The contrast in the international data and event calendars between last week and this week can best be described as waiting for London busses – where last week there were no busses and this week two came along within seconds of one another.
Despite the apparent lack of data last week, it was still an interesting week with some narratives being confirmed. The one big data set that came out last week was the US 4th quarter GDP number that was released on Thursday. The US economy grew better than expected, with Q4 GDP coming out at 2.9% q-on-q versus an expected 2.6%. This has caused the US dollar to lose a little bit of ground and trade around the 1.09 level against the euro, as the market believes that the US could engineer a soft landing and not go into recession due to the aggressive monetary policy by the US being used to curb inflation. The truth of the matter is that, while the US data is surprising, we still believe that economic headwinds will start to plague the US and the rest of the world in the back end of the first half of 2023.
On the South African front, we had the MPC meeting where the MPC hiked interest rates by 25 basis points. The hike was less than the previous few meetings, and the reason for the lesser hike was borne out of inflation looking like it is stabilising, but also in reaction to the anaemic growth that is currently happening in South Africa and major hikes could have a detrimental effect on the economy. Local issues are also weighing on the rand, and we have seen the rand being the second weakest currency in the world since the start of the year.
See below the rand underperformance, due thanks to our government
That brings us to this week where there are data and events all over the place. There is huge potential this week for some really big market moves, with top-tier data being released. The slew of data and events start on Tuesday with the Eurozone GDP for the 4th quarter being released. It is expected that the number will print lower than expectations, due to the cost of living crisis in the Eurozone and the higher interest rates taking effect. Even if the number prints positive, it could be the start of weaker and weaker data out of the Eurozone until a recession is confirmed.
On Wednesday we have the Eurozone inflation rate and the Fed interest rate announcement. Inflation in the Eurozone is expected to drift a little bit lower to 8.7% but not as significant as the drop seen in the US of late. This will keep pressure on the Eurozone to keep hiking in an effort to get inflation under control.
Later in the evening, we have the US Fed announcing its interest rate decision. We expect the Fed to deviate from its aggressive hikes of the past and start hiking by 25 basis points. The key will be the commentary of the Fed and whether there is any indication of hikes going forward and the size thereof.
Looking at the graph below, the market is not expecting the Fed to hike past 5% although the dot plot released by the Fed still has terminal rates above 5%. The speech after the Fed rate announcement will be watched closely to see if the Fed will continue to hike rates.
On Thursday we have the European Central Bank and its interest rate decision. As we stated earlier, we expect the ECB to keep its foot firmly on the rate hiking accelerator with a 50-basis point hike as inflation is still a problem in the Eurozone. The interest will also be in the statements made after the announcement as the Eurozone economy is struggling and the question will be how many hikes will suffice before plunging the Eurozone into a recession, but another 50bps will probably be communicated.
Finally, we end the week with the US non-farm payroll number, and consensus indicates that the number could be lower than expected. Could this be the first economic indicator that shows that the US economy is slowing? Unemployment is also expected to rise a little, and if that is the case, we could see some risk-off trading in Friday’s afternoon session.
The question then becomes: What will all of the above do to the markets? While there are no certainties, we expect the market to trade in a volatile fashion, with any weakness in the US dollar being exploited by EM currencies and we could see the rand testing the R17.00 should sentiment rise after the Central Bank speeches.
The risk for a weaker run is also on the cards should the Fed be more hawkish than expected or the US data show signs of slowing down. The US dollar could find short-term support should the employment data come out weaker than expected.