Welcome back to another weekly installment of our Rand Review!
We ended the previous week on a high note for the local unit as US inflation figures cooled, which gave most emerging market investors an opportunity to dust off the cobwebs and re-enter markets with renewed hopes of a pivot in the US Feds monetary tightening policy…
...albeit tentatively.
Each new piece of data now seems to unleash a wave of undercurrent and uncertainty, and last week was true to form…
...emerging markets this year have shown time and again how volatile they are, and after making strong gains in a short period, the big question last week was: Can it be maintained, or are we going to see another swift U-turn?
There’s only one way to find out. To the review!
Key Moments (14-18 Nov 2022)
Headlines in the week were dominated by:
- SA Retail Sales - Local consumer spending declines ahead of the festive season as interest rates continue to take massive bites out of households' disposable cash.
- US Resilience - Despite the US Feds' aggressive attempts to cool the economy, US consumers continue to show resilience in spending regardless of extreme price pressures.
- UK Recession - Soaring energy bills have driven UK inflation even higher than expected to a 41-year high, and Chancellor Jeremy Hunt confirms that the Brits are now in recession.
- EU GDP - Inflation in October proved to be marginally lower than previously reported for the 19 countries sharing the Euro, while GDP grew by a concerning 0.2% in Q3.
- Crypto Contagion - the fallout from the FTX collapse has spread in the crypto world, with other crypto exchanges being exposed and pulled into the meltdown.
Let’s start our weekly expedition on home grounds, where the local unit opened trading doors on Monday morning at R17.32/$, slightly down from its previous close.
It was a thin first half of the week in terms of economic data, and the Rand ebbed and flowed, opening Tuesday at R17.24/$ with traders looking to US producer price index data later in the day
...which was recorded to have declined to 8% on a yearly basis in October from 8.4% a month earlier.
This was headed by a decline in the cost of wholesale goods (excluding food and energy), which, in turn, reflects improving supply chains and slowing demand that is likely attributable to higher borrowing costs. It also offers more evidence that inflation may be starting to subside, which many feel is another indicator for the Federal Reserve to slow its pace of interest hikes.
Following the US PPI results, the Rand was forced backward in evening trade and closed at R17.42/$.
Midweek was a little busier, with the all-important retail sales figure results set to take center stage. Stats SA showed that consumer spending appears to be waning, experiencing an unexpected fall of 0.6% in September from a year ago.
Persistent, heightened loadshedding would also have weighed on retailers' ability to operate at optimal levels at a time when consumers are already grappling with consistently rising debt costs and declining disposable income…
...which, by all accounts, isn’t going to change anytime soon as inflation continues to run significantly higher than the SARB’s target band of 3-6%.
Interest rates have almost doubled this year, and as energy and food prices remain elevated, there are unsettling murmurs of a potential blockbuster 100 basis point hike in the offing at next week’s local monetary policy meeting! Certainly not what Saffers were hoping for ahead of the December holidays!
Meanwhile, over in the US, it was a slightly different picture.
US retail sales jumped more than expected in October, picking up 1.3% to $695 billion from the month before, suggesting American consumers are still able to weather the high inflation and interest rate environment.
That’s good news, right?
Well, it depends on the perspective you look at it from.
In general terms, consumer spending resilience is a great asset to any economy, and in the current climate, it creates optimism about avoiding a major downturn or even a recession…
...however, if this is merely spending on credit, it is adding to an already massive problem...
...and the continued strength in business and consumer spending also opens the door for the US Fed to remain on track with its monetary tightening tactics.
Several high-profile US Fed officials addressed the media following the retail sales results to warn that despite the positive signs, ongoing hikes are still necessary and that rates reaching between 5-7% were certainly not yet off the table. Most financial markets are already betting on a 50 basis point hike at the next policy meeting scheduled for the 13th of December.
The Rand continued to take its cues from global forces and slipped on Thursday to R17.55/$ just after midday on the conflicting retail sales data from the US.
All focus will now move to next week’s local interest rate decision, which will be released on Thursday, 24 hours after the October inflation figures. Time to brace for a full percentage point? Can the economy afford such a move?
Next week’s going to be a telling one.
And then, in other news:
- Thursday proved crucial for the Brits as Jeremy Hunt unveiled an austerity budget consisting of £55 billion of tax hikes and spending cuts which he claims are needed to bring stability after recent turmoil. The UK’s Consumer Price Index accelerated to 11.1% in October from a year ago, registering a 41-year high, with expectations of it going even higher in the upcoming months. The staggering inflation rate beat expectations of 10.9% and piles pressure on the BOE to raise interest rates again.
The bad news continued as Minister Hunt went on to confirm “that the UK, like other countries, is now in recession!” The headline inflation contributors were gas prices and electricity, which surged by 36.9% and 16.9%, respectively.
But there’s more... The UK unemployment rate also rose marginally by 0.1% in the three months to September to 3.6%, and while this is also already close to a five-decade low, the BoE has already warned that it expects unemployment will nearly double by 2025 as the UK battles through one of its toughest recessions in history.
- Eurozone inflation remained stubbornly high despite the marginal 0.1% adjustment down to 10.6% year-on-year. Energy prices contributed the lion’s share of 4.44 percentage points, while food, alcohol, and tobacco came in with 2.74 percentage points. All the while, the European economy has continued to cool as results released in the week showed that the GDP in both the Eurozone and the wider EU expanded by a concerning 0.2% in Q3 from 0.8% and 0.7% respectively in Q2. There was also a notable slowdown in job creation over the same period, dropping from a 0.4% increase to 0.2%.
- China announced steps to ease its zero-Covid policy, including plans to shorten quarantine periods, clarify travel rules, and alter certain monitoring and control measures. The country’s Health Commission was also quick to point out that the plans are intended to optimize and adjust the current rules and do not amount to a relaxation in the existing control measures.
However, within days of the announcement, China 'reportedly' experienced daily record levels of infections in heavily populated cities across the country, which has forced stricter sanctions and backlash from struggling citizens. We’ll have to wait and see how this one pans out.
- The fallout from the FTX exchange bankruptcy has rocked the cryptocurrency world, with several crypto exchanges being exposed and withholding client withdrawals. And it would appear there may be skeletons in the FTX cupboard amidst allegations of Ponzi schemes, international money laundering and massive misappropriation of client funds. This one is far from over.
- SA - PPI YoY (OCT), Inflation Rate MoM (OCT), Interest Rate Decision
- US - FOMC Minutes
- EU- ECB Monetary Policy Meeting Accounts
Getting back to the Rand, on Friday, the local unit started the day on the front foot at R17.34/$ after making up ground on the greenback overnight and maintained its form to close the week in the mid R17.20s.
As a painful year for global markets draws to a close, some may argue a light at the end of the tunnel may be appearing and a possible recovery regime unfolding…
...while others may insist that it’s just the calm before the storm.
But that’s a tale for another day.
Until then!
The Week Ahead (21-25 Nov 2022)
A pretty big week of local economic data is expected. Here are the main headlines we’ll be watching:
The first signs of winter are starting to show, with parts of the US and Europe expecting freezing temperatures next week and with a gas and energy crisis hovering, the recent positive outlook could change in the blink of an eye.
For the time being, it’s best to avoid an aggressive knee-jerk reaction to what may still prove to be a brief recovery.
As for us? We'll be relying on our Elliot-Wave-based forecasts to provide some direction. Please join us as we continue to watch this play out...!
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