Market panic and weaker rand – what it means for interest rates in South Africa
There has been a notable shift in interest rate expectations for the United States this week. This follows a market panic, which saw emerging market currencies take a beating, and investors started raising red flags about a possible recession in the world’s biggest economy.
Projections have shifted from a slower start to the US cutting cycle to a bigger and more rapid move – with three sizeable cuts possibly coming before the end of the year.
This could mean good things for the rand in South Africa, but the projections for our own rate-cutting path have not shifted.
The root of the market panic lies in weaker-than-expected jobs data in the US, on top of a higher-than-expected unemployment print.
According to Old Mutual Wealth Investment Strategist Izak Odendaal, high interest rates in the States have “really “put on the squeeze”, with smaller businesses, commercial real estate, and low-income households feeling most of the pain.
“Manufacturing has also been soft, and the latest data points to fresh weakness in the US and elsewhere,” he said.
As a result, American job growth slowed notably in July, with only 114,000 jobs added, below expectations. Moreover, the unemployment rate ticked up to 4.3%. While still low, it has increased in recent months.
Wage growth slowed to below 4% year-on-year.
“The (US) labour market is clearly cooling, though the current pace of growth can still sustain a decent, if slower, expansion in consumer spending. Moreover, the labour market is increasingly unlikely to be a source of upside inflation pressure, i.e. a wage-price spiral.
“The big question is whether it goes from cooling to cold. Rising joblessness would put pressure on consumer spending, which would, in turn, lead to companies cutting jobs to preserve margins. Things can snowball quickly,” he said.
This has sparked recession fears and several calls from investors and market analysts for the US Fed to start cutting rates urgently.
Sebastian Mullins, Head of Multi-Asset & Fixed Income at Schroders, said that the long-talked-about “soft landing” for the US in terms of rates has now moved forward, with cooling inflation and retail sales holding up presenting enough of a reprieve for three rapid cuts before the end of 2024.
“This will relieve pressure on the pockets of the US economy that were reliant on floating rate financing, from microbusinesses to lower-income consumers. Lending standards are already starting to ease,” he said.
Looking at the impact this week’s events have had on South Africa, the main victim has been the rand.
The local unit is already a highly volatile currency and operates in a high-risk environment. Along with other emerging market currencies, the rand suffered when investors switched to risk-off mode in a global selloff, sending it to almost R18.70/$ – its weakest position since around the 2024 elections.
The rand has since recovered slightly to R18.40/$, but remains in an overall weaker position.
Investec chief economist Annabel Bishop said the rand remains a highly volatile currency, subject to significant fluctuations based on changes in global financial market risk sentiment, and it is expected to remain volatile as the year continues.
“The rand would weaken further on the publication of additional weak US economic data, but could strengthen if the data proves better than expected,” she said.
Markets have shifted from expecting a 25 basis point cut by the US Fed in September to a more rapid cutting path: 50 basis points in September, with close to another -50bp cut in November.
“The Fed funds implied futures have added in a third cut of -25bp for December, and a fourth, also of -25bp in January – a series of very rapid, sharp loosening of monetary policy as markets fret about a potential US recession,” Bishop said.
However, there has not been a shift in tone regarding South Africa’s rate cut trajectory – and it is unlikely to follow the US Fed because local conditions are very different.
One thing of particular note is that markets are optimistic that South Africa will avoid recession. Another is that economists are already anticipating several rate cuts over the next 12 months.
For the time being, the latest assessments of the Reserve Bank’s cutting cycle remain a 25 basis point cut in September and another in the final MPC meeting of the year in November.
Further cuts are expected in the new year, with a total 100-150bp in the cycle, terminating with the repo rate at 7.25%-7.75% by mid-2025.
What may prove beneficial to the rand, though, is if the US proceeds with larger cuts compared to South Africa, increasing the differential between the two rates.
Bishop previously noted that the simultaneous start to the interest rate cutting cycle would have a negative to neutral impact on the rand – but any delay, or widening of the differential between the two rates, should prove more positive.
“The longer South Africa delays its first interest rate cut, the likely stronger the rand—which is positive for inflation, as rand appreciation is a significant contributing factor to lowering inflation, particularly when international commodity prices are not rising,” she said.
The opposite is also true, which is why most market commentators have noted that the SARB will only follow, not lead, the US cutting cycle. Cutting before or larger than the US Fed would shrink the differential, putting more pressure on the rand and putting inflation in a bad spot.
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