August 2020
Share markets, exchange rates, commodities, international developments, domestic economic indicators
By far the biggest announcement that will affect international financial markets going forward was the change in the United States monetary policy, as the economy recovery seems to by V-shaped.
According to the US Fed Chair, Jerome Powell, the US will in future follow an inflation target based on an average of 2% - and not target 2% every month.
In addition, the US will prioritize employment to inflation, meaning monetary policy will be set to increase employment to achieve at least natural rate of unemployment levels.
However, a lot of uncertainty exists as to the exact functioning of the new policy.
Nevertheless, at a first glance, this means that interest rates in the US will remain very low for a long period – as inflation will be allowed to overshoot 2% to compensate for periods it undershot 2%.
In addition – in the absence of more information – this new monetary policy in the US will not be supportive to the US$ - hence the US$ weakened further in August.
When considered in conjunction with very low interest rates and inflation environments in Europe, it means that interest rates will for a very long time be low in two of the world’s largest regions.
This increases the probability of investors shifting to countries offering higher returns and to commodities such as gold, while also supporting share markets, as it will underpin demand.
In the meantime, the GDPNow forecast suggests annualized economic growth of almost 30% in the US in Q3, pointing to a V-shaped recovery following a 31.7% contraction in Q2.
China’s economy also showed a V-shaped recovery as the economy grew by almost 55% (annualized) in Q2 following a contraction of 34.7% in Q1.
The UK, however, suffered an economic contraction (annualized) of 59.4% in Q2.
South Africa is bound to also see an (annualized) economic contraction above 40% in Q2. Initial quarterly results for the primary and secondary sectors and some tertiary sectors (see table below) show contractions ranging between 20% and 80%. But the large trade surplus will support growth.
Although CPI picked up to 3.2%, chances remain for another reduction in the repo rate.
However, in contrast to the US, who is now prioritizing employment to inflation, the South African Reserve Bank’s (SARB) conservative “inflation character” will rather see unemployment increasing to 50% than inflation breaching the 4.5% target. Although another rate reduction is necessary, the conservative view makes the possibility remote.
The Covid-19 infections, which caused the lock-downs and large economic contractions, are still spreading. At a first glance it may seem to be a second wave, but deeper investigation revealed that, at this point, it is due to strong growth in South America rather than a second wave – confirming the view that the virus will spread at different paces in different regions.
Courtesy: Multivest Economic Division