Financial markets in South Africa retreated yesterday after the US Federal Reserve (Fed) remained hawkish about tapering monetary policy as inflation in the world’s largest economy was forecast to remain stubborn above the target range for longer.
The JSE all share index was 0.6% lower at 79 024 index points while the rand plunged by 1% to R18.45 against the US dollar by 5pm yesterday on the back of the strengthening greenback.
The JSE and the rand also weakened as the US economy showed resilience as the S&P Global Purchasing Managers’ Index (PMI) smashed expectations and pointed to robust economic growth in the US private sector activity and a fresh acceleration in inflationary pressures in May.
However, it was the Federal Open Market Committee (FOMC) minutes that had driven the risk-off sentiment in domestic market as investors looked for safe havens amid weakening emerging markets stocks and currencies.
“Concerns of stubborn US inflation dampened any hopes of lower interest rates in the near future,” said Bianca Botes, director at Citadel Global.
“The Fed, again, expressed its disappointment with the slow rate of disinflation and vowed to keep rates higher for longer to get inflation closer to its 2% target.”
The lack of significant progress on inflation returning to target in the US was a dominant theme in the minutes, and has halted the rand’s recent progress towards R18/$.
“Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the committee’s 2% objective,” read the summary of the FOMC minutes.
“The recent monthly data had showed significant increases in components of both goods and services price inflation.
“Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2% or reducing policy restraint in the event of an unexpected weakening in labour market conditions.”
Investec chief economist Annabel Bishop said the FOMC members’ concerns over inflation had knocked back the growing risk-taking in the markets which had seen the rand gain over the course of the month of May.
“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook, with no indication of any monetary easing yet likely in the near term,” Bishop said.
“Both the central banks in the US and South Africa, the Federal Reserve Bank and South Africa’s Reserve Bank respectively, continue to communicate their firm focus on returning inflation to target, and delaying rate cuts as inflation proves stubborn.
“However, South Africa’s financial market indicators, particularly bond yields and the rand, gain from US interest rate cutting cycles, which drive heavy risk-taking in financial markets, and so flows into emerging markets portfolio assets.”
Indeed, the South African Reserve Bank is likely to keep rates unchanged next week when it decides on monetary policy for May as headline inflation eased from 5.4% in March to 5.3% in April, far from its 4.5% midpoint of the 3–6% target range.
BUSINESS REPORT