STANLIB Podcasts

SA’s inflation data for February surprised on the upside, rising to 5.6% y/y from 5.3% y/y in January. This was due largely to a hike in medical aid costs, as well as a higher petrol price. Increases in administered costs like medical aid, energy and water cannot be controlled by higher interest rates. Arguably, the SA Reserve Bank may have to accept that anchoring inflation around its 4.5% target is impossible and find a way to cut interest rates, or risk triggering a recession.

Around the world, other central banks cut policy rates in March, including Switzerland, Norway, Brazil, Mexico and Czech Republic. The US Federal Reserve held rates but indicated it would cut three times this year, despite elevated inflation. We anticipate the global interest rate cutting cycle will follow the Fed and start around the middle of the year, although a geopolitical or climate event could disrupt the outlook.

In this second podcast of our series, our chief economist, Kevin Lings and Amit Parmar, Investment Specialist at J.P. Morgan Asset Management, delve into the investment philosophy behind the STANLIB Global Select Fund.

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.