By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
A better landscape for the upcoming MPC deliberations
The Monetary Policy Committee (MPC) is set to meet again next week and will make an interest rate announcement on Thursday. Once again, the MPC is expected to keep interest rates unchanged, however, the pending interest rate cutting cycle is starting to come into view and the probability of an earlier start has increased. In the United States (US) the Fed's rhetoric has become less hawkish, global risk sentiment has improved, South Africa's (SA) political uncertainty has subsided, and inflation is projected to be more benign a year from now. While near-term interest rate expectations have improved, our view on high-for-long rates in the medium term is upheld. Let's unpack.
At the time of the previous MPC meeting, SA citizens had just cast their vote for the national and provincial governments, and political uncertainty was elevated. Fortunately, the rand had already started recovering ahead of the elections and, alongside relatively stable oil prices, projections of slower fuel and imported price inflation supported an earlier stabilisation in overall inflation. The global picture had started revealing divergence in central bank decisions, with some emerging and developed market policy rates being lowered ahead of the Fed. This not only highlighted faster tightening of emerging market monetary policy, having more accurately anticipated the post-pandemic inflation surge, but a recognition of diverging economic outcomes as well. While the US has experienced resilient economic outcomes and sticky inflation, regions that were more vulnerable to accelerated supply-side price pressures had started to foresee more stable inflation and were in a better position to ease the restrictiveness of policy.
Since then, we have had a 25bps cut by the European Central Bank (ECB) and the Bank of England (BoE) is expected to cut rates next month. We have also seen softer data from the US, allowing the Fed to shift to a less hawkish stance. While comments from the Fed have emphasised the need for more confidence in the inflation trajectory and has not been definitive on the timing of the first cut, expectations are that it will happen in September, followed by another cut in December. This will be supportive to riskier assets
On the local front, the announcement of Cabinet under the Government of National Unity (GNU) has been received with optimistic caution. There has been more participation in local financial markets and expectations for a gradually improving operating environment should support confidence. However, unified policy remains key to driving structural investment growth. That said, we still believe that the rand remains on a recovery path, despite its usual volatility, and should entrench the South African Reserve Banks's predictions that inflation will stabilise around the midpoint in 2Q25. The latest reading on surveyed inflation expectations1 also shows that inflation is anticipated to be slower than previous expectations across the medium-term horizon. We are aware that these expectations, at around 5% on average, remain above the MPC's preferred 4.5% target, but salary growth expectations of 4.9% on average suggest that compensation will barely manage to keep up with inflation and passthrough should be limited.
Comparing the landscape at the time of the May MPC meeting and the upcoming one highlights improved conditions. However, caution should prevail. Cutting ahead of the Fed may slow the recovery in the rand, especially with ongoing jitters around the stability of the GNU. After local interest rate expectations had been pushed-out and scaled down ahead of the elections, the Forward Rate Agreement (FRA) curve, as at the end of June, indicates more market optimism. The first cut is expected in September, we think November, and most think next week could be uneventful but let's see how it goes.
Week in review
Total mining production, not seasonally adjusted, remained flat (0%) in May compared to the same month last year, falling short of Reuters' consensus prediction of a 0.7% y/y increase. Seasonally adjusted output fell by 0.6% m/m, partially reversing the 0.8% expansion recorded in April. For the three months ending in May, output was down by 0.8%. This suggests that the mining sector's gross value added could, depending on the June data print, again drag GDP growth in 2Q24. This clouds our expectations for a GDP growth rebound following the 0.1% contraction in 1Q24.The weakness in mining output persists despite easing energy constraints, with the country having observed over a hundred days without load-shedding. This suggests that a combination of negative factors, including a stable yet unsupportive external environment and low commodity prices on average, may be at play.
Total manufacturing production, not seasonally adjusted, declined by 0.6% y/y in May, following a downwardly revised 4.9% increase (previously 5.3%) in April. The outcome was worse than Reuters' consensus prediction of a 2.4% increase. Seasonally adjusted output fell sharply by 3.2% m/m, partially reversing the 5.2% monthly increase in April. This aligns with the manufacturing PMI business activity index, which fell deep into contractionary territory in May, reaching 38.1 points from 57.2 in April. Worryingly, the business activity index contracted again in June, indicating that output likely weakened further at the end of 2Q24. For the three months ending in May, output was down by 0.4%, suggesting that the manufacturing sector, pending the June data, could again drag GDP growth in 2Q24.
Week ahead
On Wednesday, data on retail sales for May will be released. In April, retail sales exceeded expectations and grew by 0.6% y/y, albeit down from 2.3% in March. Volume sales increased across five out of the seven types of retailers, led by spending at Pharmacies (4.1% y/y) and Furniture shops (5.6%). On the opposite end, volumes declined among Food and beverages (-1.1%) as well as Hardware retailers (-1.7%). Seasonally adjusted sales also increased by 0.5%, down from 1.3% in March, marking a decent start to 2Q24. That said, consumer spending should remain relatively subdued given the persistently high costs of living and low consumer sentiment.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 11 Jul | SA | Mining production % m/mI | May | -0.6 | 0.8 |
| SA | Mining production % y/y | May | 0.0 | 1.4 | |
| 4 Jul | SA | Manufacturing production % m/m | May | -3.2 | 5.2 |
| SA | Manufacturing production % y/y | May | -0.6 | 4.9 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 17 Jul | SA | Retail sales % m/m | May | -- | 0.5 |
| SA | Retail sales % y/y | May | -- | 0.6 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 81,093.99 | -0.1% | 6.6% | 5.9% |
| USD/ZAR | 18.00 | -1.4% | -3.2% | -0.7% |
| EUR/ZAR | 19.56 | -0.9% | -2.0% | -3.1% |
| GBP/ZAR | 23.25 | -0.2% | -1.9% | -1.3% |
| Platinum US$/oz. | 1,007.34 | 0.6% | 5.2% | 5.5% |
| Gold US$/oz. | 2,415.48 | 2.5% | 4.2% | 23.4% |
| Brent US$/oz. | 85.40 | -2.3% | 4.2%% | 6.6% |
| SA 10 year bond yield | 10.29 | -2.2% | -7.9% | -7.6% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.9 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.1 | 5.0 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.0 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.6 | 4.7 | 4.7 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.30 | 17.50 | 18.30 |
