This was a monster week, filled with a plethora of policy statements, economic reports, and geopolitical developments. The primary driver of the market’s bullish sentiment was the Fed’s policy discussion on Wednesday, although the market also liked the BoE interest rate decision, the US labour market report for October and the US ISM services report – also for October.

The focus areas during the week included:

While the Federal Reserve kept interest rates unchanged, as expected, investors were encouraged by its post-meeting statement and press conference. The Fed appeared to signal that the recent run-up in long-term Treasury yields had achieved some of policymakers’ intended tightening of financial conditions. (Ironically, the recent rally in both equity and bond markets will reverse a lot of that tightening.) Chairman Jerome Powell also seemed comfortable with the prior upside surprises in economic data, with the FOMC merely tweaking its description of the pace of economic growth from “solid” to “strong.” Many market participants expected Powell to adopt a hawkish tone in the press conference, but instead he appeared unconcerned by the recent strength of the US economy.

The S&P 500 Index recorded its strongest weekly gain in almost a year, rising by an impressive 5.9% in the week, with gains recorded on each trading day of the week. Year-to-date the S&P 500 is up 13.5%, although at its peak at the end of July 2023 it was up 19.5%. This week’s strong rally in US (and other) equity markets was supported by further evidence that the US economy can achieve a “soft-landing” while still getting inflation back under control. The South African equity market gained an equally impressive 4.9% in the week, although year-to-date the market is down -0.3%.

The yield on the US 10-year government bond fell from 4.88% to an intraday low on Friday of around 4.48%, its lowest level since late September. Similarly, SA’s bond market also rallied during the week, unperturbed by the projected increase in government debt or debt servicing costs. Instead, the market was encouraged by the planned reduction in government expenditure over the next three years as well as its commitment to maintaining a primary budget surplus.

The rand has strengthened against the dollar on each of the past seven trading days, gaining a combined 4.5% – although this was boosted by the fact that the dollar weakened by 1.8% against the euro on Thursday and Friday. In general, the recent softening of US economic data and neutral rhetoric from the Federal Reserve has encouraged a move into emerging market assets, with most emerging market currencies strengthening during the week.

US employment rose by 150 000 jobs in October, which was well below the previous month’s revised gain of 297 000 jobs and below the prior 12-month average gain of 258 000. The market was expecting employment to rise by 180 000 jobs. The unemployment rate increased slightly from 3.8% to 3.9%, and average hourly earnings continued to moderate, rising by 4.1% y/y from 4.3% y/y in September. The labour market report is in line with a “soft-landing” in US economic activity going into 2024 and consistent with interest rates having already peaked.

The US ISM services index slowed more than expected in October to 51.8 from 53.6 in September. The market was expecting the index to moderate slightly to 53. While the reading suggests that the services component of the US economy remains in expansion, the rate of expansion appears to have slowed appreciably, perhaps signaling the start of a more broad-based softening of the US economy. Earlier in the week the ISM manufacturing index for October was also recorded noticeably weaker at 46.7. The manufacturing index has been below the key 50 index level in each of the past 12 months.

The US Federal Reserve kept interest rates unchanged at 5.25% – 5.5%, in line with market expectations, but signalled that it was not yet fully confident that interest rates were restrictive enough. There were very few changes to the FOMC policy statement, with economic activity described as “strong” versus “solid” in the previous FOMC statement. Despite robust economic growth in Q3 2023, and some uncertainty over the outlook for inflation, interest rates appear to have peaked. The Fed is still expected to keep interest rates elevated well into 2024.

US house prices rose by a further 1% in August, taking the overall price index back to a record high. House prices have risen in each of the past six months, after declining throughout the second half of 2022, driven by a shortage of homes for sale. This is despite extremely high mortgage rates. As highlighted previously, the lack of homes for sales largely reflects the fact that many existing homeowners are reluctant to sell their properties because they are probably still benefiting from prior very low fixed mortgage rates. This is likely to correct systematically in 2024/25 as the US economy slows and interest rates are reduced.

The US Census Bureau released its Q3 2023 assessment of residential vacancies and home ownership during the week, which always provides a range of useful information. In particular, the rental vacancy rate increased further to 6.6% in Q3 2023. It has risen from a low of 5.6% in Q2 2022, which should help to further soften rental inflation. Since the beginning of 2022 the number of rental homes/apartments has unfortunately increased by a very modest 0.2% to 44.372 million (34% of all housing inventory). US home ownership was steady at 66% in Q3 2023, although for people under the age of 35 it is only 38.3%. Ownership jumps impressively to 62.9% for people aged 35 to 44 and then (as expected) rises systematically to a high of 79.2% for people 65 years and older.

US initial jobless claims rose to 217 000 in the week, slightly above market expectations for a rise to 210 000. Despite the increase, weekly jobless claims remain historically low, averaging just under 230 000 in 2023 compared with the average since 2000 of around 380 000.

The ADP private-payroll report showed that the private sector added 113 000 jobs in October, higher than the previous month’s reading of 89 000, but below expectations for a gain of 135 000. Encouragingly, the report showed that wage growth continued to decelerate, and the gap in wage growth between “job stayers” and “job switchers” is continuing to narrow.

The US Labour Department’s quarterly employment cost index, released on Monday, surprised modestly on the upside, indicating an annual increase in wages and benefits of 4.3%.

Consumer inflation in the euro area slowed more than expected, from 4.3% in September to 2.9% y/y in October 2023. This is the lowest level of inflation in the euro area since July 2021. The decline was largely due to lower energy and food prices. Core inflation slowed more modestly from 4.5% to 4.2% over the same period.

