The United States (US) Federal Reserve (Fed) started its rate hiking cycle in March 2022, and having raised rates by a total of 525 basis points since then, went from an interest rate range of zero to 0.25% to a range of 5.25% to 5.50% by July 2023. This is the quickest and most substantial tightening of monetary policy in 40 years, as the Central Bank aims to control high inflation levels not seen since 1980.
Key themes for this week include:
- US Inflation climbs
- European Central Bank (ECB) hikes interest rates
- United Kingdon (UK) economy stalls
- Oil prices continue to soar
- Dollar surges on strong data
US ECONOMY REMAINS RESILIENT
Even as the impact of the numerous hikes by the Fed filters through, the US economy, and inflation for that matter, remains resilient. This has meant that the proverbial can of interest rate cuts continues to be kicked further down the road. The Fed recently hinted at one more rate hike before a potential pause in 2024, and judging from the data released this week, that could very easily be a reality.
This week saw the release of the all-important US CPI (Consumer Price Index) data, that accelerated for the second consecutive month, climbing to 3.7% in August, up from 3.2% in July, and exceeding market forecasts of 3.6%, largely attributed to the significant rise in oil prices, and low base effects from last year. On the flip side, core inflation, which excludes volatile food and energy prices, slowed for the fifth consecutive month to 4.3%, matching expectations. Adding fuel to the fire, in August, US producer prices surged by 0.7%, their highest level since June 2022, surpassing the expected 0.4% increase. US goods prices rose by 2%, mainly due to a 10.5% jump in energy costs, while service prices went up by 0.2%, driven by transportation and warehousing expenses. Excluding food and energy, the producer price index rose by 0.2%. On an annual basis, producer price inflation hit a four-month high of 1.6%. Retail sales also outperformed market expectations of a 0.2% rise, growing by 0.6% in August, highlighting strong consumer spending, despite higher prices and borrowing costs.
The robust data sent US Treasury yields higher, with the yield on the benchmark 10-year US Treasury note nearing 4.3%, close to its 15-year high of 4.34% reached on 22 August. This rise reflects growing confidence in the US economy, leading to expectations that the Fed will maintain higher borrowing costs for an extended period. Strong producer inflation in August, robust retail sales, and low unemployment claims indicate economic strength and suggest that the Fed may continue its tightening policy. This expectation is supported by hawkish views within the Federal Open Market Committee (FOMC).
DATA FROM THE REST OF THE GLOBE
The UK’s unemployment rate climbed to 4.3% in May to July, reaching its highest level since the third quarter of 2021. This suggests a potential cooling of the country’s labour market following extensive monetary policy tightening by the Bank of England (BoE). The number of unemployed individuals increased to 1.46 million, primarily among those jobless for up to 12 months. Employment levels also fell significantly, down by 207,000 to 32.88 million, the largest drop since October 2020, exceeding the expected decrease of 185,000. This decline was driven mainly by a decrease in full-time self-employed workers. In July 2023, the British economy stagnated compared to the same month the previous year, following a 0.9% growth in June and contrary to forecasts of a 0.4% increase.
On Thursday, the ECB raised interest rates for the tenth consecutive time and indicated a potential end to its tightening policy. The main refinancing operations rate reached a 22-year high of 4.5%, and the deposit facility rate set a new record at 4%. Despite a decline in inflation, it is still expected to remain high for an extended period. According to the September ECB staff projections, euro area inflation is forecasted to be 5.6% in 2023 and 3.2% in 2024, both higher than previous estimates, mainly due to elevated energy prices. However, the 2025 projection has been reduced to 2.1%. There were also slight downward revisions to core inflation forecasts, with averages of 5.1% in 2023, 2.9% in 2024, and 2.2% in 2025. The ECB has significantly lowered its GDP (gross domestic product) growth projections. It is now expecting a 0.7% expansion in 2023, 1.0% in 2024, and 1.5% in 2025. In September, the ZEW Indicator of Economic Sentiment for the euro area decreased to -8.9, down from -5.5 in the previous month, and below market expectations of -6.2. The surveyed analysts had mixed expectations, with 58.5% foreseeing no change in economic activity, 25.2% anticipating a deterioration, and 16.3% predicting an improvement. Furthermore, euro area industrial production fell by 2.2% year-on-year in July, following a revised 1.1% drop in June, which was worse than the expected 0.3% contraction.
In July, South Africa’s manufacturing production increased by 2.3% compared to the same period last year, marking the fourth consecutive month of growth, although it was slower than expected. Notable increases were seen in electrical machinery, vehicles and transport equipment, wood and paper products, and petroleum and chemical products. In contrast, South Africa’s mining production saw a 3.6% year-on-year decline, its largest drop since February. Notable decreases were observed in diamond, nickel, PGMs (platinum group metals), and coal. On the positive side, gold production increased by 12.9%, although this was a slowdown from the previous month. On a monthly basis, mining production also declined by 1.7% in July. The growth in gold production is influenced by a low base effect due to previous challenges, including load shedding, which negatively impacted production in July 2022.
