What we know
The past week was dominated by inflation and interest rate decisions on both sides of the Atlantic.
Locally, the June CPI figures surprised to the upside, accelerating to 5.0% year-on-year from 4.5% previously. Transport costs, driven largely by higher fuel prices, were the biggest contributor to the increase. More worryingly, the broader inflation picture moved further away from the SARB’s 3% target.
Despite this, the South African Reserve Bank surprised markets by keeping the repo rate unchanged at 7.00%. Most economists had largely priced in another 25-basis-point increase following the stronger inflation print, and the SARB’s decision immediately weighed on the Rand as the local currency lost more than 2% after the announcement, jolting back towards the R17.00 handle before recovering some ground into the weekend.
In the US, attention also shifted to inflation figures, albeit for opposing reasons, as softer US inflation data and employment figures have reduced expectations of additional rate hikes in the near term, although policymakers continue to stress that inflation remains above target.
Meanwhile, Brent crude oil remained elevated throughout most of last week after briefly trading above $100 per barrel, supported by renewed geopolitical tensions and ongoing supply concerns. Higher oil prices remain an important inflation risk for both developed and emerging markets.
What others say
Axios – ‘Behind the Curtain: The 6 stages of political surrender
“Republicans didn’t decide to become President Trump’s party. They surrendered to him, one stage at a time, over a decade, in plain sight.“
The Real Economy – Market Minute: Will Warsh be more specific about inflation?k
“Will the Fed stick to its playbook and look through the supply shocks and hold rates steady in September, or will the central bank determine that the price increases are more permanent and lift rates?“
News24 – Suddenly dovish SARB floors rand as Fed decision looms
“Critics say the South African Reserve Bank contradicted its hawkish reputation on rates with its July decision to keep interest rates on hold, but some analysts say there may still be hikes later this year, which has weighed on the rand as markets await the Fed’s own decision.“
Visual Capitalist – The Mammals That Sleep Most and Least
“How much sleep does a mammal actually need? The longest sleepers tend to be small mammals, including bats, opossums, armadillos, squirrels, and monkeys.“
What we think
Last week we said that “as is so often the case, while we know what to look out for (and frequently, when), the outcomes are anyone’s guess.”
This week’s focus shifts firmly back to the US as the Federal Reserve’s latest interest rate decision headlines the economic calendar on Wednesday evening. Although markets overwhelmingly expect policymakers to leave rates unchanged, investors will be listening closely for any clues in the language used around inflation and the future path of interest rates.
The market now finds itself caught between two opposing forces. On one hand, softer US inflation is supportive of risk assets and emerging market currencies such as the Rand, as it reduces the likelihood of further Federal Reserve tightening, which would divert international capital flows towards safer investments.
On the other hand, South Africa’s inflation has moved sharply higher while the SARB has elected not to respond with another interest rate increase, for the time being. Attention remains on whether June’s higher inflation figure proves temporary or marks the beginning of renewed price pressures. That combination leaves the Rand particularly sensitive to external drivers and broader macro developments.
Should oil prices remain elevated or the US dollar regain momentum, the Rand could remain under upward pressure in the short term. Conversely, any evidence that US inflation continues to moderate, or a de-escalation of the US/Iran conflict, would likely improve global risk sentiment and provide emerging market currencies with some much-needed support.
Markets will continue balancing inflation against economic growth, with central banks attempting the increasingly difficult task of slowing inflation without tipping their economies into contraction. Elevated volatility around central bank communication means exchange rates could continue reacting more to expectations than to actual policy changes in the short term.
This is undoubtedly an exercise considerably easier in theory than in practice. As markets have demonstrated countless times, it is not always the data that moves prices, but rather whether the data came in better or worse than expected.
Our range for the week: R16.60 to R17.05.
Have a great week ahead.
