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  • Writer's picturePeet Serfontein

Thoughts For the Week Ahead

The Week That Was

All three major US equity indices experienced significant declines on Friday afternoon. Traders and investor caution was palpable due to the convergence of a massive options expiration event on the year's third "triple witching" day. The Dow Jones Industrial Average fell by nearly 300 points, while the S&P 500 and the Nasdaq Composite declined by 1.2% and 1.7%, respectively.

Shares of technology giants were notably affected, with Amazon, Nvidia, and Microsoft each tumbling by over 2%. Adobe Systems also witnessed a steep 4.9% drop, despite meeting quarterly earnings expectations. The company's failure to excite market participants about revenue-boosting AI tools was a notable disappointment.

Planet Fitness saw its shares plummet more than 14% following the unexpected departure of its CEO. In contrast, automakers Ford, General Motors, and Stellantis (the parent company of Chrysler) experienced upward momentum, benefiting from the United Auto Workers' strike that led to halted production lines.

Arm Holdings, fresh off its successful public debut, also registered modest gains. For the week, the Dow Jones Industrial Average is down 0.1%, while the S&P 500 and the Nasdaq Composite have declined by 0.5% and 1%, respectively.

The JSE All Share Index ended Friday at a one-week peak of 74590, marking a 0.3% increase. The upward movement was driven by strong performances in the luxury, consumer goods, and resources sectors, buoyed by optimistic industrial production and retail sales data from China that triggered a surge in commodities.

A Reuters survey further indicated that South Africa's Reserve Bank is likely to keep its interest rates steady at 8.25% in its upcoming meeting on 21 September, as inflation is forecasted to stay within the bank's target range of 3-6% for the subsequent two quarters.

In terms of individual shares, mining and extraction companies stole the spotlight, with Northam Platinum, Anglo American Platinum, Impala Platinum, and Exxaro Resources recording gains of 5.8%, 5%, 4.6%, and 4.3% respectively. Over the course of the week, the JSE All Share Index saw an overall growth of 1.3%.

The Week Ahead

The US Federal Reserve is poised for its monetary policy meeting this Wednesday, with market expectations leaning toward a maintenance of the current interest rates at 5.25%-5.5%—the highest levels since 2001.

Traders and investors are keenly awaiting the forthcoming FOMC projections to gauge the implications of this aggressive policy tightening on inflation and employment. On the economic front, preliminary estimates from the S&P Global PMI survey are likely to show a contraction in US manufacturing for September, even as the services sector exhibits modest growth.

The Bank of England (BOE) is projected to hike its bank rate by 25bps to 5.5%, marking the 15th consecutive increase and the highest rate since 2008. This comes a day ahead of August’s inflation data, which is expected to reveal a 7.1% surge in consumer prices—far exceeding the bank's 2% target. Retail sales data for August is also forecasted to rebound, though flash PMI figures may indicate a consecutive monthly dip in private sector output.

In Europe, early PMI readings for the Eurozone, Germany, and France are expected to reveal declining activity in both the manufacturing and services sectors for September.

In Asia, the People’s Bank of China's loan prime rate decision is of particular interest, especially following the unexpected cut in the reserve requirement ratio last week.

Japan's interest rate decision will also be closely watched after Bank of Japan Governor Ueda hinted at the potential appropriateness of positive interest rates in the long term.

Key Japanese data releases include September’s PMI figures and August's inflation rate and trade balance.

Key Themes for the Week Ahead

FOMC interest rate decision

With the US Fed fund futures indicating a 96% likelihood of the Fed maintaining interest rates this week, any move to hike would unquestionably jolt the markets.

This is despite last week's economic indicators—CPI, PPI, and retail sales—all exceeding expectations.

The current Fed Funds curve seems to back the prevailing interest rate range of 5.25-5.5% as the terminal rate, though it suggests roughly a 36% chance of a rate hike occurring in either November or December.

As such, the real focus of this week's FOMC meeting lies in setting the stage for market expectations for November and beyond.

This upcoming meeting will also provide updated quarterly staff forecasts. Last quarter, the median Fed rate projection was raised from 5.125% to 5.625%, signalling the likelihood of two more hikes.

Forecasts for 2024 and 2025 were similarly lifted, reinforcing the "higher for longer" narrative. Given that one of these anticipated hikes has already been implemented as inferred from Q2 projections, market participants are keen to find out if the median projection will be lowered, indicating that the current rate could be the terminal one. If, however, the projection remains elevated, it may imply another rate hike is in the pipeline for either November or December—assuming the Fed doesn't take markets by surprise this week.

It is crucial to also focus on updated inflation forecasts during the meeting. These will offer a more comprehensive view of the Fed's hawkish or dovish stance. Should the growth outlook be revised upward, it might suggest a potential for a "soft landing" for the economy. Conversely, if both growth and inflation forecasts are increased, the meeting would be perceived as more hawkish, likely boosting the US dollar at the expense of Wall Street indices.

UK inflation and Bank of England (BOE) interest rate decision

Wage growth headlines showed an eye-catching 7.8% year-over-year increase or 8.5% when accounting for bonuses. Although the BOE has expressed concerns about a wage-inflation spiral, these figures initially suggest that the central bank may not be as close to its terminal rate as some of its members have recently implied. However, the Office for National Statistics (ONS) notes that these figures may be artificially high due to one-time payments made to National Health Service (NHS) and Civil Service employees in June and July 2023. ING analysts also speculate that actual wage growth may have decreased recently when considering alternative payroll-based measures.