The Bank of England (BoE) kept its policy interest rates at a 15-year high of 5.25% for the second consecutive meeting but warned that rates would have to stay at a restrictive level for “an extended period of time.” BoE Governor Andrew Bailey said the bank “will be watching closely to see if further interest rate increases are needed, but even if they are not needed, it is much too early to be thinking about rate cuts”.

The Bank of Japan (BoJ) remained committed to ultra-loose monetary policy at its October policy meeting, leaving its short-term lending rate unchanged at -0.1%. However, the central bank adjusted its yield curve control framework for the second time in three months to allow yields to rise more freely. In particular, the BoJ will now regard the 1% ceiling for the 10-year Japanese government bond (JGB) yield as a reference rate, rather than a strict capping of the upper bound interest rates. However, the BoJ said it can announce unscheduled bond purchases or fixed rate operations at its discretion, depending on the path of global yields. In the week, the JGB yield rose to 0.91% from 0.87%, hovering around its highest level in over a decade.

China’s official manufacturing PMI fell to a below-consensus 49.5 in October, down from 50.2 in September. In addition, the services PMI slowed to a lower-than-expected 50.6 in October from 51.7 in September. China’s economic activity is struggling to gain traction despite the introduction of some additional monetary and fiscal policy measures in recent months. It is also clear that China’s ongoing housing market decline remains a serious drag on the country’s economic performance.

Norway’s central bank kept its key interest rate unchanged at 4.25% but said it would probably increase the cost of borrowing in December, unless inflation continued to abate.

SA’s Minister of Finance released the 2023 MTBPS on Wednesday, 1 November. Key factors to consider include:

• The government is expecting to collect R1.73 trillion in tax revenue during 2023/24, which is R56.8 billion less than the budgeted. Key areas of revenue weakness include corporate income tax, VAT and excise duties. In contrast, personal income tax collection is expected to remain ahead of budget. Unfortunately, over the medium term, government’s revenue outlook is also concerning, with the expectation for most major tax categories being revised lower. The revenue shortfall for both 2024/25 and 2025/26 is estimated at R121.4 billion relative to the 2023 National Budget.
• The Minister indicated that in next year’s Budget he will propose tax measures to raise an additional R15 billion in revenue for the 2024/25 fiscal year. This is being done to try to offset the current underperformance in revenue collection. It is unclear whether this will be in the form of additional tax increases or by simply not adjusting the tax brackets to allow for the impact of bracket creep.
• Government’s main budget non-interest expenditure is projected to decline by R3.7 billion relative to the February 2023 National Budget. This is despite the fact that there are R29.4 billion of spending increases to fund the implementation of the 2023/24 public service wage increase. According to National Treasury, this will be funded through reductions in departmental spending as well as allocations to provinces. Treasury will also use declared unspent funds, projected underspending and draw down on the contingency reserve.
• Government did not propose any additional allocations to SOEs. This is encouraging as it shows National Treasury is taking a hardline approach towards SOEs, insisting that they restructure before any funds are allocated. On the other hand, most of these SOEs are in serious financial difficulty and will need government assistance sooner or later.
• The Minister indicated that the current social relief of distress (SRD) grant  of R350 a month has been extended for one more year to March 2025. The grant currently benefits 7.4 million people and costs taxpayers R33.6 billion. In addition, a provisional allocation of R35.2 billion was set aside for the SRD grant over the medium term, pending a comprehensive review of the entire social grant system.
• The R56.8 billion tax revenue shortfall and currency weakness has forced the Minister of Finance to present a noticeable deterioration in SA’s key fiscal parameters. National Treasury is now projecting a budget deficit for 2023/24 of 4.9% of GDP, which is up from 4% at the time of the February 2023 National Budget. This means that gross government debt will increase to 74.7% of GDP from 72.2% for 2023/24. Government debt is expected to increase further over the next few years, peaking at 77.7% of GDP by 2025/26, while debt service costs will rise to 22.1% of main budget revenue by 2025/26. The risks to government finances are, unfortunately, firmly to the downside until the various initiatives to embed fiscal discipline and lift economic growth have been more fully achieved.

SA’s trade surplus remained largely unchanged in September at R13.1 billion, up from R12.6 billion in August. During the month imports fell a little more than exports. The decline in imports included a R3.3 billion drop in machinery and equipment and a R6 billion contraction in vehicles and vehicle parts. This was partly offset by a R5.5 billion increase in oil imports. Unfortunately, the decline in exports was broad-based, including a R4.5 billion decrease in coal and a R2.4 billion slump in precious metals. In the year to date, SA’s trade surplus has fallen to R43 billion from R180 billion in the same period last year.

The annual rate of growth in SA’s private sector credit increased slightly to 4.6% in September, up from 4.4% in August. Despite the increase in September, the growth in private sector credit has slowed appreciably over the past year, impacted by sustained higher interest rates and a tightening of lending standards by the banking sector. This slowdown is especially noticeable in household credit, including personal loans and residential mortgages.

SA experienced 11 days of no load shedding in October, helped by improvements at the Kusile power station and ongoing investment in rooftop solar. For October, Eskom’s energy availability factor averaged 58%, up from 54.8% in September. Every one percent increase in Eskom’s EAF is equivalent to around 470 MW.

The price of 95 unleaded petrol (Gauteng) fell by R1.78/l at the beginning of November. This was entirely due to a reduction in the international fuel price which, on its own, would have resulted in a R2.07/l reduction in the fuel price. Unfortunately, the weaker rand added 6c/l to the fuel price while the Department of Mineral Resources and Energy increase the slate levy by a further 22c/l. Over the past year, the petrol price has risen by 4.5%, which is a little misleading given that the country has experienced significant fuel price volatility in recent months.