South African equities and bonds last week moved uncertain and sideways after a strong rally the previous week.
The rand exchange rate traded in a narrow band against the US dollar, between levels of R17.26 and R17.36 last week, amid uncertainty around the next step of the US Federal Reserve on interest rates as the world awaits the next US inflation and job data. The currency improved in late trade on Friday afternoon, to R17.24 to the dollar.
The all share index on the JSE almost followed the same pattern as equities moved mostly sideways.
The index lost a mere 406 points (0.5%) for the week, mostly due to volatile gold, platinum and financial shares. Naspers, however, recovered sharply last week and gained 23.3% in intraday trade over the seven days. The gold price lost $10 (R173) last week, trading on $1 754 on Friday afternoon.
The Brent oil price lost $6 last week and traded lower than $87 on Friday ($86.44) per barrel. The combination of the lower oil price and the stronger rand should benefit fuel prices at the beginning of December. Lower global energy prices also may play a key role across the world, stopping the upward interest rate cycle, and might prevent a deepening of recession in many countries.
According to the Central Energy Fund (CEF), last Thursday, the price of diesel was 68c a litre over recovered since the previous diesel price announcement. This was at an oil price of $69 per barrel. The expected price increase for 95 petrol at the beginning of December also decreased sharply last week, from 120c under recovered to 73c under recovered last Thursday.
Given the sharp decline in the oil price last Thursday and Friday and the stronger rand at the close on Friday, one can expect that the under recovery for petrol should continue to improve over the next 10 days and may also lead to a reduction during the beginning of December.
On the global front, the inflation rate for the UK, the Eurozone, Canada and Japan was released inflation rate, however, shot up to 11.1% last week. This rate is the highest since October 1981, as prices for housing and household services (65.7%), gas (128%) and electricity (65.7%) recorded massive increases since October last year.
The Eurozone inflation rate was 10.6% in October, up from 9.9% in September. Canada’s inflation rate remained constant, on 6.9%, while the inflation rate for Japan climbed to 3.7% in October, up from 3.0% in September. This is in contrast to the US inflation rate that came down from 8.2% in September, to 7.7% in October, and a fourth-consecutive month of decline.
It seems that the recession threat for the US is subsiding. Or that the Fed is comfortable of a temporarily decline in economic activity and higher unemployment as it raises interest rates further.
The raise in US retail sales last month, by 1.3% over the previous month, indicates that the US economy remains strong, and it might put pressure on wages to raise further, resting the case for the Fed to increase its Fed rate, when it meets again during the middle of December (13-14).
Domestically this coming week, the release of South Africa’s leading business cycle indicator will be released by the SA Reserve Bank on Tuesday. It is expected that the indicator had improved strongly, from -2.3% in June to 0.3% in September.
On Tuesday, the Monetary Policy Committee (MPC) of the Reserve Bank will start it bi-monthly meeting and it will announce its interest rate decision on Thursday afternoon.
It is expected that the MPC is going to increase its repo rate, with 75 basis points, to 7.0%. This will push the bank’s prime rate up to double figures (10.5%). On Wednesday, Statistics SA will announce the inflation rate for October (increase in the CPI year-on-year). It is expected that the rate had decreased only slightly, from 7.5% in September to 7.4% in October, and is much higher than upper inflation target point of 6.0%.
On global markets, the release of the Fed’s Federal Open Market Committee minutes of its November meeting on Wednesday, will draw most attention. US durable goods orders for October will be released on Wednesday and is expected to remain positive, at 0.4% growth on the previous month.
Various housing numbers for the US will also be announced this week, and the level of the US gas and oil stock on Thursday, as well as the weekly jobless claims figures, will set sentiment on global financial markets.
On Thursday, Germany’s business climate index for November will focus on the sentiment in Europe, and its gross domestic product growth rate numbers for third quarter that will be released on Friday will also be of importance.
Chris Harmse is an economist of Sequoia Capital Management.
BUSINESS REPORT