Federal Reserve Chair Jerome Powell signalled that the Fed is gearing up for a series of interest rate cuts during his annual address at Jackson Hole, Wyoming, stating, ‘The time has come for policy to adjust’. He emphasized that while the direction toward rate cuts is clear, the exact timing and pace will be guided by upcoming economic data. Powell expressed that the Fed does not wish to see further cooling in the labour market but is increasingly confident that inflation is on track to reach 2%. Following his remarks, bond yields dropped, equities rose, and short-term rate markets remained steady, reflecting expectations of nearly 100 basis points in rate cuts by year-end.
The minutes from the Federal Open Market Committee’s July meeting indicated that most Fed officials supported a rate cut in September, with some advocating for one in July. They expected inflation to continue easing but were concerned about potential labour market issues. The minutes did not suggest a cut larger than 0.25% and were recorded before the brief market volatility in early August.
Eurozone business activity improved in August, with S&P Global’s PMI rising to 51.2 from 50.2 in July. The increase was driven by a four-month high in services output, boosted by the Olympic Games in France. However, manufacturing production fell for the 17th consecutive month. Sweden’s central bank reduced its key policy rate by 0.25% to 3.5%, as anticipated, and indicated that two or three additional rate cuts are likely this year. In the UK, August’s purchasing managers’ data showed strong UK private sector growth, driven by higher new orders. The preliminary S&P Global Composite PMI rose to 53.4, up from 52.8 in July, reaching its highest level since April.
Bank of Japan Governor Kazuo Ueda stated at a parliamentary hearing that the central bank will “adjust the degree of easing” (raise interest rates) if the economy and prices meet forecasts. However, he emphasized that the BOJ is in no hurry to raise rates and is closely monitoring financial markets.
On Monday, China’s central bank left its benchmark lending rates unchanged to protect bank profit margins. The People’s Bank of China kept the one-year loan prime rate at 3.35% and the five-year rate at 3.85%. Economists anticipated this move following the bank’s unexpected rate cuts in July and expect further easing later this year, especially after the Fed starts cutting rates.
On the market front, major global indices ended the week higher. In the U.S., the S&P 500 Index (+1.45%), Nasdaq Composite (+1.40%), and Dow Jones Industrial Average (+1.27%) rallied. The gains were widespread, with small-caps outperforming large-caps and an equal-weighted S&P 500 Index surpassing its capitalization-weighted counterpart.
Shares in Europe (Euro Stoxx 50) and the UK (FTSE 100) rose by 1.30% and 0.20% respectively. Chinese shares declined with the Shanghai index dropping -0.87%, while in Hong Kong, the benchmark Hang Seng Index managed a 1.08% gain. In Japan, the Nikkei 225 gained +0.79%. Gold rose by 0.21% while Brent Oil lost -0.68% over the week.
Market Moves of the Week:
South African (SA) headline inflation decreased to 4.6% y/y from 5.1% in July, the lowest since 2021. This figure was lower than both Bloomberg consensus expectations of 4.8% and ICIB’s forecast of 4.9%. Core inflation, excluding food and energy, also eased to 4.3% from 4.5%. Markets are now pricing in a potential 65 basis points cut in interest rates by year-end, from the current level of 8.25%. The Monetary Policy Committee’s next decisions are set for September 19 and November 21.
The City of Cape Town reported spending R9.4 billion ($523 million) on infrastructure in the year ending June, marking the highest expenditure ever recorded for any metropolitan region in South Africa. Over the next three years, Cape Town’s infrastructure budget is set at R39.5 billion, which is 80% more than Johannesburg, the largest metro area in the country, and nearly double the budget for Durban, the third-largest metro area.
Qatar Airways acquired a 25% stake in SA regional carrier Airlink to expand its presence in Africa. This investment strengthens their existing code-sharing partnership and aims to integrate both airlines’ loyalty programs, according to a statement from Airlink on Tuesday.
The All-Share Index gained +1.84% over the week, led by Industrials (+2.29%). The local currency strengthened against the U.S. dollar, dropping to R17.71/$ from last week’s R17.95/$ level. SA government bonds continued their rally, as yields on the 10-year dipped -0.25% over the week.
Chart of the Week:
The spread between the South African Reserve Bank’s policy benchmark and the annual inflation rate rose to 365 basis points in July as consumer price growth at 4.6% was the lowest in three years. That’s the biggest gap since May 2006, when the Sarb was commencing an aggressive hiking cycle. Source: Bloomberg
