6.6% over the past month. The All Share Industrials Index lost 1.5% over the past week, while the Financial 15 index gained only 0.16% and the Resources 10 index only 0.7% over the past five days. Markets in South Africa also moved with caution ahead of the elections this coming week.
On the foreign exchange market, the rand, in line with other developing market economies, pulled back against the main global developed market currencies. Against the dollar the rand lost 17 cents last week, to close Friday at R18.41 to the dollar. On Tuesday, the currency traded at R18.04/$, its strongest level since July 31, 2023.
The uncertainty on when the US may start to cut interest rates also had a negative effect on precious metal prices last week. The price of gold dropped sharply by $90 (R1657) from a new record level of $2 426 last Monday, to $2 336 on Friday. The platinum price tumbled by $64 over the week, and the Brent crude oil price pulled back by $2 to $82 a barrel.
Up to Friday, the petrol price has already over-recovered by 92 cents per litre and the diesel price by 96 cents per litre. If the Central Energy Fund does not increase the slate levy (Reserve Fund), fuel prices are likely to drop sharply next week, on June 5.
This coming week, financial markets in South Africa will be dominated by the general elections on Wednesday. The type of coalition, if this is to be, will determine especially the value of the rand and foreign portfolio capital flows, which in turn will affect equity prices and bond rates. The Monetary Policy Committee of the Reserve Bank will start its bi-monthly interest rate decision meeting on Tuesday. The rate decision will be announced on Thursday afternoon.
Movements on global markets this week will be dominated by the release on Thursday of the US second estimated gross domestic product economic growth rate for quarter one 2024. It is expected that the economy will advance by 1.5% (quarter-on-quarter, seasonally adjusted and annualised). The US will release various housing sales data during the week, and the important personal income and spending numbers for April on Friday. Various countries in Europe and the EU will release their inflation rates for April during this coming week.
Chris Harmse is consulting economist for Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT