As we begin this week, it is important that we review the past week and think carefully about what the data is telling us and what might happen next with the markets. Last week was packed with central banks and their interest rate decisions as well as some key data, the most important of which was the US labour market data.

The interest rate part started last week with the US Federal Reserve raising interest rates by 25 basis points. While there were market rumours that the Fed might continue to raise rates by 50 basis points, the Fed stuck to its promise to raise rates by 25 basis points. Jerome Powell hinted that the Fed would continue to raise rates as inflation, while slowly moderating, is still at levels last seen in the early 1980s. The market reacted negatively to the news that the Fed would continue to raise rates, but saw something of a turnaround when the Fed Chair stated that the disinflationary process had begun. The meeting only reinforced the fact that the Fed is the most important player in the market right now. So expect some volatility whenever the Fed is in the news.

Stronger US dollar


As expected, the European Central Bank raised interest rates by 50 basis points last week. This brings the European Central Bank’s rate hike to 250 basis points in just over seven months, the fastest pace in the 23-year history of the ECB. The ECB’s rhetoric makes it clear that it will raise rates by 50 basis points in March and tighten monetary policy further in the foreseeable future. Even if ECB announces further rate hikes, it will be against a backdrop of very low growth in the eurozone. Eurozone growth could remain very low for some time, as ECB should be careful not to plunge the eurozone into recession if it continues with these large rate hikes.

On Friday, the US labour market data was released, and as the economy is likely to stall in times of high interest rates, we would expect these numbers to be rather below expectations. The number beat expectations at 517k versus 170k. This suggests that the US economy is stronger than anticipated and the risk of recession is probably lower than expected.

But is that the case? One of the key observations was that the Establishment Survey data for 2022, which produces the Non-Farm Payroll numbers, has undergone its annual benchmark revision, which may have influenced the number a little. Some market participants have pointed out that this figure is an anomaly and expect it to fall in the future as the lag effects of Fed hikes begin to impact the labour market and the US economy weakens significantly in the middle of the year.

What has this done to the market? The fact that the US economy is doing better than any other economy in the world caused the market to flock back into the US dollar. The US dollar started last week trading at around 1.0950 against the euro and ended the week down to 1.0750. We expect this rally to continue in the short term and the US dollar could fall back below 1.0700. This puts pressure on emerging markets, with the rand losing around 50 cents after the release of non-labour market data. As the market follows the US dollar, it is usually the market EM that loses its shine, and this case is no different. Moreover, the magnifying glass is still on South Africa, which does not bode well for the rand, at least in the short term, due to local problems.

Rand starts to weaken


We expect that the appreciation of the US dollar could continue after the labour market data, which would bring the rand to its knees. There are also a slew of Fed speakers scheduled this week. While the Fed will be in focus, we can expect the market to keep a close eye on these speeches and could react quickly if there is new information or lack thereof. With little data being released this week, the market will be influenced by sentiment, which does not bode well for emerging markets.

The key event in South Africa is the State of the Nation Address, which will be delivered on Thursday. While previous State of the Nation speeches have not made much of a difference, expect anything to do with Eskom to be scrutinised again in the speech. It could be a bumpy ride this week.