The rand broke below R14.00 to the U.S. Dollar this week after U.S. Federal Reserve Chairman, Jerome Powell reinforced the expectation for U.S. interest rate cuts in coming months, boosting the demand for risk assets across the globe. A proposal by the Public Investment Corporation (PIC) to convert its Eskom debt into equity, provided further support for the rand.
“Many” Fed officials now believe a weakening global economy and rising trade tensions have strengthened the case for a rate cut, Powell wrote in a report released ahead of his appearance before Congress, further solidifying expectations for a U.S. rate cut in the coming months.
A proposal this week, by the Public Investment Corporation (PIC), to convert its R90bn holding of Eskom debt into equity has become a rescue option for Eskom. In return, the PIC which manages about R2.2trn and is responsible for the pensions of more than a million state workers, wants a say over Eskom’s finances, including board representation, said five people with direct knowledge of the talks. Finance minister Tito Mboweni said this week that further details on Eskom’s funding arrangements would be available on July 23, when a special appropriations bill will be put before parliament.
Staying with local news, President Ramaphosa has re-appointed Lesetja Kganyago as governor of the SA Reserve Bank, a decision welcomed by markets. Kganyago’s current term expires on November 8, and his new five-year term will begin immediately after that. All eyes next week are on the Reserve Bank interest-rate decision on Thursday, with the consensus among 17 analysts polled by Bloomberg for a 25-basis-point cut.
SA’s manufacturing production index increased by 1.0% on a YoY basis in May, below expectations of a 1.3% increase, whilst mining production decreased by 1.5%, less than market expectations for a fall of 2.4%.
A landmark free-trade agreement (AfCFTA) removing most tariffs and other commercial barriers in the African continent became operational last Sunday, as 54 member states agreed on the process to implement the accord.
The JSE All Share Index ended the week down -0.54%, with industrials (-0.79%), resources (-0.50%) and financials (-0.42%) all softer. The rand was strong, strengthening against major developed market currencies.
Market Moves of the Week
President Trump continues to send mixed signals on U.S.-China trade negotiations. According to Bloomberg, U.S. trade representative Robert Lighthizer, had “constructive talks” on the phone with their Chinese counterparts in their first contact since their president’s met at the G-20 Summit. However, Trump complained this week that China hasn’t increased its purchases of American farm products, a promise he said he had secured at a meeting with the country’s president, Xi Jinping. Trump also set his aim at India this week tweeting: “India has long had a field day putting tariffs on American products. No longer acceptable!”
U.S. weekly jobless claims fell to a 3-month low, to 209,000 for the week ended July 6, whilst the core consumer price index, which excludes food and energy, rose 2.1% from a year earlier, ahead of estimates. Both these readings further complicate the U.S. interest rate decision.
In the U.K., parliament narrowly passed a measure aimed at stopping its future leader forcing the country out of the European Union without an agreement, against the U.K.’s wishes.
Europe’s ECB monetary policy meeting minutes indicated that it was considering more strategic moves if inflation remained low and to be ready to provide more stimulus to the economy in an environment of heightened uncertainty. Investor confidence unexpectedly dropped to a level of -5.80 in July.
Finally, export-reliant Singapore reported an unexpected contraction in growth in the second quarter, weighed down by trade tensions and lower business confidence. Annualised quarter-on-quarter GDP shrank by 3.4% in April-June, the biggest decline since 2012.
Global equity market performances for the week were mixed. In the U.S., the Dow Jones (+1.52%), S&P 500 (+0.78%) and Nasdaq (+1.01%) indices were all positive. In Europe, the Euro Stoxx 50 (-0.86%) and FTSE 100 (-0.62%) indices were softer, whilst Asian markets were also weaker with the Nikkei 225 losing -0.28% and the Shanghai Composite Index down -2.67% over the week.
Chart of the Week
Whilst the Fed signaled its intention to cut U.S. interest rates in coming months due to concerns of a weakening global economy and rising trade tensions, last week’s beat in non-farm payrolls confirmed that the U.S. labour market remains robust. The 3 and 6-month averages for jobs growth are both north of 170K, which is solidly above the breakeven rate consistent with stable unemployment. Markets, for their part, are focused on what this all means for the Fed. As you can see in our chart of the week, bond markets are still pricing in about 50bp of cumulative cuts through to the Fed’s September meeting. Even if cuts aren’t justified by economic fundamentals, bond market pricing suggests there would be a cost of doing nothing, such as a meaningful tightening in financial conditions.
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