Adding to the complexity, employment growth declined at its swiftest rate since August 2020, registering at -220 000. GDP estimates showed a month-on-month contraction of -0.5%, worse than the expected -0.2%. Both construction output and industrial production failed to meet expectations, and mortgage applications are on the decline. Given these conditions, should this week's inflation data turn out to be softer than anticipated, the BOE may indeed be nearing the end of its rate-tightening cycle.

As it stands, the BOE's interest rate is 5.25%. According to the 1-month Overnight Index Swap (OIS), there's a 44% chance of an interest rate hike this week. The 3-month OIS has fully priced in at least one more rate hike, but the timing remains uncertain. Therefore, this week's Consumer Price Index (CPI) report could be the deciding factor in whether that rate hike occurs sooner rather than later.

Bank of Japan (BOJ) interest rate decision, Japan’s inflation and trade data

When it comes to BOJ meetings, the expectation is generally for policy stability, but it's always wise to be prepared for a surprise. What distinguishes this particular meeting is that BOJ Governor Ueda has been increasingly vocal about the possibility of a rate hike, even if it's not expected to occur this year. This has led to growing speculation that the BOJ might opt for a rate hike before relinquishing its Yield Curve Control (YCC) policy.

Considering that the BOJ expanded the YCC band during their last meeting, it is unlikely they will abandon the policy in the near term. A Reuters poll indicates that 73% of economists anticipate the BOJ dropping the YCC next year, but only 41% foresee the termination of negative interest rates in the same time frame.

While recent excitement in money markets has indicated an uptick in rate hike expectations, it is not until the 9-month Overnight Index Swap (OIS) that the pricing out of negative interest rates appears. Even then, this trend is receding back towards zero.

Also worth noting are the forthcoming releases of inflation and trade data. The key Consumer Price Index (CPI) metric to monitor is the core figure, which excludes fresh food and energy. A rising core CPI could make the case for a more hawkish BOJ stance. This metric surged by 4.3% in both June and August, hitting 42-year highs. If the monthly read, which has increased in six of the past seven months, posts a rise of 0.6% or higher, it could expedite expectations for a BOJ rate hike and exert downward pressure on USD/JPY.

Bitcoin (BTC) surpasses Visa transaction volume

The annual transaction volume of Bitcoin has now exceeded that of Visa (NYSE:V), marking a noteworthy milestone, especially given that Bitcoin operates on a decentralised network and has not yet achieved global usage on par with Visa. However, before celebrating this achievement, it is crucial to understand some subtleties that often get overlooked.

To begin with, the phrase "transaction volume" can be somewhat deceptive. In Bitcoin's case, a considerable portion of network activity over the past year originated from Ordinals—a protocol that assigns unique identifiers to satoshis in the blockchain, enabling transactions with additional data like images. This protocol facilitates high-frequency transactions. As such, the high volume of transactions might not necessarily reflect broad retail usage or adoption.

Moreover, comparing Visa and blockchain networks like Bitcoin in transaction terms is a complex endeavour. Visa is a centralised payment system, honed over decades to facilitate consumer transactions.

Bitcoin, by contrast, is a decentralised platform where transactions can range from buying a cup of coffee to transferring multi-million-dollar assets. These systems are fundamentally distinct, each with its own set of rules, constraints, and applications.

Still, overtaking Visa in transaction volume is undeniably a significant event. It underscores the rising prominence of decentralised networks and prompts us to ponder what the future of finance might hold. Could decentralised platforms eventually become the standard, making centralised systems obsolete?

International Earnings

This week's earnings calendar is relatively subdued, as the spotlight shifts to central banks. Notable among them are the US Fed, the Bank of England, and the Bank of Japan, all of which are scheduled to make critical interest rate decisions.

In the corporate sector, key earnings reports to watch for in the US include delivery behemoth FedEx, automotive parts retailer AutoZone, packaged food company General Mills, and Darden Restaurants, the parent company of Olive Garden. From the UK, the most significant update is expected to come from Kingfisher, the owner of retail chains B&Q and Screwfix.

South Africa News

  • As South Africa grapples with an ongoing cost-of-living crisis, consumers burdened with loan repayments are anxiously awaiting this week's interest rate announcement. This Thursday, Lesetja Kganyago, the Governor of the South African Reserve Bank (SARB), will unveil the Monetary Policy Committee's (MPC) decision regarding any adjustments to the country's repurchase rate, commonly known as the repo rate. The current repo rate stands at 8.25%, while the prime lending rate is set at 11.75%. During its last meeting in July, the MPC opted to maintain the status quo on the repo rate. Thanks to a modest easing in inflation, the SARB was able to hold the rate steady, even though it remains at a relatively elevated level.

  • Despite the challenging economic environment, the Department of Social Development has transferred more than R15 billion in unspent social relief of distress (SRD) grants back to the National Treasury during the past fiscal year. Based on the most recent General Household Survey for 2022 from Stats SA, grants serve as the secondary primary income for 50.2% of South African households, trailing only behind salaries, which account for 59.75%.

Economic Calendar

In the upcoming economic calendar for this week, several significant events are scheduled to take place.


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