An eventful week, to say the least...
…and one that could prove to be a turning point!
At least of the ongoing monetary tightening policies that have elevated the greenback to record heights.
The Rand and most emerging economies finally received some respite after months of hammering - as crucial data releases in the week suggested that the US Fed’s actions to cool the world’s number one economy may be working (that is, looking at this from an economists view - we know, of course, that central bankers are followers of the market, not the other way round)...
...but the upbeat mood was a brief one, as the local unit swiftly gave back the gains, once again proving its susceptibility to global market drivers.
Without further ado, here’s the full scoop.
Key Moments (24-28 Oct 2022)
These were some of the major headline-grabbers for the week:
- SA Mid-Term Budget - The attention this week was on the South African government's mid-term budget, which showed a welcome improvement in the country’s fiscal outlook.
- US GDP - The US managed to achieve a return to economic growth in Q3 following two consecutive quarters of contraction. But does this obscure signs of a slowdown in other components?
- Sunak At The Helm - After months of turmoil, the hopes for the stability of the Pound improved after former Finance Minister Rishi Sunak was announced as the UK’s new Prime Minister.
- ECB Hikes Rates - The central bank for the 19 countries that share the Euro as currency raised its deposit rate by another 75 basis points to record its highest level in over a decade.
Let’s set the ball rolling locally, where the Rand started the new week off at R18.14/$ and quickly began reversing the gains made the previous week. By midday, the local unit was well and truly on the back foot, trading at R18.34/$ with R18.50/$ levels firmly in sight. The first half of the week was expected to be relatively thin in terms of economic data, with all focus set on the mid-term budget due by midweek.
But that didn't mean no volatility...
...as the local unit weakened even further on Tuesday morning to test R18.50/$ as local issues, including ongoing power outages and seemingly deadlocked wage talks, dragged on local market sentiment...
...but by mid-afternoon, we saw the local unit reverse, dropping to a tad below R18.20/$ by the close of play.
On the morning of the budget release, the Rand strengthened again to break below R18/$ for the first time since the 18th of October. And then came the budget update...
...which was fairly positive, all things considered.
The South African National Treasury reported that the country’s deficits were seen shrinking more quickly than anticipated over the next three years, with expectations of debt stabilizing at a lower level, which may put the economy in a stronger position to deal with possible future shocks.
Here were some of the key points noted in the mid-term budget:
- The South African Treasury listed several impediments that continue to choke SA’s economic growth, including unreliable supply of electricity, crime, corruption, inefficient ports and rail networks, high levels of market concentration, and barriers to entry that suppress the growth of small businesses.
- Treasury cited the IMF’s global growth forecast, which has been reduced to 3.2% from 4.4% for this year, and 2.7% from 3.8% in 2023.
- Certain international issues are firmly expected to continue to have a direct impact on SA’s performance, such as the Russia-Ukraine conflict, potential further declines in China’s economic growth, and the ever-growing likelihood of energy rationing in Europe.
- Eskom seems like it will also manage to get a bailout from the government (again) in the wake of the consistently increasing frequency of power cuts. Treasury intends to provide more debt relief to the ailing electricity provider in the hope of easing its current financial pressure that currently stands in excess of R400 billion.
- The recent flood damage experienced in KZN and the Eastern Cape, combined with global weather shocks, has forced the government to consider climate changes more sharply and its expectation to reshape the world, including its economic context.
- Global stocks and the British Pound made steady gains in the week as markets reacted favorably to the news that the UK's former finance minister, Rishi Sunak, would become the country’s newest and 3rd Prime Minister in 2 months. The appointment was largely seen as a source of some stability following the chaotic stint served by Liz Truss’s leadership that created massive volatility across UK markets. The new combination of PM Sunak and Chancellor Hunt is now tasked with reducing the pile of debt accumulated by the UK and bringing about financial stability to the already battered Brit households.
