A rough week for the local unit...

...as global economic data once again took the driving seat, setting the tone for riskier assets to face even greater challenges.

All the while, geopolitics and tensions continue to simmer amid worldwide economic uncertainties as the world’s heavyweight nations play their cards in an attempt to curb rampant inflation that continues to weigh heavily on businesses and households.

Q4 is well and truly underway, and if last week was any indication of what’s to come, we’re in for an action-packed end to the year.

Let’s get you up to speed. Here’s the full review:

Key Moments (10-14 Oct 2022)

Here were some of the major economic talking points for the week:

• SA Mining Declines - According to Statistics South Africa’s latest report of the mining sector’s production, total mining output dropped by 5.9% YoY in August.
• Hot CPI Results - Higher-than-expected inflation rates in the US dashed any lingering hopes of a pivot in the US Fed’s monetary tightening trajectory.
• GBP Comeback - Sterling investors seemed to respond positively to reports of the British government considering a U-turn on parts of its unfunded package of tax cuts.
• Oil War Continues - A week of back-and-forth between the US and Saudi Arabia over the OPEC+ decision to reduce oil supply has added to an already frosty period of relations between the two countries.

We’ll kick off with the Rand, which started off the week downbeat, trading a shade below R18.20/$ at SA open on Monday morning.

With US CPI data due on Thursday, the local unit was already looking set to test September highs of R18.22/$ and potentially extend higher...

...and it didn't take long to test this level, breaking briefly higher before gaining back ground into the evening trading session ahead of local mining and manufacturing on Tuesday, which would to provide more clues on the state of the economy

Encouragingly, despite the pressures created by Eskom’s loadshedding impositions, SA’s manufacturing sector remained resilient, growing by 1.4% in the year to August. While the automotive sector made the biggest positive impact, food and beverage production declined during the same period.

However, the picture in the mining sector wasn’t as promising...

...Stats SA’s mining sector production data revealed that the total mining output for the year to August declined by a cringe-worthy 5.9% to record a seventh consecutive month of contraction. Gold mining took the steepest hit, declining by a whopping 17.4% year-on-year, while platinum recorded a 12.9% reduction in output.

Loadshedding and strikes at Transnet have weighed heavily on the energy-intensive mining sector as increased power cuts and wage disputes continue to slow down production and stifle improvement. With even higher levels of loadshedding having been implemented in September, one has to wonder what the state of the crucial mining sector will look like by the year-end?

On Wednesday morning, the Rand was trading around R18.16/$ after dipping below R18/$ overnight and steadily gave up ground, pushing as high as R18.28/$ by the close of business, with markets and traders alike braced for US inflation data the following day…

...fully aware that a strong reading would likely spark (yet another) rout on markets.

By the morning of the crucial data release, the local unit was already on the back foot, breaching R18.30/$ by the first call. And then came the big one – US consumer inflation recorded stronger-than-expected results in September...rising by 0.4% from August to 8.2% y-o-y!

...and reinforced the view that there is no way that the US Fed can contemplate a pivot anytime soon.

While the headline rate was marginally down from 8.3% the month before, it’s still proving stubbornly high and still way above the central bank's 2% target. Perhaps more concerning, though, when we remove food and energy components, the core prices rose by a significant 0.6% for a second straight month...

...which means that core inflation in the US has now accelerated to a new 40-year high of 6.6%!

The warning signs are evident, and the battle against the worst inflation experienced in a generation is far from over…

...especially not since gas prices have started to rise again on expectations of a crude output cut by OPEC+.

This most recent CPI reading paves the way for yet another bumper rate hike despite investors growing increasingly concerned that the aggressive monetary tightening strategy may plunge the US into recession - or worse!

The minutes of the US Feds' most recent September meeting also did little to indicate a pivot anytime soon…

...as policymakers noted that a slowdown in the jobs markets is required to tame inflation, adding that prices remained “unacceptably high”.

Back locally, the local unit was set alight in a flash, skyrocketing to R18.58/$ by mid-afternoon following the hotter-than-expected US CPI, to record its weakest level against the greenback since May 2020.

And then in other news:

• China’s CPI – a major contributor to global retail inflation – recorded its highest figure since April 2020, at 2.8% in September, 0.3% up from August. This follows weeks of record temperatures which resulted in devastating droughts that have wreaked havoc on local farming. All that amid ongoing lockdowns that have throttled the world’s second-largest economy and created knock-on supply bottlenecks globally.
• On Tuesday, the International Monetary Fund (IMF) warned that it foresees storm clouds looming over the global economy attributed to stubbornly persistent inflation, disruptions in China, and intensifying stresses from the invasion of Ukraine.

  Of particular significance to Saffers was the IMF’s warning that a downturn would acutely be felt by emerging economies that are more susceptible to the impact of volatile markets and high borrowing costs.

• The Russia/Ukraine conflict escalated to new levels, with Russia pummelling Ukraine's infrastructure and government facilities with long-range guided missiles, in retaliation for the bombing of the Crimea bridge, knocking out power in many cities.
• In back-and-forth exchanges of words this week, the US and Saudi Arabia’s already strained relations were further tested, as the latter came under criticism for ignoring analysis showing that a reduction in supply would hurt the world economy and for allegedly pressurizing other OPEC members on the vote to reduce production by 2 million barrels per day. The Kingdom rejected the claims mentioning that its decision was based purely on taking into account the balance of supply and demand and was aimed at curbing market volatility. Chapter 2 of pain at the pumps incoming?

By Friday, following the jolt the day before, markets defied the odds and began to stabilize in early trade...

...most notably in the UK.

The British Pound enjoyed significant gains in midweek and held on to them heading into Friday at £1.13/$ despite the wider market’s negative reaction to the robust US inflation data.

GBP Investors also reacted positively to the latest U-turns in the government’s mini-budget, which indicated that the support of the BOE buying government bonds would end on Friday and that parts of its unfunded package of tax cuts would be scrapped.

Prime Minister Liz Truss has come under severe pressure over the last month since her controversial implementations of the government’s fiscal plans, which now look set to be rolled back. This doesn’t bode well for the newly elected PM, who has been steadfast in her decisions and is now seemingly forced to backtrack on them.

Are we witnessing a PM in office but not in power?

We are now seeing monetary policymakers being able to apply discipline to fiscal authorities, which adds to traders not trusting the new UK government…

...while also dealing with the lingering concerns of the BOE’s aggressive hikes dragging the UK economy into recession.

Back at home, the local unit also reversed its losses, showing up at R18.17/$ in morning trade, before giving it back somewhat to end the week back above R18.30/$.

Phew - and that about wraps it up for the week!

The Week Ahead (17-21 Oct 2022)

And as we head into the latter half of October, going to be a big week of economic data. Here are some of the key events:

• EU/UK - Inflation Rate YoY (SEP)
• SA - Inflation Rate YoY (SEP), Retail Sales YoY (AUG)
• US - Jobless Claims

Next week is going to be crucial for the South African economy, with the all-important inflation reading due to be released midweek. As local mining production continues to wilt, so does the country’s ability to trade internationally…

...and with the US dollar set to ignite again at the next Fed meeting in November, the Rand is likely to remain vulnerable over the near term.

With power cuts, employee wage demands, and impending oil price increases on the cards, the picture doesn’t make for inspiring viewing.

Tread softly!

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