Coffee Table Economics with Anchor

Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently. It is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economies.

Executive summary

In this week’s edition, we highlight the following:

  • Central bank policy steering the markets’ pulse: Usurpingly, central bank policy meetings continue to be the predominant driver of global markets’ sentiment – particularly over the past two weeks. With Europe experiencing moderating growth and inflation compared to a resurgence in inflation dynamics in the US, it will remain interesting to see if other key regional central banks (such as the Bank of England [BoE] and the European Central Bank [ECB]) potentially emulate the Swiss National Bank’s (SNB) proactive approach ahead of anticipated Fed rate cuts.
  • SA consumers forced to tighten their belts: Unfortunately for SA consumers, the February headline inflation rate climbed to a four-month high – printing at 5.6% YoY from 5.3% YoY in January. This latest print means that inflation has moved further away from the 4.5% midpoint of the SA Reserve Bank’s (SARB’s) target band, where it prefers to anchor expectations. However, it is still within the central bank’s 3% to 6% target range.
  • ‘Januworry’ strikes again: Latest retail sales reflect a gloomy consumer environment. Reflecting the current depressed local consumer environment, retail trade sales volumes contracted by 2.1% YoY in January 2024, down from December’s festive season-boosted growth of 3.2% YoY. Looking ahead, the retail sector will likely remain weak over 1H24 as a high interest rate environment and rising unemployment push households to prioritise necessities over luxuries. However, there are some interesting caveats regarding high-income consumers’ confidence and spending levels.

Central bank policy steering the markets’ pulse

Unsurprisingly, central bank policy meetings remain the predominant driver of global markets’ sentiment – particularly over the past two weeks. In a largely expected move, the Bank of Japan (BOJ) drove market movements early last week when it announced a move away from its 17-year, sub-zero interest rate monetary policy framework. Whilst the BOJ’s actual rate increase was unlikely to cause significant shifts in global capital flows, it was the BOJ’s move away from yield curve control, as well as details on the reduction in domestic asset purchases, that pressured the yen and provided a broadly supportive underpin for the US dollar throughout the week. Market moves were then compounded by the release of the Fed’s latest Federal Open Market Committee (FOMC) statement and the FOMC’s updated projections for the US economy. Despite maintaining the target level for the fed funds rate, the FOMC surprised markets with a notably dovish tone on interest rates. The FOMC reiterated its guidance for a total of 75 bps of rate cuts this year despite upward revisions to GDP growth and core personal consumption expenditure (PCE – the Fed’s preferred method to measure inflation) projections. However, the committee tempered expectations for next year, reducing the median number of projected rate cuts from 100 bps to 75 bps. Notably, a divided opinion persists among FOMC members, with ten expecting three or more rate cuts and nine anticipating two or fewer cuts. While recent inflation data hint at a potential uptick, the divergence in rate expectations among officials suggests a possibility of sustained higher US rates, bolstering the dollar’s resilience in the markets throughout the week.

Amidst a global market respite and optimism over the Fed’s economic outlook, the SNB made a surprising move by cutting its interest rates by 25 bps to 1.50%. This marked the SNB’s first rate cut in nine years, prompted by a significantly lower inflation forecast. The unexpected decision had substantial effects on markets, causing the Swiss franc to weaken against the US dollar, boosting local Swiss equity market indices, and driving spot gold prices to record levels surpassing US$2,220/oz. The SNB’s policy shift is important to understand as it carries implications beyond its borders, hinting at potential pre-emptive actions by other major central banks ahead of the Fed. Heightened speculation regarding interest rate decisions in developed markets (DMs) could increase short-term volatility across global capital markets, especially considering the sustained subdued inflation trends in key European economies.

The bottom line

Following the market’s reaction to a more dovish stance in the FOMC’s policy statement, the SNB’s surprise 25-bp rate cut (driven by a tempered inflation outlook) placed downward pressure on the Swiss franc. As a result, it also bolstered bullish sentiment towards the US dollar against a range of other major currencies, as focus shifted towards the differing macroeconomic trends between Europe and the US. With Europe experiencing moderating growth and inflation compared to a resurgence in US inflation dynamics, it will remain interesting to see if other key regional central banks (such as the BoE and the ECB) emulate the SNB’s proactive approach ahead of anticipated Fed rate cuts. Regardless of the potential policy directions (and timing thereof), what is certain is that central bank policy rhetoric will continue to steer financial market sentiment throughout the year.

