STANLIB Podcasts

US headline inflation data for December was in line with expectations but core inflation surprised on the downside, as it rose by 3.2% y/y from 3.3%. This pushed up US bond and equity markets. Core inflation benefited from a moderation in the rate of increase in rentals. However, this does not affect the outlook for interest rates, with no cuts expected for the next couple of months.

A flurry of executive announcements is expected after US president Donald Trump is inaugurated. An increase in import duties is likely to exert upward pressure on inflation. Trump’s policies may also affect the overall growth rate but at this point the US economy is expected to remain strong.

STANLIB is an authorised Financial Services Provider in terms of FAIS and a registered representative manager in terms of CISCA

Uncertainty about how aggressive incoming US president Donald Trump will be in implementing policy has hung over global markets in recent weeks. Continued US economic strength, as reflected in labour market and other data, is also creating nervousness about underlying inflationary pressures and future interest rate cuts. This is negative for bonds and equity valuations in the short term.

The rand has weakened appreciably to over R19/$ in recent weeks. It partly reflects dollar strength but also other factors, including post-year-end restocking of imported items, foreign selling of South African bonds and equities, and lacklustre economic growth. A more compelling level of economic growth is needed to attract foreign investment and cause the rand to strengthen.

STANLIB is an authorised Financial Services Provider in terms of FAIS and a registered representative manager in terms of CISCA.

In Q3 2024, SA’s GDP fell by a surprising 0.3% quarter on quarter, while the market expected a small increase. This mainly reflected a massive decline in agricultural production, which fell 28.8% q/q, largely reflecting a four million tonne drop in the maize crop (which was actually an annual, not quarterly decline). This will make it difficult for SA to achieve a 1% GDP growth rate for 2024.

Various US labour market reports were released last week, showing 227 000 jobs were added in November, with more job growth in the services sector than in industrial activity. Also, the previous two months’ data was revised upwards. The unemployment rate drifted up to 4.2% from 4.1%. Given this level of vibrant overall economic activity, the Federal Reserve will have to adopt a cautious approach to further interest rate cuts in 2025.

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The Global Debt Monitor for Q2 2024, which includes data for developed and emerging economies, was released on 25 November 2024, while the Frontier Markets Debt Monitor for Q2 204 was released on 4 November 2024. This provides a good opportunity to examine South Africa’s total level of debt, both foreign and domestic, within an international context.

US core personal consumption inflation for October remained elevated at 2.8% y/y, despite relatively high interest rates, suggesting that the US Federal Reserve (Fed) does not have to be in a hurry to take interest rates significantly lower. We expect that the extent of further US interest rate cuts will be determined by trends in inflation data and the strength of the US economy.

SA’s producer price inflation (PPI) has fallen from 4.7% at the beginning of 2024 to -0.7% y/y in October, largely as a result of lower fuel prices. Together, PPI and CPI data show SA’s inflation is under control, and it could be argued that the South African Reserve Bank should be more aggressive in cutting interest rates. However, this is a very conservative central bank and we expect it will only continue to cut by 25 bps at each meeting in the first half of 2025.

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SA’s headline inflation rate for October fell to 2.8% y/y, which was lower than expected, showing a pleasing reduction from above 5% in June. A key reason was a drop in fuel inflation, which is currently -19%. Food inflation has also dropped below 3% from over 14% in 2023. However, there is upward pressure on fuel, food and electricity prices and inflation is likely to revert to about 4.5% in the second half of 2025.

The South African Reserve Bank’s (SARB) decision to cut interest rates by 25 bps at its latest meeting was unanimous and expected by the market. Rather surprisingly, the bank said it had not considered cutting rates by 50 bps. It said international central banks have become more cautious and the South African economy was gaining momentum. STANLIB sees only 50-75 bps of additional interest rate cuts in the current cycle, taking the repo rate to about 7%. Click here to listen to the podcast.

The US inflation rate in October was 2.6% y/y from September’s 2.4%, which was in line with expectations but still above the US Federal Reserve (Fed) target of 2%. Core inflation, however, is at 3.3%, largely due to shelter prices, and there are other inflationary pressures which will require the Fed to be more cautious about making future interest rate cuts. While a 25 bps cut is still expected at the next meeting, the Fed is unlikely to be too aggressive with cuts in early 2025.

S&P has unexpectedly changed SA’s credit rating outlook from neutral to positive, although the rating, at BB-, is still well below investment grade. S&P cited the potential for SA’s growth rate to accelerate in the current policy environment and government’s intention to maintain fiscal discipline. This move was encouraging, but SA needs to make progress in the next 18-24 months if it is to win a rating upgrade.

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It's hard enough to manage our own biases but certainly we are nowhere near the point where we let the machines loose on making decisions,’ says Peter van der Ross, deputy head of multi-asset and portfolio management at STANLIB.

The Republican Party is on the verge of securing a sweeping election result, which puts President-Elect Donald Trump in a powerful position to effect policy changes. These policies could stimulate growth, but also have negative consequences. They include extending tax cuts, imposing a wide range of import duties (which could trigger an international trade war and add inflationary pressure) tightening controls on illegal immigration and deregulating key sectors such as energy.

The US Federal Reserve unsurprisingly cut the key interest rate by 25 bps last week and is expected to cut again by 25 bps in December. It acknowledged the strength of the US economy and expressed disappointment about slow progress in taming inflation to target levels, which may affect future interest rate cuts.

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A range of US labour market data was released last week but it was distorted by the hurricanes in September and October. Only 12 000 jobs were created in October – way below the 100 000 that the market expected, but the response rate to the survey was low. The unemployment rate remained steady at 4.1%, showing the labour market remains quite robust. Q3 GDP showed the US economy grew 2.8% y/y, better than the 2.6% the market expected, with strong consumer spending. While another 25 bps interest rate cut is expected later this month, the outcome of the presidential election will raise questions over the longer-term trajectory of interest rate cuts. Click here to listen to the podcast