South African financial markets traded mostly weaker last week as uncertainty continues regarding the magnitude of interest rate cuts by the Monetary Policy Committee (MPC) of the SA Reserve Bank and the Federal Open Market Committee of the US Federal Reserve (Fed) at their upcoming meetings in November.

Geopolitical tension in the US ahead of the elections and negative news from the Minister of Finance's Medium-Term Budget Statement contributed to a sell-off of risky assets such as shares on the JSE and a weaker Rand exchange rate.

Although the All Share Index recovered by almost 1.0% on Friday, the index ended the week 1.3% lower, having dropped sharply since last Tuesday after reaching a new record level on Monday, October 28.

The All Share Index declined by 1.3% in October. Despite these negative movements, most indices on the JSE are recording their highest annual rates in the past five years. Since the end of October 2023, the All Share index has increased by 22.4%, the Industrial Index has gained 23.3%, the Financial 15 Index has surged by 32.8% and the Resources 10 Index has grown by 10.0%.

In his first Medium-Term Budget Policy Speech (MTBPS) for the Government of National Unity (GNU), Finance Minister Godongwana remained conservative in his projections for economic growth and tax revenue. He announced that the GNU would continue with an expenditure-led fiscal consolidation strategy. This approach indicates a wider deficit in the current year, with somewhat weaker projected revenue and slightly higher spending, raising public debt to higher levels over the next four years.

Debt is expected to increase from the current 75.3% of gross domestic product (GDP) to 75.5% in 2025/2026, as the main budget deficit projections remain high at 4.7% this year and 4.3% of GDP next year. The National Treasury is more pessimistic about economic growth prospects over the forecast horizon compared to the February budget, with real GDP growth projected at 1.1%/1.7%/1.7%/1.9% for 2024/2025/2026/2027. In February, economic growth was projected at 1.3% for the current year.

Consequently, tax income for this year is expected to fall short by at least R20 billion. This implies a slight deterioration in the debt trajectory, with the projected peak in debt rising from 75.3% to 75.5% of GDP in the 2025/2026 financial year.

In response to the MTBPS and the sharp decline in the price of gold, the Rand exchange rate remained under pressure for most of last week. The currency was stable at around R17.65 per dollar for most of the week, depreciating by 26 cents over the month.

Concerns that the Fed will not lower rates as quickly as expected have placed emerging market currencies under pressure. The Rand/US dollar, however, appreciated by almost 100c compared to last October’s R18.63 per dollar. The Rand/US dollar exchange rate will, nevertheless, contribute to an 8c per litre (cpl) over-recovery in fuel prices for October. However, due to higher average landed international refined oil prices, 95 unleaded petrol is expected to increase by 25 cpl, and diesel prices by 23cpl this coming Wednesday.

On Wednesday, Statistics South Africa announced that producer price inflation decreased sharply from 2.8% in August to 1.0% in September, falling by 0.3% month-on-month in September 2024. This significant decrease is expected to contribute to a downward trend in consumer price inflation in the coming months, raising hopes for sharper cuts in the repurchase rate by the MPC at its next meeting later this month.

US non-farm payrolls data for October, released on Friday, showed that the United States economy added only 12000 jobs in October 2024, significantly below a downwardly revised 223000 in September and forecasts of 113000. This sharp decline in job creation was largely due to the impact of recent devastating hurricanes and ongoing labour actions. The unemployment rate in the US remained at 4.1% in October 2024, the same as in the previous two months. This steady rate will contribute to the Fed lowering its bank rate by only 25 basis points during its November meeting this coming Wednesday.

Chris Harmse is the consulting economist at Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

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