Developments since September are likely to shift the balance of risk assessment from a neutral to a higher stance. This reflects the evolving global political and economic landscape: The MPC could adopt a more guarded tone at the November MPC meeting. In the September MPC meeting, the MPC statement noted that “the case for caution is further bolstered by the difficult and unpredictable geopolitical environment, with risks of inflationary shocks through trade restrictions and supply chain disruptions, among other things”. Some of the dynamics will continue to unfold but the known “unknowns” have become more prominent.
Investec for Business has observed that the Red Sea crisis, along with the consequent rerouting of vessels around the Cape of Good Hope, has resulted in an increase of approximately 20 days in shipping times. This delay in transit must be accounted for in delivery schedules. For instance, goods from China that previously took four weeks to arrive are now taking nearly eight weeks. As a result, the buying cycle has effectively advanced.
US politics - navigating the incoming Trump administration policies in a world of high uncertainty: The incoming Trump administration received a strong mandate to implement its campaign policy platform, having achieved a clean sweep in the Presidency (with Trump winning both the popular and electoral college votes), the Senate, and the House of Representatives. Policies related to trade tariffs, immigration reform, industry deregulation, corporate tax cuts, and foreign policy initiatives are expected to have significant domestic and global repercussions. While some of these policies may stimulate economic growth, others could lead to higher inflation and reduced growth in the medium term. The sequencing of these policies will be critical, particularly as inflationary measures—such as tariff announcements and deportations—are anticipated to emerge around mid-2025. Trump's transactional leadership style raises questions about whether tariffs will be primarily used as leverage to negotiate better deals for American companies or if they will be sharply increased, potentially provoking retaliatory measures.
The initial effects of Trump's anticipated policies and cabinet appointments have already begun to reverberate in global financial markets, which are now awaiting the Senate’s confirmation. The US dollar index and equities have rallied, rising by 2.1% and 4.3%, respectively, while US Treasury yields have adjusted to reflect a deterioration in fiscal metrics and expectations of higher inflation. This shift indicates a market response to the potential implications of the incoming administration's economic strategies, highlighting the interconnectedness of domestic policy decisions and global financial conditions.
Fig 1: Financial assets return: 31/10 to 15/11: Bitcoin/S&P500 > EM FX> EM equities
Source: Bloomberg, ICIB
Fed thinking - The debate about how aggressive/gradual the FOMC would be willing to cut interest rates and where the terminal rate could be, received more colour this week: A takeaway from Chair Powell’s keynote in Dallas was that the Fed is in no hurry to cut rates, which led to a reduction in the implied probability of a 25bps rate cut from 80% to 60%. His remarks signalled that the Fed remains data-dependent and is too early to alter its views, even amid heightened policy uncertainty. Chair Powell noted that the cooling in the labour market has mitigated a source of inflation risk and acknowledged that inflation may fluctuate within recent ranges, with housing services inflation not yet fully normalised. In response to the unexpected rise in Producer Price Index (PPI) inflation from 1.9% to 2.4%, he remarked that “today’s reading was slightly more of an upward bump than we had expected, but I would say the broader trend, if you look back over the last 18 months, is still intact.” It is conceivable that the Fed may pause in cutting rates between meetings.
Tweaking the SARB’s November inflation forecast: We do not anticipate significant revisions to the South African Reserve Bank's (SARB) inflation forecast. However, the near-term forecasts for Q3 2024 and Q4 2024 may be adjusted to approximately 3.6% (compared to ICIB's estimate of 3.4%) and 4.6% (versus ICIB's estimate of 4.5%). This adjustment can primarily be attributed to the lower-than-expected inflation outcome for August, which was recorded at 4.4% (forecasted at 4.6%) and was not reflected in the SARB's September forecast.
Gradual rate cuts to continue as monetary policy remains restrictive: The MPC is likely to proceed cautiously, with a 25bps rate cut anticipated at the November MPC meeting. Monetary policy remains restrictive, with the policy rate adjusted for a 12-month forward inflation rate of 4.5% estimated at ~3.5%. This supports the potential for an additional 75bps of rate cuts, aligning with the SARB’s neutral policy rate of 7.0% to 7.25%.
Market dynamics: The US risk-free rate has increased, and the slope of the US Treasury yield curve has turned positive in September for the first time since mid-2022, with yields rising by nearly 80bps across the maturity curve. Drivers have been stronger incoming data, a repricing of rate expectations and fiscal concerns, pushing both the breakeven inflation rate and term premium higher. South African interest rates, however, have traded remarkably well, which we ascribed to inflation dynamics and interest rate expectations. The SA/US 10-year interest rate differential has receded to 5.93%, the lowest since 2018 when South Africa was eligible for inclusion in the JPMorgan GBI-EM. The dominant drivers, however, as the improved inflation outlook which could allow for a further 75bps of rate cuts (with our forecast aligned with the FRA rate expectations), with the 10-year real yield at 6.3%, when adjusted for an average inflation rate of 4.5% in 2025. The disconnect between the sharp correction of the ZAR and interest rate expectations can be ascribed to the starting point of the ZAR in the SARB’s inflation forecast, which is unlikely to lead to a meaningful upward revision to the outlook if the ZAR settles in a trading range of R17.80/$ to R18.30/$. Our fair value for the 10-year yield, which incorporates fiscal dynamics, is at 10.4% and SA/US interest rate differentials and a higher US risk-free rate. However, with the money market rate set to decline further, it is possible for the 10-year yield to rally by a further 30bps.
Fig 2: Disconnect between ZAR and SAGB yields (R2030): R/$ starting point in SARB’s September CPI inflation forecast at R8.05/$
Source: Bloomberg, ICIB