Welcome back, and thanks for joining us for the latest edition of your favourite Weekly Rand Review!
And it was a tough week for Saffers, as the local economy went through another week of blow upon blow, which caused the Rand to plummet to its worst level in nearly three years.
In the space of a few weeks, a string of strong data points has left the US Fed spooked and changed the global financial outlook drastically…
…and with the local economy’s susceptibility to global market shifts, combined with inexplicable local political decisions and a rapidly contracting economy, last week felt like something out of a horror movie for Saffers and local unit investors.
Brace yourself. Here’s how it unfolded.
Key Moments (6-10 Mar 2023)
These were the major talking points of the last week:
- Presidential Spotlight - Cyril Ramaphosa dominated local news headlines for most of the week when he announced an eyebrow-raising Cabinet reshuffle amid new developments in the Phala Phala saga, which left most onlookers shaking their heads in disbelief.
- Recession Fears Reignited - The Rand fell to its lowest level since the global pandemic in 2020, as reports in the week showed that the local economy contracted by a forecast-busting 1.3% in Q4 of 2022.
- Powell Drops the Hammer - The US Fed boss Jerome Powell dealt a hammer blow to traders that were holding on to hopes that the central bank may pause its tightening campaign as he indicated (quite strongly) that further rate hikes were to be expected.
The local unit had a brief period of respite in the previous week, dropping to the low R18.10/$ region and, hopefully, creating a platform to build on into last week…
…but that was far from the case.
We got going on Monday at R18.15/$ and traded sideways for most of the day as Saffers, and local unit traders awaited the confirmation of the hotly-debated Cabinet reshuffle due in the day.
But before that, the spotlight was beaming down on the President as the Phala Phala scandal took another twist, with SARS delivering their response following an investigation into the records surrounding the incident.
In its response, the reports, which was led by the retired chief justice Sandile Ngcobo, said that after an extensive search for records, none could be found and/or may not be in existence!
The DA, along with most other political parties, saw this as a major victory in the ongoing debacle, as several party leaders eluded that it was proof that the President had hidden dirty dollars, which entered the country illegally and were stashed in a couch on his game farm.
Not a good outcome for the President.
In the aftermath of the report from SARS, the Cabinet reshuffle due later in the day became ever more interesting as onlookers expected a positive reaction from the President, who had lost a fair few credibility points earlier in the day.
The widespread expectation around the headlines of the address was that the President would shrink the size of his Cabinet and announce who the new Minister of Electricity would be, along with a few other tweaks.
However, what actually happened was virtually incomprehensible!
During the twice-delayed address to the country, Ramaphosa confirmed recent weeks' speculation as he revealed that Kgosientsho Ramokgopa would be the country’s new minister of electricity.
Next came the confirmation that Paul Mashatile had been sworn in as the new Deputy President of South Africa following David Mabuza’s resignation last week.
Up to that point, everything was going according to expectation.
But then came the drama!
The President went on to announce that Maropene Ramokgopa, a long-time ally of Ramaphosa, would be appointed as the Minister for planning, monitoring, and evaluation.
That’s right, another new minister in the Presidency!
By the looks of it, one would be excused for feeling as though the President is keeping his allies close, with four ministers and four deputies, including two brand-new positions for Maropene and Kgosientsho Ramokgopa.
The new ministries will add another R74 million to the public wage bill, which includes costs such as VIP protection for the ministers and their deputies, as well as four luxury vehicles - two for each minister and two for each deputy…
…the cost of which will ultimately be pushed onto the South African taxpayer at a time when the nation languishes under sluggish growth, record unemployment levels, and of course, Eishkom.
Questionable characters, such as Zizi Kodwa and David Mahlobo, who in normal societies would be dealing with criminal proceedings for past indiscretions, remained in Cabinet while failed premier Sihle Zikalala was bumped up to a Minister role.
Ramaphosa’s long-time opponents, meanwhile, got the boot, with Lidiwe Sisulu being the most prominent casualty of the shake-up, while the likes of Pravin Gordhan, Gwede Mantashe, and Bheki Cele were all untroubled by the changes.
Needless to say, most onlookers felt that the reshuffle was underwhelming at best and perfectly demonstrates the dearth of talent within the ruling party, as many suggested that it’s the same deck of cards, just being played in a different order.
Daily Maverick had some interesting comments...
All that, and it was still only Monday!
After opening at R18.24/$ on Tuesday, the Rand began its first ascent for the week as the local GDP results for Q4 of 2022 were released.
Stats SA revealed that the South African economy contracted by 1.3% in the three months to December, blowing the anticipated 0.4% decline out of the water.
Seven of the ten key industries recorded contractions over that period, with the finance, real estate, and business services industries contributing the lion's share to the decline.
Several high-profile economists and finance experts were quick to point out that the outlook for Q1 of 2023 would likely be worse than the 1.3% reduction in GDP in December, which would put South Africa in the realms of a technical recession!
But hold on. It gets worse...
