US February CPI data was disappointing, showing an increase to 3.2% y/y (from 3.1% in January), with indications of more underlying pressure. It means the US Federal Reserve is unlikely to be able to cut interest rates by June, as widely expected, but only later in the year, which will influence other global central bankers, including in SA.

Transnet’s draft Network Statement published on Friday is a detailed outline of how government will involve the private sector in running numerous corridors. It is more encouraging than the previous draft, which for example limited contract length to two years. However, it will take 3-5 years before any progress becomes evident.

US labour data for February showed more jobs were created than the market expected, but a broader range of data suggests that labour conditions are softening. The unemployment rate is rising, wage growth is slowing and the quit rate has fallen back to the pre-Covid average. At this stage, there is no sign of recession, but the trends may encourage a US rate cut in June.

SA’s Q4 2023 GDP growth of 0.1% was below market expectations, although the country is not in recession. Annual growth of 0.6% is less than the 1.6% annual population growth. There were some encouraging developments in the transport sector, especially airline travel to Cape Town, but consumer spending is declining. Infrastructural renewal is critical to help kickstart growth.

Latest US personal consumption expenditure (PCE) data showed a moderation in growth to 2.4% from around 3% late last year, indicating inflation is being brought under control. We are optimistic inflation will continue to ease towards the US Fed’s 2% target, which would prompt an interest rate cut – by the earliest, around June.

In SA, growth in private sector credit demand has slowed to 3.2%, largely because banks are becoming more careful in granting credit to households. Mortgage growth is only about 3%, while last year house prices nationally increased by only 1-2% on average, showing a domestic housing market that is likely to remain under pressure until interest rates are cut.

The rand weakened by just over 2% after SA’s National Budget, reacting to the decision to access R150 billion of the Gold and Foreign Exchange Credit Reserve Account (GFECRA). The main reason was that government failed to stipulate how debt would be controlled in future or give assurances that the funds would not be squandered. Meanwhile, hopes of an early US interest rate cut have ebbed, due to still-high inflation data and a strong labour market. In fact, there is even a possibility of another interest rate hike.

In this podcast, STANLIB’s Chief Economist, Kevin Lings, emphasises the most important points of Budget 2024, focusing on the government's choice to access R150 billion from the R500 billion surplus in the Gold and Foreign Exchange Currency Reserve Account (GFECRA) to decrease debt. Although this move has pleased bond market investors, Kevin argues that a better use for the funds would be to stimulate economic growth.

STANLIB’s Head of Fixed Income, Victor Mphaphuli, remarked that Budget 2024 turned out to be more positive than what bond markets had anticipated. Despite concerns that the 2023/4 main Budget deficit might spike to 5% due to lower-than-expected revenue and increased spending, it will remain unchanged at 4.7%. The market also reacted positively to the proposed introduction of binding fiscal anchors

STANLIB’s Head of Credit, Tarryn Sankar, and Chief Economist, Kevin Lings, discuss how rating agencies will view the government’s careful measures to tap R150 billion from the Gold and Foreign Exchange Currency Reserve Account. They also note the Minister’s firm stance on bailing out state-owned entities such as Transnet.

Latest CPI data from the US for January was surprisingly high, raising red flags as far as early interest rate cuts are concerned. Core inflation, at 3.9%, is almost double the Fed’s 2% target. The main culprits were food inflation, which can be volatile; shelter inflation, which remains far too high and needs to be curtailed; and motor vehicle insurance, up over 20% year-on-year, reflecting a post-Covid catch-up by insurers. The market continues to expect the first interest rate cut in June, but the next three months will be critical.

Both producer and consumer inflation in China in January were again negative: producer inflation was -2.5% (the 16th month it has been negative) and consumer inflation was -0.8% (the 4th negative month). This is largely due to falling food prices, and is seasonal, but clearly the Chinese economy is weak, and there is negative sentiment about its property sector. In SA, data on both international flights and foreign visitor stays are very encouraging, especially for Cape Town. Clearly this is also partly seasonal and event-driven, but clearly tourism is recovering from Covid-19 and reflects a positive area of the economy.

The US Fed is no longer warning of a risk that interest rates might rise further but is clearly not yet comfortable enough about inflation trends to cut. It may wait for inflation to fall sustainably below 3%. In SA, while consumers are under pressure from rising interest rates and shrinking disposable incomes, they do not appear to be as reliant on credit as in the past: household credit growth is slower than inflation, due to tightening bank lending.