Market dynamics
The New Year has started with heightened volatility in bond, FX and equity markets, setting the tone for a challenging year requiring careful and thoughtful navigation of complex geopolitical and national politics and economic uncertainties. Key factors such as risk sentiment, Federal Reserve policy, the terminal rate, US risk-free rates, and growth differentials between the US and other regions will significantly impact South Africa's interest rates and the (ZAR). These dynamics will influence foreign capital flows on the one hand and trade flows and the terms of trade on the other. In South Africa, a big focus of the GNU should be on creating a growth environment that can create jobs. This could help to contain the risk premium on SA assets at a time when uncertainties may keep the global cost of capital elevated. Other developments that need to be read at an inflection point are reforms at Transnet, with the financial model of paramount importance, and dealing with the water and local authority crisis.
In the coming months, critical developments are expected, with January poised to set the stage. Notable events include the release of robust US labour data, upcoming US inflation figures, and President Trump's anticipated signing of presidential decrees shortly after his inauguration.
Higher UST risk premium spreads to the rest of the world's sovereign bonds: US Treasuries bear steepened on a higher term premium. The “real” rate rose by more than the inflation breakevens and sparked a wider selloff in global sovereign bond yields, raising government borrowing costs. The elevated term premium reflects the uncertainty surrounding President Trump's pro-growth policies, which include deregulation measures and an extension of tax cuts, occurring in the context where the economy has demonstrated resilience and appears to be reaccelerating. Moreover, the administration's fiscal strategies, such as extending or cutting taxes despite a high budget deficit of 6.5%, which is expected to be partly funded through tariff increases as they need to be very high to cover the deficit, add to the uncertainty. The deportation of immigrants remains a priority, and recent labour market data indicates that solid demand for labour has not dissipated.
Fig 1 US 10yr real yield has raised the term premium and caused a selloff in global bond markets

Source: Bloomberg
FOMC interest rates and the 2% inflation target: Friday's jobs report and the preliminary Michigan inflation expectations report holds implications for R-star and the Fed’s credibility (if longer-term inflation expectations rise consistently) The current financial landscape raises questions about the restrictiveness of monetary policy, especially as financial conditions have remained relatively easy. The FOMC's decision to cut the policy rate by 25bps in December, while simultaneously raising its core PCE inflation forecast from 2.2% to 2.5% for 2025, has added to the uncertainty about r-star and disagreement between FOMC members about how restrictive or not the stance is. Whether the FOMC is aiming for a 2.0% target or is willing to tolerate inflation around 2.5% remains unclear. Notably, four members voted against the rate cut, indicating differing views within the committee. This evolving landscape has rendered the Fed's terminal rate outlook highly uncertain. The upcoming CPI print for January will be critical in the context of the global bond market selloff.
Trump's policy agenda: The incoming Trump administration's policy agenda is set to unfold in a world that is entering a new phase, characterised by elevated uncertainty regarding which of his campaign policies will be enacted and how they will serve as bargaining tools in the evolving global order. Trump is widely viewed as a political disruptor, raising questions about whether his contributions will have a positive or negative impact, particularly in the context of a divided United States and a shifting international landscape. The presidential decrees expected to be signed shortly after his inauguration on January 20 will provide initial direction for his administration's priorities. However, with a slim majority of 219 vs 215 seats in Congress, there is a significant risk that Trump may struggle to secure support for his agenda. The potential for losing the majority, especially if key Republicans do not align with his policies, adds to the uncertainty. As such, important policies will likely be pushed early in Trump's tenure, potentially through a single comprehensive bill encompassing multiple initiatives. This high-risk approach could lead to significant volatility in both domestic and global markets, depending on the reception of these policies by Congress and the public.
Currency movements: The USD index has appreciated by 5.1% from November to January 10, leading to a notable depreciation of EM currencies. JP Morgan's EM currency index has declined by 4.5%, with the ZAR experiencing a significant drop of 7.8%. The low liquidity levels in December, combined with the high beta nature of the ZAR, have eroded the currency's post-election gains, resulting in a closing exchange rate of R18.84/$ at the end of the year. Recent developments in the US markets have further contributed to the ZAR's weakness, with the currency hitting R19.10/$ on Friday, marking its lowest level since April 2024. In response to these currency pressures, EM central banks, including the SARB, have maintained a restrictive monetary policy stance since 2023, primarily due to the currency risks associated with repricing US rate expectations. The frequent divergence followed by corrections between US implied rates and the Fed's median dot plot has increased currency volatility, particularly observed in December and the New Year.
The outlook for the CNY is critical for EM currencies, including the ZAR, particularly in the context of ongoing tariff uncertainties. There is speculation that the PBOC may allow the CNY to depreciate further if tariffs are increased, which could lead to capital outflows reminiscent of the situation in 2015 when the currency was devalued. In response to the recent depreciation of the CNY, there were two significant efforts last week aimed at stabilising the currency namely drain liquidity in Hong Kong to raise demand for offshore yuan and suspend government bond purchases.