The outlook for inflation and consequently interest rates drove markets sharply higher after the latest US economic data. The Dow closed at some stage above the key 40,000 level for the first time in history, while the S&P 500 and Nasdaq climbed 1.5% and 2.1% during the third week in May.
US inflation eased in the first slowdown of 2024 and dropped from 3.5% to 3.4% as expected. U.S. consumer prices rose less than expected in April in a boost to financial market expectations for a rate cut. Forecasts are including two cuts of 0.25% towards the end of the year, and another one early in 2025.
Source: Trading Economics
It is expected that the US interest rate will trend around 4.25% in 2025 (current 5.5%) and 3.25% in 2026.
The expectations that interest rates may decline later this year, has put some pressure on the dollar. However, the rand has also strengthened against most currencies, including the pound and euro. It has also outperformed against most other emerging market currencies. This is on the back of stable economic data, no load shedding for two months and positive expectations for the rest of the year.
In the graph below one can see the currency trends over the last year, and the dollar weakening towards the end. Very few South Africans would have predicted one year ago that out of this basket of currencies, the rand would have been the strongest, albeit with huge spikes of volatility. Towards the end of May the rand again experienced some pressure.
However, an interesting trend is that whenever the dollar is under pressure, the rand seems to gain from its weakness (yellow arrows). This can also be contributed to the fact that the South African rand is one of the most-traded currencies in the emerging market space. It almost becomes a proxy trade currency whenever emerging market exposure is sought. The inverse, however, is also true, making the rand one of the most volatile currencies in the world.
Source: Fund Focus
UK pay growth is still strong, but a looser labour market means a June rate cut is possible, with Europe not trending far behind. Germany’s economy grew more than expected last quarter, and investor morale is at a two-year high that might lead to upside surprises in the Euro zone.
Retail sales in China slowed and home prices fell at their fastest pace in more than nine years. The central government unveiled an historic rescue package to stabilize the country’s ailing property sector by issuing $140bn of treasury bonds to stimulate the economy. The People’s Bank of China (PBOC) lowered the minimum down payment ratio to 15% for first-time buyers and to 25% for second home purchases. They hope this might ignite demand.
The war in Gaza is intense and pressure is placed on Israel to stop the war. However, Israel has now taken control of all terrestrial borders, leaving only the ports for humanitarian aid. The Middle East is remaining a boiling pot of tensions.
South Africa
The big news items during May revolved around the elections of 29 May. The debate whether the ANC would keep the majority vote, or whether it will be forced into a coalition, was discussed around all braais. However, the biggest shift expected was probably the number of coalition provinces that will emerge, with speculations of about six of the nine provinces standing a chance to have no outright majority party. However, he era of ANC dominance in South Africa is over, and as projected has lost the outright majority for the first time since 1994. Furthermore, KZN, Northern Cape and Gauteng are all provinces that had no outright majority, although The ANC is close in Northern Cape, and MK in KZN.
Coalitions or some form of working together will have to happen within the next two weeks when a president needs to be elected. There is the doomsday option where the ANC and EFF or MK join forces, and then there is the option where the ANC seeks the help of the Multi Party Charter. This will be a more market friendly option and perhaps the solution for the future where parties need to work together and not as enemies. However, the next two weeks will set the base from which negotiations can follow over the next couple of months.
Source: IEC: results.elections.org.za
Not only did President Ramaphosa sign the National Health Insurance Bill, but parliament voted on the so-called Basic Education Laws Amendment Bill (better known as the BELA Bill) that left so many parents, schools and political parties stunned. There is little certainty as to how the government will pay for a healthcare system that will push private medical schemes out of the services the NHI proposes to offer. This is seen as a cynical electioneering ploy by the ANC two weeks ahead of national elections, and various political parties and groups in South Africa are gearing for a fight in the courts.
However, these legislations might become part of coalition negotiations.
We had two months of no loadshedding, and various calls have gone up that it is merely an election ploy. Claims have been made that large amounts of diesel have been burnt to keep the lights on. However, when the facts are considered, it seems as if the political pressure has developed into a new process of maintenance, and the Electricity Availability Factor (EAF) has sharply improved since the beginning of the year.
Source: My Broadband.co.za
An independent electricity expert, Chris Yelland, explained this improved factor at the hand of a couple of management successes:
The utility managed to keep its unplanned breakdowns consistently 5% lower than the first quarter of 2024.
Eskom has started collaborating with original equipment manufacturers to conduct better maintenance.
Eskom has conducted more maintenance, and the quality of maintenance was at a higher level.
Furthermore, only about one third of the diesel used in the corresponding time during 2023, was used in 2024. It was therefore not a matter of dumping diesel to keep the lights on for the elections. Unplanned breakdowns can occur, causing loadshedding, but with the huge number of private energy projects already in use, as well as those in planning and construction, electricity outages will probably be reduced to the minimum over the next two years.
However, weak maintenance on the water and sanitation infrastructure currently seems to hold more threats for South Africa’s future stability.
Snippets from the markets
US markets pricing in a lower probability of a rate cut in September and now anticipating just one cut by the end of the year.
UK inflation falls to 2.3%, lowest in 3 years.
The Bank of Japan has been letting 10-year yields rise to over 1%, the first time in 11 years.
Taiwan swore in a new president, Lai Ching-te.
SA’s annual CPI decelerated for a second consecutive month to 5.2% in April from 5.3% in March this is due to interest rate that’s remained at a 15-year high since May 2023.
The Constitutional Court has ruled that former president Jacob Zuma is not eligible to stand for office in the National Assembly.
Eskom: Latest performance shows unplanned capacity loss factor dropped from 30.6% to 25.6% over the last week of May, resulting in the week-on-week energy availability factor to rise sharply from 58.6% to 62.1%.
$221.2 billion – The jump in Nvidia’s market value post its earnings release, the second-largest daily gain for a company ever, taking its market cap to $2.5trillion. It is now larger than the GDP of every country in the world except 7.
22 million – the number of Capitec’s active clients, which makes it by far the largest retail bank in the country.
NHI Bill signed into law.
South Africa’s unemployment rate rose 0.8% to 32.9% in the first three months of year, according to Stats SA.
New Peugeot bakkie plant is preparing to start construction of its R3 billion assembly plant in the Eastern Cape, near Gqeberha.
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