- Following a reversal in inflation back to 9.9% in September, the ECB confirmed in the week that it would be raising the deposit rate by yet another 75 basis points. The latest increase sees the 19-country shared currency record its highest rate since 2009 at 1.5%. ECB rates enjoyed an 8-year period of negative rates before its initial hike in July this year. And it seems that they’re not done yet, with several experts factoring a further 50 basis point increase in December and a gradual transition to 25 basis point increments into 2023. The Euro broke back above parity with the US dollar in midweek and maintained its form for the majority of the week before dipping back to €0.99/$ on Friday.
- Chinese authoritarian leader Xi Jinping secured himself a historic third term in power of the world’s second-largest economy early in the week and immediately flexed his strength by reshuffling the country’s top officials with loyalists in a clean sweep that has not been seen since the Mao era. While it remains to be seen exactly who will occupy the major economic roles for the foreseeable future, investors are worried that loyal but less competent individuals could be chosen, which would likely equate to a continuation of growth-stifling policies such as the hotly debated pandemic strategy and crackdowns on the private sector that have already caused serious damage to the country.
- EU - Core Inflation Rate YoY Flash (OCT), GDP Growth Rate QoQ Flash (Q3), Unemployment Rate (SEP), BoE Interest Rate Decision
- US - ISM Manufacturing and Non-Manufacturing PMI (OCT), Fed Interest Rate Decision and Press Conference, Balance of Trade (SEP), Unemployment Rate (OCT)
- SA- Balance of Trade (SEP)Y
Overall, the good news from the mid-term budget policy statement was an improved fiscal position with a revenue overrun of R85 billion.
However, despite the positive statements, the local unit softened slightly, highlighting the fact that local events are hardly triggers for the Rand, which is currently being much more affected by global market sentiment...
...especially US sentiment.
The world’s leading economy made a return to economic growth in Q3, reversing the trend set over the first half of the year, which suggested that the country was heading for - or was already in - a shallow recession.
US GDP increased by an expectation-beating 2.6% for the period of July – September, a notable turnaround from a steep decline of 0.6% in Q2...
...but the underlying numbers made for even more interesting reading.
Firstly, while the GDP did rise notably in Q3, the gain merely made up for the economy’s significant contraction during Q1 and Q2.
Next, and perhaps most importantly, consumer spending increased at an uninspiring 1.4% over the same period, down from 2% in the previous 3-month cycle.
Finally, private domestic investments fell by a further 8.5%, maintaining the downward trend from a 14.1% drop in Q2. The results also revealed that much of the GDP growth was attributable to an increase in US exports of 14.4% and a decrease in imports to 6.9%...
...while this does provide a shot of adrenalin to the GDP figures, it’s highly unlikely that it will continue at such a large variance over the long term. And one has to wonder: At normal levels, what would the GDP have been?
That’s not all, though.
The greenback lost ground in the week to most counterparts as experts and investors ramped up the pressure for a less-hawkish policy stance by the US Fed as a result of the decline in consumer spending. Typically this indicates that inflation may have peaked, led by the fall in consumer spending, which has been a part of the Fed’s plan since it began its aggressive rate hiking process...
...I guess we will just have to wait and see.
And then, in other news
Getting back to the Rand, as the week drew to a close, the local unit was unable to hold on to the gains made over the week...
...after opening at R17.99/$ on Friday morning, the Rand steadily receded through the day and eventually closed out the week a shade below R18.20/$.
And that was the wrap!
The Week Ahead (31 Oct - 4 Nov 2022)
A relatively thin week of economic data is expected, but there are a few significant ones we’ll be focusing on:
As we draw to a close of an eventful month, all indications suggest that the remainder of Q4 is going to be an absolute doozy to predict...
...and with yet another monstrous 75 basis point hike on the cards by the US Fed, there’s no telling where riskier currencies like the Rand may end up by this time next week?
Nevertheless, we’ll be right here to give you the full rundown. But until then, proceed with caution!
As for us? We'll be relying on our Elliot-Wave-based forecasts to provide some direction. Please join us for the ride!
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