Markets keep eye on international developments for direction

The past week there were international economic indicators and political news influencing the prospects of the South African economy.

China is a key market for South African exports, and some good news is that the Chinese posted better-than-expected GDP growth for the second quarter. It grew by 2% year-on-year, which is slower than the first quarter’s 5.4%, but faster than expected.

US tariffs are still in the news, but South Africa’s position remained uncertain with negotiations about the 30% tariff set for August 1 said to be ongoing. More broadly speaking, macroeconomic news from the US also influences us through the rand-dollar exchange rate and our repo rate decisions. Analysts are waiting to see some of the impact of the increased tariffs on US inflation, economic growth and employment, and are speculating what it would mean for their monetary policy.

In the past week US core CPI came in lower than expected, increasing from 2.4% in May to 2.7% in June. Some categories that are vulnerable to the new tariff regime showed increases, including food and transport. In response 30-year US Treasury yields rose above 5% for the first time in June. However, their lower-than-expected PPI numbers had a positive influence on sentiment and increased the probability of a Federal Reserve rate cut in September. At the same time President Donald Trump kept the pressure for a rate cut on Jerome Powell, calling him a "knucklehead" but also saying that it is unlikely that he would fire him before the end of Powell’s term next year. Most would say that there is no sane reason for the Fed to cut rates much, if at all, and this kind of uncertainty may well cause our Monetary Policy Committee to keep the repo rate unchanged at the next meeting on July 31.

The key South African indicators of the week were mining production numbers, retail trade sales and wholesale sector sales. Mining production rose by an above-consensus 0.2% year-on-year in May. The month-on-month seasonally adjusted numbers show output rose by a solid 3.7%. If there is no sharp reversal in June, mining may make a positive contribution to second quarter GDP growth. Despite all the concerns about the consumer spending slowing, retail trade sales still increased by 4.2% year-on-year in May. Six out of seven subsectors reporting gains. The largest positive contributors were retailers of textiles, clothing and footwear, as well as general dealers. But there are signs of the slow down in the monthly numbers with only 0.1% growth in May, compared to 1.1% in April. Though real motor trade sales rose in May, annual wholesale trade sales contracted for a fifth month in a row.

In the week ahead, the SA Reserve Bank will publish their leading business cycle indicator for May on Tuesday and StatsSA will publish the June consumer price inflation rate on Wednesday. Economists expect inflation to have accelerated a bit from 2.8% in April and May to 3% in June. The main contributor to the upward pressure is slightly higher food prices, while the annual decline in fuel prices will exert downward pressure. Even with inflation drifting higher in the second part of the year, it is not expected to reach the mid-point of the target band at 4.5%. Based on the inflation outlook alone, markets still expect a 25 basis points rate cut at the July MPC meeting.

Waldo Krugell is a Professor of Economics, North-West University, Potchefstroom.

*** The views expressed here do not necessarily represent those of Independent Media or IOL

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