The decision last Wednesday by the US Federal Reserve (Fed) to increase its bank rate to 5% was expected by many analysts and economists, although some felt that due to the current banking crisis they should have stayed their hand.
The Fed not only increased its Bank rate by 25 basis points, but also took an aggressive stance, indicating that the current interest rate cycle was far from its upper turning point.
Fed chairperson Jeremy Powell stressed that the Fed would continue to increase interest rates till US inflation was back on 2.0% (US inflation in February was 6.0%).
Powell said, “Rate cuts are not in our base case.” He also remained hawkish by adding that the Fed might increase rates beyond levels not expected.
Equity markets in the US surprisingly recovered last Thursday and Friday after the rate announcement, whereas across the globe stocks reacted negatively on the Fed’s rate decision and outlook.
On Wall Street, the Dow Jones industrial index traded 1.18% higher last week and the S&P500 gained 1.4%. The dollar also remained strong against most currencies. European bourses and the FTSE 100, in the UK, had big losses last Thursday and Friday after the Fed rate hike. The FTSE 100 lost 2.1% during the two days, and the Euro Stoxx index 2%.
The gold price as a safe haven against a possible US recession continued to increase sharply, reaching the $2 000 level last Thursday, closing on $1 976 (R35 904) on Friday. The price of this precious metal shot up by more than $50 per ounce over the past week. As a result, the Resource 10 index increased by 2.3% over the past seven days. The index, however, last Thursday and Friday alone lost 2.4% on the US interest rate hike.
The rand recovered strongly against the dollar last week, helped by the bullish gold and platinum prices, and some support from foreign buying of South African bonds. Last Tuesday the rand still traded at R18.60 to dollar, but since recovered to R18.17 over the weekend.
Although the all share index recovered by 3% the past seven trading days, it lost 1.3% last Thursday and Friday. It is expected to move more negative this week, especially if the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) also lifts its repo rate on Thursday.
At SARB’s previous meeting in January, the repo rate was increased by 0.25% to 7.25%, pushing the prime lending rate of commercial banks up to 10.75%.
Given the hawkish stance of the US Fed, as well as the increase in South Africa’s inflation rate to 7.0% in February, it is expected that another 25 basis points increase is likely to be announced.
On global markets the release of the inflation rate for February for the EU, as well as most countries in Europe, will be important. In the US, the announcement of the latest personal income and spending data for February will also draw attention. It is expected that personal income will have increased by 0.3% in the January number, much lower than the 0.6% monthly recorded the previous month. Personal spending is also expected to have grown by only 0.3% in February month on month, strongly down from the 1.6% increase in January.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT