Last week US Consumer Price Inflation (CPI) came in a touch softer than expected with very minimal reaction from the market. Softer US inflation reinforced investor expectations of a Fed rate cut in September. Locally, retail sales numbers came in stronger than expected, demonstrating a resilient SA consumer in the face of high interest rates.
International Market Developments
U.S. consumer prices rose 0.2% in July, in line with expectations. The latest monthly increase follows a 0.1% decline in June and lowered the year-ago rate for the headline CPI from 3% to 2.9%. Energy prices were a neutral contributor in July following consecutive months of declines. Excluding food and energy prices, core CPI also rose 0.2% in July. This was a touch lower than we projected and lowered the year-ago rate from 3.3% to 3.2%. Financial markets appear to have looked through this report with only a 4bp reaction in 10y UST yields, which considering the swings we have seen in the recent past, is muted. CPI print was fairly encouraging, showing signs of moderating inflation towards the Fed’s 2.0% target, even if it is in small steps reinforcing our view that the Fed will reduce interest rates at the September meeting.
Looking ahead, US Fed Chair Jerome Powell’s testimony at Jackson Hole on Friday will take center stage this week. Investors will be looking for clues on when the Fed will start cutting rates. The Fed’s FOMC meeting minutes of the 30-31 July meeting will also garner considerable attention this week. Powell signaled at that meeting that the bank might cut its Fed funds rate at the September FOMC meeting.
Local Market Developments
South Africa’s retail trade sales data for June came in much better than expected. Seasonally adjusted retail sales volumes rose 1.6% month-on-month in June following an upwardly revised contraction of 0.2% (previously: -0.7%) in May. The June month-on-month outcome was the highest since January 2022. Underpinning the monthly rise in retail trade sales was the increase in ‘textiles and clothing’ (+3.8%) and general dealers (+3.3%) more than offsetting weaker sales elsewhere. On a year-on-year basis, retail trade sales volumes were up 4.1% in June (May: +1.1%).
Looking ahead, SA CPI data is due for release on Wednesday. A combination of factors could result in headline CPI breaking below the 5% mark for the first time in 10 months and inching closer to the SARB’s inflation target of 4.5%. Stable food inflation in the near term, lower services inflation and marginally lower utilities inflation are expected to help SA achieve its inflation target in the near term. Investors polled by Bloomberg expect inflation to ease to 4,8% year-on-year in July, from 5,1% in June, driven by lower utilities and transport inflation. Core inflation is expected to remain at 4,5% year-on-year.