SA consumers are forced to tighten their belts as inflation climbs to a four-month high

Unfortunately, for SA consumers, February headline inflation climbed to a four-month high – printing at 5.6% YoY from 5.3% YoY in January. Product categories that drove much of the upward momentum include housing & utilities, miscellaneous goods & services (most notably, insurance), food and non-alcoholic beverages (NAB) and transport. It is important to note that the February CPI release includes the bi-annual survey of medical health insurance costs, which account for 7.1% of the CPI basket. Subsequently, the 10.3% MoM increase in medical aid premiums (in the miscellaneous goods & services category) took the annual rate for health insurance to 12.9% YoY. Premiums for all types of insurance have increased by 9.5% over the past year. In a further dent to consumers’ pockets, the transport category registered an annual rise of 5.4%, driven mainly by increases in vehicle and fuel prices. More positively, however, inflation for food & NAB slowed to 6.1% in February, with most food price categories recording lower annual rates. Notably, meat and egg prices are recovering from the impact of avian influenza, while the fruit and vegetable segment is rebounding from past challenges with harvests and quality, exacerbated by irrigation difficulties linked to power outages. Core inflation (excluding the more volatile price categories of food, fuel, and electricity) increased to 5% YoY from 4.6% in January as rising health insurance costs filtered into the data. Overall, the unfortunate rise in core inflation is indicative that recent headline pressures are becoming more entrenched in the greater inflation basket. This latest print means that inflation has now moved further away from the 4.5% midpoint of the SARB’s target band, where it prefers to anchor expectations. It is, however, still within the central bank’s 3% to 6% range.

The bottom line

Unfortunately, most SA consumers will have to continue to fasten those belts even tighter as inflation is likely to continue to rise over the short term (off the back of increasing fuel costs, base effects, and the weak rand exchange rate). However, we believe that the general trend for this year will be downward, albeit in a non-linear manner. This month (March) has recorded an additional petrol price increase to February’s R1.21/litre rise, which will exert some marked upward pressure on the next inflation reading. Overall, fuel prices have been adding to volatility in the inflation figures. As it currently stands, April is on course for only a small petrol price hike, of around ZAc14/litre, as the international Brent crude oil price has dropped in rand terms. Nonetheless, we anticipate some moderation in consumer prices driven by a continued easing in food prices, which should help counterbalance the projected uptick in fuel costs. Moreover, core inflation (particularly that of goods) will likely remain subdued as consumer demand continues to be constrained by the pressures of elevated interest rates. However, we, unfortunately, continue to view food prices as a key upside risk given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate. Overall, risks to the inflation outlook have deteriorated – geopolitical tensions have worsened, and the deteriorating performance at our key ports adds uncertainty to the future inflation path.

‘Januworry’ strikes again: Latest retail sales reflect gloomy consumer environment

Reflecting the current depressed domestic consumer environment, retail trade sales volumes contracted by 2.1% YoY in January 2024, down from December’s festive season-boosted growth of 3.2% YoY. This contraction was driven by a significant decline in sales volumes of textiles, clothing, footwear, and leather goods, as well as pharmaceutical and medical goods, cosmetics, and toiletries. Sales volumes of textiles, clothing, footwear, and leather goods plummeted to R15.1bn, down 6.6% YoY from the R16.1bn recorded in January 2023. This is a significant decline compared to the R32.3bn (not seasonally adjusted) sales volume recorded in December 2023. Whilst the trend of strong December sales followed by moderation in January is fairly normal, it was notably more pronounced this year. Furthermore, all sub-categories of the retail sector saw sales volumes that were either flat or contracted in January. Nonetheless, the sharp drop in sales volumes for textiles and related products formed the clear standout deterioration for the month. Looking ahead, the retail sector will likely remain weak over 1H24 as a high interest rate environment and rising unemployment push households to prioritise necessities over luxuries and to shop around for sales. This will, in turn, pressure retailers to reduce profit margins over passing increased cost pressures on to consumers. In the current depressed consumer environment, there is no real scope for consumers to further absorb additional costs.

There may yet, however, be a break in the cloudy horizon. After slipping from -16 to -17 index points in 4Q23, the FNB/BER Consumer Confidence Index (CCI) improved to -15 in 1Q24. Given that the long-term average CCI reading is zero (since 1994), the latest reading of -15 points underlines a consumer environment that is still particularly gloomy. However, as we head into 2024, consumer sentiment is significantly higher than the -23 reading recorded during 1Q23, when stage-6 loadshedding, surging food prices, and successive interest rate hikes rocked consumer confidence. This suggests that retail sales volumes could gradually start to recover from the poor performance during 2023 and the start of this year. A breakdown of the CCI per household income group shows that the slight improvement in overall confidence was driven by an uptick in the confidence levels of high-income households (earning more than R20,000/month). High-income confidence rose from -19 to -14 index points because of significant improvements in high-income consumers’ ratings of the outlook for the national economy and their own household finances. Confidence levels of middle-income households (earning between R5,000 and R20,000/month), on the other hand, were unchanged at -17 index points, while the confidence of low-income households (earning less than R5,000/month) slipped back from -13 to -16. All three income groups still consider the present time highly inappropriate for purchasing durable goods (even more so than during the previous quarter). Still, high-income households turned noticeably more optimistic about their financial prospects (+13) compared to middle- (+6) and low-income (+5) households.

The bottom line

Whilst there has been only a minor improvement in the overall CCI reading, the uptick in the confidence of high-income consumers, in particular, is good news for the retail sector – affluent consumers have greater spending power than low- and middle-income consumers. Nonetheless, for middle-income and low-income households, a high interest rate environment and rising unemployment will continue to push households to prioritise necessities over luxuries. As such, general weariness around splurging on big-ticket items suggests that durable goods sales will underperform relative to the other consumption categories during 1H24.

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