Fed Chair Powell suggests that 50bp cuts will not be the norm moving forward, Euro area inflation returns to the ECB’s 2% target, while vigilance remains high on the Middle East and the increasing potential for a widening and escalating regional conflict there.
International Market Developments
Fed Chair Powell participated at the National Association for Business Economics annual meeting where he provided a heavy signal that last month’s half point cut in interest rates will not be the norm moving forward, and that the Fed is more likely to revert to 25bp cuts from here. The Chair spoke about the need for policy to move towards a more neutral stance over time. Financial markets are not quite convinced that the Fed will revert to 25bp moves though, with 70bps of policy easing still priced in until the end of the year, spread across the two remaining meetings.
Euro area inflation for September provided further confirmation that inflation was returning to the ECB’s 2% target. Headline inflation fell to 1.8% (consensus 1.8%), marking its lowest level since April 2021. One part of the inflation picture that has concerned the ECB Governing Council has been services inflation. President Lagarde touched on this in a speech to the European Parliament, where she also noted that the ECB’s confidence that inflation was sustainably returning to target had increased.
Last week’s news flow was dominated by geopolitical concerns and the risk of an all-out war between Israel and Iran. In a significant escalation, Israel launched a ground invasion into Lebanon, intensifying its offensive against Hezbollah, whilst Iran launched direct missile attacks on Israel, increasing the risk of a full-blown regional war. From a market perspective the biggest impact was seen on oil prices, with Brent rising 8% on the week. Beyond this, market movements have been relatively contained, however with reports that Israel could strike at Iranian oil, infrastructure bonds have begun to factor in some risk of higher inflation.
Looking forward to this week, markets will remain focused on the Middle East, while US CPI data is due to be published on Wednesday.
Local Market Developments
The rand has strengthened since the start of the year, from above R19.00/USD, to nearer R17.00/USD, aided by the anticipation, then the materialization of the US interest rate cutting cycle, which kicked off this month with the surprise 50bp cut. The rand has strengthened quickly over the past couple of months, since the national election in South Africa at the end of May.
In South Africa, improving economic activity has also had a positive effect on the domestic currency, along with the reduction in political risk on the formation of a centrist government, and increased foreign appetite for SA’s portfolio assets.