STANLIB Podcasts

The US Federal Reserve will meet on Wednesday this week to discuss interest rates and the South African Reserve Bank (SARB) will meet on Thursday. Both central banks are expected to cut rates by 25 bps and signal further cuts in the rest of this year and 2025. The SARB is most likely to cut by only 25 bps, given its cautious approach to keeping inflation around 4.5% and withdrawals from pensions under the two-pot system.

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The US August labour market report was mixed. It showed an improvement in the unemployment rate to 4.2% from 4.3% in July, but the number of jobs created was below the monthly average. Whether the US Fed will cut interest rates by 25 bps or 50 bps later this month to stimulate the economy is under debate. STANLIB believes a 25 bps cut is most likely, followed by a series of others.

In Q2 2024, SA’s GDP grew by 0.4% q/q, better than the zero rate of growth in Q1, but still very weak. Growth was driven by higher electricity production, financial services and retail spending post-election. While there is no sign of broad-based growth, looming interest rate cuts, the cash released from the two-pot retirement system and public-private partnerships may stimulate the economy next year.

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US core PCE inflation for July, at 2.6% y/y, was welcomed because it shows inflation is under control, although it still above the US Federal Reserve’s target of 2%. In Europe, consumer inflation has moderated to 2.2% y/y, close to the European Central Bank’s target of 2%, which may prompt the bank to cut rates again before the end of the year.

SA’s producer inflation rate of 4.2% y/y for July reflected the second consecutive month-on-month decline. However, it suggests a lacklustre manufacturing sector, with no pricing power. South African government revenue for July has printed slightly behind budget, while expenditure is slightly ahead of budget. This is not a risk yet but, if the economy fails to gain momentum, there is a risk of a revenue shortfall in the February 2025 Budget.

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SA’s headline Consumer Price Inflation (CPI) rate for July was surprisingly subdued, slowing to 4.6% from 5.1% in June. This reflects a slightly lower than expected electricity tariff hike and a slowdown in food price increases, as well as fuel price cuts. The slowing inflation trend makes it more likely that the SA Reserve Bank will start to cut interest rates in September.

In the US, signals from the Federal Open Market Committee and Federal Reserve chairman Jerome Powell indicate more confidence that inflation is trending downwards. It has also become clear that the US labour market is weakening. The longer the Fed waits to cut rates, the greater the risk that the economy will go into recession. STANLIB expects the Fed will implement a series of gradual interest rate cuts, starting in September and continuing into 2025. Click here to listen to the podcast.

The release of generally encouraging CPI and PPI data in the US, together with a strong retail sales report, helped global equity and bond markets to recover last week. There are high expectations that the US Federal Reserve will start to reduce interest rates in September, probably starting with a 25 bps cut.

In SA, strong June retail sales delivered a positive surprise to markets, but may not be sustainable. Mining data was disappointing, underlining a longer-term decline in the sector which goes beyond electricity supply. The unemployment rate moved above 33% in Q2 2024, with about 8.5 million unemployed. Without higher economic growth, SA’s unemployment will continue to increase. Click here to listen to the podcast.

US data released this past week points to less concern about inflation and more concern about the labour market. The Federal Reserve has kept interest rates unchanged at 5.25% to 5.50%, and the forward guidance is a more confident outlook for inflation, with the Fed comfortable of reaching its inflation target within the next year or so.

The Fed is now focusing more on its dual mandate of keeping inflation under control and ensuring the labour market remains strong.

The deterioration in the US labour market, as the unemployment rate moved from 4.1% to 4.3% in July, and inflation mostly under control, are justifying that it is time to start the interest rate cutting cycle, and the Fed is expected to cut rates by at least 25 basis points in September, and to continue cutting interest rates thereafter.

Labour market conditions have slowed meaningfully and suggest that the US economy is going to lose momentum, and that the risk of recession has risen appreciably, while financial markets have only priced for a moderate slowdown in activity.

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US GDP growth in Q2 2024 was 2.8% q/q, well above expectations for 1.9%. About half of this came from growth in inventories and government spending pre-election, which is not necessarily sustainable. Since there is evidence that consumer demand is softening, the underlying dynamic is that US growth is easing but the economy is not moving into recession.

Although SA’s CPI rate for June was above the Reserve Bank’s target at 5.1% y/y, inflation is expected to fall for the remainder of the year, which would allow for an interest rate cut. The main contributors to CPI for the month were a decline in the petrol price (with another due in July); an increase in non-alcoholic beverage prices but not food prices as a whole; and a substantial increase in rental inflation, although on an annual basis rental inflation remains modest.

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The STANLIB Flexible Income Fund delivered a pleasing 3.2% return in Q2 2024 vs 2.3% for the benchmark, despite an eventful quarter, says Sylvester Kobo, Deputy Head of Fixed Income at STANLIB. The fund made dynamic asset allocation and duration decisions, especially before and after the South African election. The R57.5 billion STANLIB Income Fund, which has delivered an above-inflation return of 10.5% in the year to June, is positioned to maintain yield in anticipation of a total of 1.25% of interest rate cuts in SA: two this year and three next year.

The STANLIB Enhanced Multi-Style Equity Fund slightly underperformed its benchmark in Q2 2024 due to its underweight in Anglo American, which was buoyed by the BHP bid, says Rademeyer Vermaak, Head of Systematic Solutions. However, over any rolling three-year period, the fund has consistently beaten its benchmark, reflecting its focus on the intersection of quality, value and growth to build robust portfolios. Over the next 3-6 months, Vermaak expects the market-friendly GNU in SA, together with a rate cut by the SARB, will support the domestic equity market.

Although the Magnificent 7 stocks in the US are expected to continue delivering margin growth, opportunities are now opening up in more defensive sectors of the US market, such as consumer staples, says Amit Parmar, Investment Specialist – International Equity Group, J.P. Morgan Asset Management. Parmar said Q2 was positive for the STANLIB Global Select Fund, sub-managed by JPMAM, as it delivered 1% above the MSCI World Index. Going into the second half, the team’s view about the macroeconomic environment and corporate earnings has resulted in a more cautious positioning for the fund.