Currency: The ZAR has enjoyed a strong start to August barring the volatile equity market-induced sell-off seen last week. Following that brief sell-off, the ZAR recovered against the USD in almost every session, enjoying tailwinds from softer US data, and equity markets recovering from the tech plunge that also occurred last week. There is scope for these gains to extend over the coming weeks and months, depending on how Fed policy evolves and if the new GNU can provide evidence that it is effectively undertaking much-needed economic reforms. Risk-adjusted fair value hovers close to R17.0000/$, with the 12-month-ahead fair value at R18.5500/$.
Inflation: Headline inflation slowed marginally to 5.1% y/y in June, resuming its descent toward the mid-point of the SARB’s target range. The SARB’s July MPC statement indicates that the inflation target midpoint of 4.5% y/y will be met by Q4 this year, but with core inflation already at the target and both the goods and services annual inflation rate down from the previous month, there is scope for a possible SARB 25bp rate cut in September.
Repo rate: The SARB kept the repo rate unchanged at 8.25% for a seventh consecutive meeting in July. However, there was a dovish twist, with two members of the MPC voting to cut rates by 25bp. The central bank is likely waiting until the Fed starts reducing rates, which now looks like it will do in September. The market is currently positioned for a certain 25bp cut in September and a very strong chance of a follow-up rate cut in November.
Government Finances: South Africa’s budget balance moved into a surplus of R38.6bn in June, from a deficit of -R12.8bn in May. However, the budget balance tends to improve seasonally in June, which was the case this year again. Despite the seasonal improvement, South Africa’s challenging fiscal position remains entrenched. Though there is much more optimism with the formation of the GNU, it will take time for policy reforms to bear fruit.
GDP Growth: Real GDP for Q1 2024 decreased 0.1% q/q, following an increase of 0.3% q/q growth recorded in Q4 2023. Q1’s outcome broadly missed the consensus forecast of 0.1% q/q growth. The Q2 numbers are unlikely to reflect much of an improvement with the monthly sectoral data still weak. The latest survey of economists by Bloomberg pencils in growth of just 0.3% for Q2, a downgrade from the prior estimate of 1.3%.
Offshore conditions: Financial markets have stabilised and the panic that existed at the start of last week has thankfully dissipated. Some soothing comments by central banks, aimed at calming fears were at least one reason for stability returning. However, investors were given a taste of what current lofty valuations could lead to should conditions deteriorate. Global growth is slowing and there are notable warning signs that the US economy could be heading for a downturn. China is also struggling to rebuild any sort of economic momentum, a worry for commodity-linked economies.
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