Warsh's hawkish words

Iran update

Over the weekend, Iran vowed to stand firm against US sanctions. Iran maintains that it has control over the Strait of Hormuz and will use a combination of diplomacy and military action against sanctions.

This morning, there was renewed military action between the US and Iran. This is the first military action in a month. Oil prices were up just under 1% at the time of writing.

Both Brent crude and West Texas Intermediate (the US oil price benchmark) remain well below their April peaks. The question now is whether the lower prices compared with April will be enough to lead to energy price disinflation?

There remains a material risk regarding refined products, with crack spreads (the difference between crude and refined product prices) elevated. This has implications for downstream applications.

It's becoming more than just a Strait of Hormuz issue. The Rhine plays an important role in global supply chains, and low water levels remain an issue. Rainfall last week was helpful, however. It's a similar problem for the Panama Canal, with below-average rainfall affecting Lake Gatun, which supplies water to the canal's lock system.

The net result is multiple global supply chain disruptions; this is playing out more meaningfully through shipping costs, which are at their highest levels in about two years.

Fed chair delivers a "hawkish" statement at Jackson Hole

Fed chair Kevin Warsh delivered his maiden statement at the Jackson Hole symposium on Friday. The key takeaways from his speech are that the labour market has been consistently strong (at "full employment") and that inflation remains elevated. That said, he did not give clear guidance on where monetary policy is heading.

The US dollar responded immediately, rising 0.5% from the start of the meeting to Friday's close. The probability of a quarter percentage point (25bps) interest rate hike at the September meeting is now at 58.3%, while two 25bps rate hikes are expected over the coming year.

This marks a major shift in expectations. On Thursday last week, only one 25 bps hike was expected over the next year. 

US PCE accelerates, but the devil is in the details

Last week, the Bureau of Economic Analysis (BEA) released personal consumption expenditures (PCE) inflation data for the US. Headline PCE inflation rose 3.7% year-on-year, above the consensus of 3.6%.

The dollar responded quickly, rising 0.3% amid rising expectations of a Fed hike to cool inflation pressures (this was before the Jackson Hole statement).

The core number was 3.3%, in line with the consensus forecast. Core PCE inflation is the Fed's preferred measure of inflation, which strips out volatile components. 

The three-month annualised number moderated to 3.1%, incrementally closer to the Fed target. Month-on-month inflation will be key in setting the trajectory.

Should month-on-month core PCE inflation normalise towards the 20-year median, then it will likely be below 3% in the first quarter of next year.

The Bloomberg consensus forecast for core PCE inflation in 2026 was slightly revised down to 3.2%. For average core PCE inflation to be 3.2% in 2026, this implies a normalisation of core PCE to the 20-year median, with PCE potentially trending toward 3% by year-end.

US personal spending moderates

Even as PCE has remained elevated, personal spending moderated (a potential disinflationary force for PCE) in July and was below personal income growth for the first time since the beginning of the year.

The consistency with which personal spending has exceeded personal income growth remains a key concern for the broader consumer spending outlook. This comes at a time when interest paid as a percentage of personal income remains elevated. An increasingly precarious rates picture may affect interest costs, crowding out spending.

Nondiscretionary spending may continue to crowd out discretionary spending if gas (petrol) prices remain high.

US midterms – a Democrat sweep is looking more likely

According to odds by Polymarket, the prediction market platform, a Democratic Party sweep (a majority in both houses) is increasingly likely in the midterm elections in November.

According to the Pew Research Center, the state of the economy is the most important issue for voters heading into the midterms. A slowing economy and elevated inflation may provide a headwind for the Republicans. 

There's an economy-wide profit surge in the US

The latest data from the Bureau of Economic Analysis show that corporate profit growth is economy-wide, with quarter-on-quarter growth of 9%. The same is true for nonfinancial corporations. 

SA government revenue falls

Last week National Treasury released revenue and expenditure data for July. Revenue numbers were slightly lower than for July last year. Even so, with a buoyant number in June, the fiscus may collect around R80bn in additional revenue at the current run-rate this year. The next few months' intake will be critical, in addition to the all-important months of December, February and March. 

Rand strengthens, then weakens

The rand was strong last week, consistently below the R16/$ level. However, remarks by Fed chief Kevin Warsh at Jackson Hole on Friday led to a weakening to around R16.15/$ against the dollar.

The weakness was broad-based across currencies, and the rand is still outperforming the currencies of other emerging market commodity exporters. 

SA private sector credit extension slows

After reaching multi-year highs earlier this year, private-sector credit extension has tapered off, reflecting an increasingly difficult economic environment. 

Is AI spending driving up yields?

There has been a spending boom in capex for artificial intelligence (AI) infrastructure, such as data centres, and the trend is expected to continue.

The key question arising is how the capex will be funded, and its implications for financial markets.

There has been a lot of debate around whether the expected AI capex requirement will compete for capital with sovereigns in the debt market as corporates shift away from using their free cash flow to fund the capex. The implication is that this will lead to higher long-bond yields, a potential issue given the level of sovereign long-bond yields.

For the argument to hold water, the scale of AI funding requirements would need to be comparable to sovereign funding requirements. According to the Bank of England's July Financial Stability Report, the scale of bond issuance by hyper-scalers has been increasing.

A counterargument is that the AI build-out is not driving up yields, but the US fiscal situation is. Unlike the 2000s tech bubble, nonfinancial corporates are currently net savers. 

*Chris Holdsworth is on leave. Osagyefo Mazwai, investment strategist at Investec Wealth & Investment International, is filling in for him this week.