Softer US inflation provides good news for SA and consumers

Softer US inflation and stronger production data for SA last week, brought some positive news to the business front, after months of negative economic data.

According to the Bureau of Economic Research at Stellenbosch University, the key theme last week, stemmed from the below-consensus US consumer inflation print for October. Although inflation remains elevated, the downward surprise could encourage the US Federal Reserve (Fed) to start slowing interest rate hikes.

“Further hikes are expected, but the mere possibility of a moderation in the pace in December led to significant market movements. Markets were also hopeful that China may finally move away from its economy-crushing zero-Covid strategy,” Lisette IJssel de Schepper, editor of the BER Weekly, says.

Statistics SA released stronger-than-anticipated production data, while there were also some positive non-data events. South Africa signed loan agreements with France and Germany at the 27th UN Climate Change Conference (COP27).

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Manufacturing production increased by 2.9% in September, compared to September last year, after an upwardly revised 1.7% increase in August.

“This was well ahead of market expectations for a 2.4% decline, which likely reflected the anticipated impact of the severe load shedding experienced in the month.”

She says the load shedding impact was outweighed by a surge in output in the transport sector that increased by 43.2% compared to last year, contributing 3.7% pts to annual growth, likely on the back of the flood-affected Toyota plant ramping up production.

“Indeed, if the transport sector is excluded, manufacturing output would have contracted by about 0.8%. Monthly output rose by a solid 4.9%, once again supported by higher transport production. All in all, real manufacturing output increased by 1.9% compared to the previous quarter in the third quarter, recovering from the 5.3% decline in the previous quarter.”

Production struggled on an annual basis in the mining sector, decreasing by a larger than anticipated 4.5% in September compared to September last year.

This was the eighth consecutive slump in activity and follows an upwardly revised 4.5% dip in August. The biggest drag on annual growth was iron ore (-23.1% y-o-y; -2.7% pts) and gold (-12.4% y-o-y; -2.1% pts).

However, output edged up by 0.1% month-on-month and this means that, after declining by 3.4% quarter-on-quarter in the second quarter, real mining output increased by 2.2% in the third quarter.

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COP27 loans for SA

Germany and France will each extend €300mil concessional financing (around R10bn in total) to the country to support its efforts to reduce its reliance on coal in the energy sector. The loans from France’s AFD and Germany’s KFW each have a maturity of 20 years, including a five-year grace period.

South Africa will benefit from the more favourable interest rates of the AFD loan, that will have to be paid back at an interest rate of 3.6% and the KFW loan, with an interest rate of 3%. These rates are better than those government would get on capital markets.

The loans form part of the $8.5bn pledged last year, as part of the Just Energy Transition Partnership and are already reflected in SA’s gross borrowing requirement. President Cyril Ramaphosa noted at the summit that this was only a fraction of what is needed over the next five years, as the country’s climate investment plan estimates that about $98bn will be needed over the next five years to meet its climate goals.

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However, back home, Gwede Mantashe, minister of mineral resources and energy, said in a parliamentary debate the country’s renewable energy transition push should not be at the expense of coal mining communities.

He argued that a combination of gas, nuclear, coal and hydro should still provide a baseload supply, with solar and wind in a supplementary role.

Mantashe also said government signed power purchase agreements with three projects under Bid Window 5 last week, which will add 364 megawatts to the national grid once completed. Another 13 similar will be signed under this window before the end of November.

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US inflation and China’s zero-Covid

De Schepper points out that last week’s lower than anticipated US consumer inflation print sent investors into risk-on mode, with US Treasury yields moving lower as investors revised down their expectations of the peak US interest rates.

Markets are now expecting a 70% change that the Fed will hike interest rates by 50 basis points in December, breaking a streak of four 75 basis point hikes. The dollar weakened significantly and fell to its weakest level against the euro since August.

“The rand benefitted from the weaker greenback too and gained 4% against the US currency last week, reaching its strongest level since September. Global equity markets rallied amid hopes that the worst is behind us for US inflation,” she says.

Tentative signs from China to ease its zero-Covid policy added to the positive sentiment on (non-crypto) financial markets. The Chinese government released new Covid-19 regulations last week, and some measures were eased, most notably quarantine requirements for close contacts and international travel.

However, De Schepper says, the government maintained that these changes reaffirmed the zero-Covid policy and are aimed at optimising implementation.

“Worryingly, the number of Covid-19 infections breached 10 000 per day last week, with more than 14 000 cases recorded on Saturday. Indeed, despite initial optimism from markets, the continued rise in new local cases and Chinese leaders’ reiterations that zero-Covid will stay, means that a reopening will likely be a very slow process.”