US FUTURES CLIMB ON ROBUST DATA
On Thursday, US futures climbed by about 0.5% across major stock indices, reflecting confidence in the US economy’s resilience, despite ongoing inflation concerns. Recent economic data, including strong retail sales and robust producer prices, contributed to this optimism. Investors also kept a close eye on chip designer, Arm’s Nasdaq debut at $51/share.
In Europe, the FTSE 100 index outperformed expectations, rising 0.4% above 7,550, driven by gains in mining and oil companies due to a weaker US dollar and hopes for increased resource demand in China. However, home building companies lagged as a proposal to ease property planning barriers was rejected.
European stock indices initially faced losses this week, but turned slightly higher as the ECB raised interest rates and signaled the end of its rate-hike campaign. The auto sector remained under pressure due to an EU probe into Chinese electric vehicle subsidies.
In Japan, stocks rebounded, with the Nikkei 225 surging 1.41% and the TOPIX gaining 1.13%. This recovery followed hotter-than-expected US consumer inflation data, and expectations that the Fed will keep rates steady.
On the JSE All Share index, there was a slight upward move as resource-linked sectors rose while financials and industrials declined. Investors were cautiously optimistic about US inflation data indicating potential pauses in interest rate hikes. South Africa’s mining activity contracted by 3.6% year-on-year in July, contrary to market expectations of a 0.5% increase.
OIL AT HIGHEST LEVELS SINCE NOVEMBER 2022
West Texas Intermediate Crude futures neared $90/barrel on Thursday, their highest level since November last year, amid expectations of a tightening global oil market. The International Energy Agency projected a significant market deficit through the fourth quarter, while the Organisation for the Petroleum Exporting Countries, OPEC, expected a large deficit of 3.3 million barrels per day in the same period, and the US Energy Information Agency forecasted a smaller deficit of 230,000 barrels. Surprisingly, US crude inventories rose by four million barrels last week, defying expectations of a drop.
In contrast, gold slipped to around $1,905/ounce as strong US economic data reinforced the case for the Fed to maintain a hawkish stance, which boosted the dollar. Unemployment claims remained low, indicating a tight labour market. In contrast, the ECB signalled the end of its monetary tightening after a 25-basis point hike this month, supporting safe-haven assets.
Copper futures rose above $3.75/pound, driven by a weaker US dollar over the past week and optimism about increased demand in China. The People’s Bank of China’s reserve requirement ratio was cut and supportive policies aimed at industrial activity have had positive effects, which is reflected in slight improvements in the Chinese economy. However, rising copper inventories limited further gains in the metal’s price.
STRONG US DATA REGNITES DOLLAR’S CLIMB
The US Dollar Index surged by more than 0.5% on Thursday, reaching above 105, its highest level since March. This was driven by recent data that reinforced expectations of ongoing interest rate hikes by the Fed. Data revealed that in August, retail sales exceeded expectations, rising by 0.6% month-on-month, while producer prices saw their most substantial increase since June 2022, rising by 0.7%, surpassing the anticipated 0.4% increase.
In contrast, the ECB delivered what many analysts believe is the final rate hike in its current cycle. The euro dipped below $1.068/€, hitting a three-month low, following the ECB’s tenth consecutive rate hike.
The British pound slipped below $1.25/£, marking its lowest level since early June. This decline followed data revealing a larger-than-expected 0.5% contraction in British economic output for July, the most significant decline this year. The BoE is scheduled to meet next week to decide on monetary policy, with forecasts suggesting a potential 25 basis points rate hike. Some voices within the Central Bank, such as Catherine Mann, have cautioned against halting rate increases too soon, while Governor, Andrew Bailey, hinted at the possibility of concluding the series of interest rate hikes, despite ongoing inflationary pressures.
The South African rand traded around R18.90/$ on Thursday, not far from its recent three-month low of $19.20/$ recorded on 5 September. The currency is facing pressure due to the global backdrop, coupled with concerns over the impact of ongoing load-shedding on South Africa’s economic prospects. The country is grappling with severe load-shedding, coming perilously close to Stage 7, one of the highest levels on record, which has affected nearly every sector of the economy. Additionally, the National Treasury of South Africa has warned of substantial budgetary challenges in other government departments, emphasising the need for spending control to achieve its debt-stabilisation goals.
The rand is trading at R19.00/$, R20.24/€ and R23.60/£.
Sources: Reuters and Trading economics.