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Inflation, the weaker rand and the high petrol price become worries

Dr Chris Harmse is an economist of CH Economics. Photo: File

Dr Chris Harmse is an economist of CH Economics. Photo: File

Published Nov 1, 2021


Foreign selling of bonds and equities on the JSE, reflecting some nervousness on the outcome of South Africa’s municipal elections yesterday, saw the rand depreciating strongly against the dollar, euro and pound.

Weaker precious metals prices also started to take their toll on the currency, as gold, silver, platinum, and palladium recorded big losses last Thursday and Friday. The currency lost 43 cents against the dollar last week, trading at one stage close to R15.30, but closed on R15.10.

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Against the euro, the rand ended the week also 43 cents weaker, on R17.64, and against pound sterling the currency traded 30 cents weaker than the previous Friday, on R20.86.

Foreign selling of bonds pushed the R186 up by 1.36 percent. World inflation fears are busy pushing most emergency currencies weaker, as interest rate hikes in the Developed World, or, at least, monetary tapering, become more and more a reality.

Given the weaker rand and an oil price that remains high, it is expected motorists and the taxi industry will be hit hard on Wednesday with the anticipated sharp increase in fuel prices. At this stage, it is expected that petrol will increase by about R1.05 and diesel by more than R1.50 a litre.

Transport prices (increasing by 10.1 percent year-on-year) was the main contributor to the rise in the inflation rate in September. The transport sub index contributed 1.4 percent to the total inflation basket (CPI) increase of 5 percent.

On Friday, Statistics SA announced that producer price inflation (PPI) for final manufactured goods and services increased by 7.9 percent in September 2021, 0.7 percent up from the 7.1 percent level in August. As was expected, petroleum, chemical and plastic products had increased by 15.3 percent year-on year. Under intermediary inputs, electricity and water recorded an increase of 23.3 percent.

Financial markets, especially equities, remain nervous after the release of the US gross domestic product economic growth rate during the second quarter of 2021. The US economy expanded by 2 percent in the second quarter, below expectations of 2.7 percent and well below the 6.7 percent sharp rebound in Q1. It is the lowest growth since the injection of US stimulus packages.

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The surge in Covid-19 cases in the US and supply constraints continue to weaken US consumption and production, while production and consumer prices are rising alarmingly. Although better than expected earnings by most companies, especially NASDAQ listed shares, boosted Wall Street during the first part of last week, share prices started to lose momentum at the end of the week. However, all three of the main indices, the Dow (0.5 percent), the S&P500 (1.5 percent) and the Nasdaq (2.8 percent) traded at new record levels on Friday.

The JSE ended Friday uncertain and in negative territory, despite trading higher than the previous week's close levels. For the week, the all share index gained 0.6 percent (losing 0.5 percent on Friday alone). The Industrial 25 index was higher for the week by 0.5 percent, losing 0.8 percent on Friday, while the Resources 10 index ended the week flat gaining only 0.03 percent, but traded down 0.8% for the day. Financials closed also flat for the week, gaining 0.03 percent.

This coming week, investors looked forward to the Medium-Term Budget Policy Statement (MTBPS) by Finance Minister Enoch Godongwana, initially set to be delivered on Thursday, October 4. In a press release last week, National Treasury, however, announced that the MTBPS will be tabled by the Minister on October 11. The reason given for the postponement was “the local government elections”. The HIS market Purchasers Managers Index (PMI) for September will be released on Wednesday.

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On global markets, the Federal Reserve monthly meeting and the release of its interest rate decision will dominate financial markets this week. The release of US non-farm payrolls on Friday will also draw huge attention.

It is, therefore, expected that the rand and South African equity markets and bond rates will remain uncertain, and rather under pressure to move weaker this coming week.

Dr Chris Harmse is an economist of CH Economics.

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*The views expressed here are not necessarily those of IOL or of title sites.