Local assets rally as inflation eases

• SA investors bet on the Fed easing up on rate hikes and announcing a smaller rise next month

Local assets rallied on Friday, adding to the previous session’s strong gains as investors bet that cooling inflation in the US may see the Federal Reserve ease up a little on aggressive rate hikes. After trading at its weakest levels in two years just a month ago, the rand broke below R17.30/$ for the first time in two months on Friday.

Local assets rallied on Friday, adding to the previous session’s strong gains as investors bet that cooling inflation in the US may see the Federal Reserve ease up a little on aggressive rate hikes.

After trading at its weakest levels in two years just a month ago, the rand broke below R17.30/$ for the first time in two months on Friday, while the local bourse rallied to its best level in almost seven months.

US consumer inflation for October came in at a betterthan-expected 7.7% on Thursday

— the market consensus was 7.9% — and the slowest pace in nine months.

Core inflation, which excludes volatile food and energy prices, printed at 6.3%, also below the consensus of 6.5%.

“The downside surprise in US headline and core CPI inflation for the October data provides scope for risk appetite to improve and risk assets to rally further,” said Matrix Fund Managers economist and macro strategist Carmen Nel.

“The market is already discounting a decline in the size of the hike to 50 basis points (bps) in December.”

While the federal open market committee indicated at its November meeting interest rates may rise in smaller increments — as some parts of the economy were starting to show signs of slowing — Fed chair Jerome Powell said more increases were likely until the central bank considers a pivot.

In September, officials projected that rates would rise to 4.5%, but market expectations are for a terminal rate of more than 5%. “I was quite surprised by the extent of the move in markets, given that the inflation numbers only slightly beat expectations,” said Jacobus Brink, head of investments at alternative fund manager Novare Holdings, saying “the Fed has reiterated time after time that it wants to see a string of cooler numbers before it decides to move and that they are dedicated to fighting inflation.

“While the rally in global stock markets, including the JSE, could still have some legs as investors become more willing to take on risk, there is a chance that Fed officials could begin talking the slower inflation numbers down,” added Brink.

Old Mutual Wealth investment strategist Izak Odendaal echoed Brink’s cautious optimism, saying that one betterthan-expected inflation report was not enough by itself to force a rethink of the Fed’s policy stance. “We’ll need a few more of these, plus more evidence of weakening economic activity in the US.

“While a peak of around 5% in the Fed’s interest rate is now more or less priced in, what is not clear is the extent to which that 5% rate will hurt the economy in the subsequent several quarters,” said Odendaal, adding that the US might still be heading towards a recession.

“For emerging markets like SA, though, the fact that a peak in the Fed’s hiking cycle is in sight takes some pressure off central banks.”

On Friday, the JSE all share index rallied 3.12% — the biggest one-day jump since the previous Friday when markets speculated that China would ease its zero-Covid policy — to 73,235 points, while the rand firmed 0.62% to R17.2542/$.

Tech stocks, which have been the hardest hit this year, led the gains in most markets, with Naspers and Prosus among top gainers on the local bourse, gaining 8.42% to R2,387.97 and 9.33% to R987.82.

In the bond market, yields on SA’s 10-year notes, which move inversely to the price, fell 11 basis points to 10.19% on Friday, having reached their lowest level since mid-August on Thursday following the US inflation report.

Looking ahead, analysts say the Reserve Bank is likely to sound less hawkish at the November monetary policy meeting, but would be cautious to keep its options open should the need arise to keep hiking rates in the first half of 2023. The monetary policy committee is due to announce its latest decision on November 24, roughly a year after it began raising rates following the record lows reached during the pandemic.

If the Fed does begin to sound dovish, then the slowdown in growth and the lower Fed funds profile would erode some of the dollar’s gains, said Nel.

“This would ease conditions for emerging markets, lead to stronger emerging-market currencies, lower inflation, less hawkish monetary policy, and better emerging market growth.”

She did, however, warn that rising tailwinds may be offset by existing and potential headwinds. “SA’s political outlook remains highly uncertain, while potential growth is constrained by the power crunch and logistical challenges [relating to Transnet].

“The ANC election outcome could be adverse for markets with the expectation that [President Cyril] Ramaphosa will win re-election, but not to the extent to be in full control of the other five members of the top six.”

THE MARKET IS ALREADY DISCOUNTING A DECLINE IN THE SIZE OF THE HIKE TO 50 BPS IN DECEMBER