Interest rates forecasts do little to calm markets

ALTHOUGH central bankers, economists and market analysts remain bullish that interest rates will not increase soon around the world due to sharp increases in inflation rates, share prices on the JSE remained under pressure last week.

Equities on the JSE continued on the volatile path with no new direction as various indices were still under pressure, as were the rand and bond rates.

Various US Federal Reserve officials in their monthly speeches last week were bullish that US inflation would start to subside and that interest rates would remain at their current lowb levels for at least another two years.

Governor Lael Brainard told the Economic Club of New York that the US stimulation programmes were still on track and that growth this year was expected to be the strongest in decades.

Equities on Wall Street reacted in a bullish manner to these remarks and the S&P 500 index on Friday traded at a new record high as share prices ended the week strongly.

US economic data released two weeks ago had also shown that the economy was recovering, and that consumer spending drove the upturn.

On the domestic front, however, share prices remained under pressure as prices of metals and other commodities were still volatile. Inflation fears and possible higher interest rates kept risk bearing investors awayb from equities.

South Africa’s consumer and producer inflation rates increased sharply during May. Although it is expected that the SA Reserve Bank would increase the repo rate at their next meeting in June, the possibility of sooner than later hikes is strong.

The CPI inflation rate increased from 4.3 percent in April to 5.2 percent in May, as food and non-alcoholic beverages (6.7 percent increase with a contribution of 1.2 percent to the total inflation rate), transport (15.3 percent rise, contributing 2 percent to the inflation rate), pushed prices higher.

Although the prices for diesel and petrol came down in May, the year-onyear increase for petrol was 40 percent and that of diesel 33 percent.

Prices at the factory gate (PPI) increased by 7.4 percent in May. It was the highest monthly increase in the last five years.

Given the weaker rand since the second week of June and the steady increase in the oil price, it is now expected that both petrol and diesel prices will increase at the beginning of July. Up to last Friday, the price for petrol was under recovered by 14 cents an litre and that of diesel by 18c.

On the JSE, the all share index last week gained 0.9 percent after its big fall of more than 3 percent the previous week.

The recovery in metal and mining prices led the Resources 10 index to win back 5 percent last week after it had lost 7.3 percent the previous week.

Financials also recovered some of its negative movement (-4.7 percent) the previous week and ended Friday 0.7 percent in the green. The Industrial 25 index shed 1.8 percent.

On the foreign exchange market, the rand recovered last week. The currency traded 21 cents stronger against the dollar on Friday evening at R14.09. Against the pound, the rand firmed by 16c to R19.60 and against the euro it had gained 15c to R16.83.

This week, Absa will release its manufacturing purchasing managers index for June on Thursday. The June new motor vehicle sales data will also be also be out on Thursday. Trade balance for May will be released on Wednesday.