The current account balance was the next piece of information to disappoint, showing a deficit of R174 billion, compared to a surplus of R3.1 billion just three months earlier - the first deficit since 2019!
And then, to top off what was already a miserable day for the local economy, news from the US began to do its rounds as Jerome Powell confirmed the fears of emerging economies…
…warning that US interest rates might go up faster and higher than expected as the world's top economy continues to battle to curb inflation which is still too high for comfort!
Following Powell’s announcement, the greenback surged to multi-month highs against other currencies, and the local unit was not spared, breaching R18.40/$ by lunch and barrelled onward to R18.60/$ by the day’s end.
While most were still digesting the craziness of Tuesday, the local unit hit its lowest level since May 2020 on Wednesday morning, trading at R18.62/$ as investors piled back into the greenback off the back of the hawkish statements of the Fed the previous day.
Could the week get any worse for the local economy?
Unfortunately, the answer is YES, it could, and it did!
Following the local GDP and current account results from the previous day, S&P Global downgraded South Africa’s outlook from “positive” to “stable”...
…while also providing an uncomfortable caution that South Africa’s economic growth is facing severe pressure mainly due to the ongoing electricity shortages.
S&P Global only upgraded South Africa’s outlook to positive last May, and the quick U-turn is a major setback for the economy and underlines the pace at which South Africa is receding in the eyes of the global market.
The local unit pushed higher on Wednesday to test R18.70/$ before recovering slightly to trade in the high R18.50s through most of Wednesday and Thursday as the focus shifted nervously to February’s US Non-Farm Payrolls report due on Friday…
…with investors fearing that another strong print from the US labour market would queue a bloodbath for the local and other emerging financial markets.
But first, here’s a quick look at some other big news from the week:
-
- Despite the BoE and the Office for Budget Responsibility forecasting a five-quarter recession from Q1 in 2023, the data out of the UK continues to defy expectations. The UK economy fended off recession fears, albeit for one more month, notching up by 0.3% in January. Finance Minister Jeremy Hunt is set to deliver the country’s budget next Wednesday, and Brits will be eagerly awaiting the government’s plans to manage the country’s cost of living crisis over the upcoming months.
- After a strong start to 2023, crypto backers are feeling the pain of market volatility once again following Jerome Powell’s hawkish comments in the week. Bitcoin, the largest cryptocurrency by market capitalization, fell below $20,000 for the first time since early January, as a wave of bearish news caused sellers to re-emerge. Among the main contributors to the sell-off were fears over interest rates for the foreseeable future as well as the collapse of crypto-friendly lender Silvergate Bank on Wednesday.
As Friday emerged, the local unit strengthened from R18.50/$ to just below R18.30/$ ahead of the crucial non-farm payrolls report for February from the US.
With the door for higher interest rates being left ajar by Jerome Powell earlier in the week, investors were aware that a figure above 225,000 jobs created would spell bad news for emerging currencies.
The result: 311,000 jobs were created in February!
The report also showed that unemployment also ticked up to 3.6%, and average earnings came in lower than expected at 0.24% month-on-month.
Interestingly, the leisure and hospitality sector added 105,000 jobs, food services added 69,000, and healthcare/ social assistance added 63,000, while the manufacturing sector saw a reduction of 4,000 jobs.
The sectors that contributed the major gains are traditionally those that are lower paying in comparison to the finance and manufacturing sectors, which have a higher wage bracket.
This suggests that while job creation remains strong, higher earning and more specialised roles are the ones that are feeling the brunt of the pain and is something that headline figures do not highlight. As previously stated, how many of these are second or third jobs being taken due to higher living costs is also an unknown factor.
Nevertheless, following the jobs results, markets seemed uncertain about how to react, though bets did begin to increase on the Fed reverting to a 50 basis point hike at the end of the month.
Next week’s CPI data results have become extremely crucial now as that will likely provide a much clearer indication of what’s to be expected at the next monetary policy meeting.
On the local front, the Rand hovered around the R18.30/$ region following the jobs report and ended the week in that region, recording a small loss for the week…
…but a loss nonetheless.
Roll the credits. That’s the wrap.
The Week Ahead (13-17 Mar 2023)
With a big week of data points incoming, here’s what we’ll be keeping an eye on over the next five days:
- SA: Mining Production YoY (Jan), Manufacturing Production YoY (Jan), Retail Sales YoY (Jan)
- EU/UK: ECB Interest Rate Decision, UK Unemployment Rate (Jan), EU Industrial Production YoY (Jan)
- US: Inflation Rate YoY (Feb), PPI MoM (Feb), Retail Sales MoM (Feb)
As uncertainty continues to be the order of the day, the near-future remains a volatile one.
It’s going to be extremely tricky but interesting to see how the local unit and its emerging currency peers fare in the early part of this week.
It is another big week incoming. We’ll be watching how it pans out with interest, with some key levels needing to be broken to confirm our current preferred outlook for the Rand against the Dollar, Euro and Pound.
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