Market commentary

COVID-19 news has slowly faded into the background, as focus has instead shifted to the global economic recovery – with particular attention on the world’s two biggest economies, China and the US. As we come to grips with the full effect of worldwide lockdowns, one thing has become apparent: there will be no V-shaped recovery.

 

FED SHIFTS ITS INFLATION POLICY

The US Federal Reserve (Fed) claimed the spotlight this week as the annual Jackson Hole symposium kicked off on Thursday. While the annual symposium has always been a significant event on the economic calendar, market attention this year intensified dramatically. As the world’s largest economy, the US is a significant contributor to global economic growth. It is only fitting, then, that the Fed’s policies and views play such a crucial role in global economic and financial performance.

A dovish Fed was largely expected, and additional stimulus remains almost a certainty. However, the Fed has now also adopted on a new strategy of inflation targeting. Some of the highlights of Chairman Jerome Powell’s address included:

Low interest environments have left the Fed with little room to take aggressive action during an economic downturn. 

  • Persistent low inflation, even during robust labour markets, has remained a concern.
  • To ensure that the Fed has sufficient firepower during future potential downturns, the new policy approach will allow inflation to run above 2% over time. Updating its monetary policy will see the Fed focus on cultivating a strong labour market while keeping inflation steady.
  • The Fed will engage in a monetary policy review approximately every five years to ensure a robust and dynamic policy approach.

Powell also emphasised the role of all governmental spheres to support the labour market, and in turn assist in alleviating racial inequality within the economic ranks of society.

The dollar initially weakened during his speech, but US treasury yields climbed and the dollar strengthened again after the address. Meanwhile, US stock markets opened at a record high, as accommodative monetary policy continued to boost capital markets. Market focus largely remained on additional stimulus, although Powell warned of a stop-start economic recovery and the unfortunate reality that the next few years will be challenging for many as the economy struggles to regain momentum.

Another major event making global headlines this week was the refusal of European countries such as Greece and Malta to allow refugees to port. This decision has left many refugees stranded at sea, and could once again spark a humanitarian crisis.

Turning east, while trade tensions seemingly eased this week, military tensions stirred some nervousness on Thursday as China fired ballistic missiles into the South China Sea in an apparent warning to the US. Tensions in the disputed sea lane remain elevated, and the missiles were reportedly a response to US aerial activities in a no-fly zone.

Crossing over to data, the following releases are worth noting:

US:

New home sales rose by 13.9% month-on-month in July

  • Durable goods orders increased by 11.2% month-on-month in July
  • Q2 GDP declined by 31.7% quarter-on-quarter 
  • Jobless claims declined by 98,000 this week to just over 1 million

CN:

Industrial profit gained 19.8% year-on-year in July

 

NEW BILLS PROPOSED IN SA

In a jam-packed parliamentary session on Thursday, the announcement of four new bills, the COVID-19 response, and the contentious corruption issue all made their way onto the agenda. The four proposed bills include:

Changes to electoral legislation aimed at increasing the efficiency of the IEC

  • The Sectional Titles Amendment Bill, which is aimed at providing clarity and additional protection to tenants and other property leaseholders
  • The Children’s Amendment Bill, which seeks to enhance the rights of single fathers, as well as address additional adoption and surrogacy matters 
  • The Cannabis for Private Purposes Bill, which outlines cannabis possession and cultivation rules for private use.

On the topic of corruption, President Ramaphosa opted to highlight the silver lining in the corruption scandal which took place during the COVID-19 pandemic. Ramaphosa noted that the scandal has provided government with an opportunity to overhaul its procurement system by making use of block chain and AI to root out any further corruption related to government tenders.

Meanwhile, ANC spokesperson Pule Mabe this week raised concerns over factionalism within the ruling party. In response to a letter by fellow ANC member Andile Lungisa, which called for the investigation of President Ramaphosa with specific focus on his 2017 campaign, Mabe accused Lungisa of fighting factional battles.

Economic data this week included CPI and PPI. Inflation ticked up to 3.2% year-on-year in July, making its way back to the lower end of the target band, while PPI gained 1.9% year-on-year for the same period.

The rand made some strides this week in light of the weaker dollar, although it failed to gain momentum below the R16.70/$ mark. By Thursday afternoon, the rand was trading back above the R17.00/$ mark.

 

LOOKING AHEAD

The shift in the Federal Reserve policy to tolerate higher inflation and to improve employment assisted US treasury yields and saw the dollar gain momentum, putting the rand under pressure during the late trade yesterday.

From a currency perspective, the rand will continue to take its directional cues from the global landscape, and risk sentiment. Our focus now shifts to the SARB MPC meeting, where interest rates will be largely determined by the local economic outlook, as well as the upcoming Federal Reserve interest rate decision, which are both due to take place in September.

The following data is due for release in the week ahead:

Monday:

UK bank holiday

  • CN composite PMI
  • Local trade balance

Tuesday:

  • CN Caixin manufacturing PMI
  • EU manufacturing PMI, CPI and unemployment
  • UK manufacturing PMI
  • Local vehicle sales
  • US manufacturing PMI

Wednesday

  • EU PPI

Thursday:

  • CN Caixin services PMI
  • Local Std Bank PMI
  • EU composite PMI and retail sales
  • US Challenger job cuts & initial jobless claims

Friday

  • US unemployment & PMI

The rand traded to a low of R17.10/$ in the overnight session but starts the day at R16.99/$, R20.10/€ and R22.45/£.

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