US Federal Reserve chairperson Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting at the Federal Reserve in Washington, DC, on July 31. Photo: AFP
By Nicola Mawson
Federal Reserve chairperson Jerome Powell’s more optimistic outlook on US inflation, while being cautious on the state of the job market, has increased confidence that the US will cut rates in the third quarter, with South Africa to follow.
Annabel Bishop, Investec’s chief economist, said, given more “dovish undertones from central banks in both the US and South Africa, markets have now fully factored in a 25bp (basis points) cut in South Africa’s repo rate in September”. Inflation in June came in at 5.1%, down from May’s print of 5.2%.
Nolan Wapenaar, the co-chief investment officer at Anchor Capital, said: “It is fair to say we are most likely headed towards a first interest rate cut in September both in the US and in South Africa.
“While it seems that both the Fed and the South African Reserve Bank (SARB) are likely to cut in tandem, Anchor Capital retains its view that the Fed may have scope to cut further than SARB will be cutting, which could see 1.5 percentage point cuts in total in the US, but only one percentage point locally.”
However, he said the start of a cutting cycle was likely supportive for the South African rand and Anchor was hopeful that the currency would strengthen into the high R17s against the dollar.
Bishop said the Fed’s news had the consequence of moving the rand to gain 20c overnight.
After opening at R18.20, the local currency was bid at by 6pm bid at R18.1879 – marginally stronger to the dollar
Yet, Bishop added that the local currency “remains volatile as financial market expectations have shifted around the timing and speed of the anticipated US interest rate cutting cycle, in turn contributing to rand volatility from an international perspective”.
Johann Els, Old Mutual chief economist, took a slightly different view, arguing that there was scope for three cuts this year, starting in September. At the same time, he continued to expect a softer dollar, which would lead to a stronger rand.
Els maintained his stance that South Africa could have moved independently of the US and could have cut last month. However, he also noted that additional data is still due from the US, such as labour figures due today.
Andre Botha, the head of execution at TreasuryONE, said markets had already factored in much of what Powell said on Wednesday in terms of being more positive towards an interest rate cut.
Botha noted that the SARB and the Fed usually moved in line with interest rate moves.
“We can expect that, should the Fed cut in September, we could see the SARB following suit afterwards. We have seen that our inflation rate has steadily come down, which from a monetary policy perspective could be scope to cut rates.”
Geopolitical tensions continued to simmer.
Gold moved onto the front foot yesterday “as is usually the case when the market turns risk off, with the Fed being less of a factor”, said Botha.
“We expect a see-saw trading session leading up to the weekend as the focus will shift quite quickly between US data and geopolitical tension.”
The JSE’s all share index closed 1.08% points lower at 81 869 points yesterday.
BUSINESS REPORT