The focus areas during the week included

• The S&P 500 equity index suffered its worst weekly drop in 18 months, declining by 4.2%, as a range of economic data triggered concerns that the Federal Reserve (Fed) has waited too long to start its interest rate cutting cycle. The market was also undermined by rumors that Nvidia may be the subject of a Justice Department anti-trust investigation.

• While the Fed is highly likely to start cutting interest rates later this month, the market is unsure about the extent and duration of the rate cutting cycle, including whether the Fed will opt to start with a cut of 25 bps or 50 bps. On balance, Friday’s labour market report appeared to reduce expectations that the Fed would cut rates by a full 50 bps, with the CME FedWatch Tool reflecting a 70% chance of the Fed cutting by only 25 bps on 18 September.

• US bond yields moved lower, with the yield on the 10-year government bond ending the week at 3.72%, down from 3.91% at the end of the previous week. With the two-year bond yield at 3.66%, the term spread between the two- and 10-year instruments has finally returned to positive territory, after more than two years of inversion.

• SA’s All-Share Index also had a difficult week, declining by 2.8%. Although the equity market is still up 5.8% year-to-date, the market has lost 3.8% of its value over the past nine trading days. This is despite a positive GDP performance in Q2 2024, as well as increased electricity production. In the absence of strong domestic economic fundamentals, the local equity market will continue to be buffeted by fluctuations in international investor sentiment.

• In August 2024, the rand and emerging market currency index both gained 2.5% against the US dollar, helped by the fact that the dollar weakened by 2.2% against the euro over the same period. Year-to-date the rand is up 2.8% against the dollar, gaining 5.7% since the National Election at the end of May 2024.

• In August 2024, the US unemployment rate improved slightly to 4.2% from 4.3% in July, but was up from 4.1% in June. The unemployment rate has moved higher in recent months, rising systematically from 3.7% at the start of 2024. While an unemployment rate of 4.2% is still low by historical standards, the upward trend has been established and is likely to continue. In addition, US non-farm employment rose by a modest 142 000 jobs in August 2024, which was below market expectations for an increase of 165 000 (Bloomberg), and well below the average monthly gains of 207 000 jobs in the first six months of the year. Overall, the August labour market report was mixed. The improvement in the unemployment rate to 4.2% was the key positive, especially after the sharp increase in July. In contrast, the modest job gains (142 000 jobs) confirmed that the labour market has a softening bias – certainly relative to the first half of 2024 – while the substantial downward revision to the prior two months of job gains (-86 000 jobs) will raise concerns that the labour market is slowing more than many people recognise. On balance, we would still expect the Fed to cut rates by 25 bps this month (and not 50 bps) but signal a path of steady rate cuts well into 2025.

• US job openings fell to 7.673 million in July, which is down from a revised 7.910 million in June and a cyclical high of 12.182 million in March 2022. The latest decline in job openings pushed the ratio of job openings to unemployed workers to the lowest level in more than three years and slightly below the pre-pandemic level.

• US weekly jobless claims remained relatively low at 227 000, indicating that employers are mostly pulling back on hiring additional employees, rather than reducing staff. US weekly jobless claims have remained well below 250 000 during the first eight months of the year.

• US Federal Reserve Governor Chris Waller, speaking at the University of Notre Dame at the end of the week, outlined his reasons for the Fed to start cutting interest rates. The conclusion of his speech is speech is worth repeating in full: “I believe it is important to start the rate cutting process at our next meeting. If subsequent data show a significant deterioration in the labor market, the FOMC can act quickly and forcefully to adjust monetary policy. I am open-minded about the size and pace of cuts, which will be based on what the data tell us about the evolution of the economy, and not on any pre-conceived notion of how and when the Committee should act. If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings. If the data suggests the need for larger cuts, then I will support that as well. I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate. Those decisions will be determined by new data and how it adds to the totality of the data and shapes my understanding of economic conditions. While I expect that these cuts will be done carefully as the economy and employment continue to grow, in the context of stable inflation, I stand ready to act promptly to support the economy as needed”.

• The US ISM manufacturing index for August remained subdued at 47.2, with new orders and employment also remaining well below the 50-index level.

• In the second quarter of 2024, South African GDP grew by a modest 0.4% q/q, (seasonally-adjusted, but non-annualised). This compares with a revised 0% performance in Q1 2024 and market expectations for growth of 0.5%. Over the past year the economy expanded by a mere 0.3%, after growing by 0.7% in 2023. The GDP performance in Q2 2024 was mainly boosted by improved electricity production, an increase in financial services activity and election-related spending, which helped retail activity in June 2024. The tourism industry is also in better shape. In contrast, transport activity (rail, road, port) fell sharply during the quarter, while output from the mining sector declined for the second consecutive quarter, signalling that the industry has entered recession conditions. Under these circumstances, it is critical that the Government of National Unity (GNU) remains stable, that government policy implementation demonstrates a high degree of urgency, that Eskom and Transnet can continue to be reformed, and that local government is substantially revamped. Unfortunately, South African consumer and business confidence remains relatively subdued, unconvinced that recent policy initiatives will make a meaningful difference. Greater confidence from the private sector is key to unlocking SA’s growth potential.

• SA’s current account deficit narrowed to 0.9% of GDP in Q2 2024 from 1.5% of GDP in Q1 2024. This was broadly in line with market expectations. The improvement in the current account balance was helped by an improvement in the trade balance (+0.3% of GDP) as well as an uplift in the income balance, which includes interest and dividend income (+0.6% of GDP). In contrast, the services balance, which includes tourism flows, deteriorated.

• According to Statistics South Africa, electricity production rose by a further 1.3% m/m in July, after increasing by 2.4% m/m in June. Electricity production has increased by an impressive 8.5% over the past year and is at its highest level since July 2020. In the past week, Eskom’s Energy Availability Factor was 66.3%. It has been consistently above 60% for the past four months.

• European Central Bank (ECB) Governing Council member Gediminas Simkus told Econostream Mediathat he saw a “clear case” for an interest rate cut in September but regarded the potential for another one in October as “quite unlikely.” In his view, it was appropriate to ease policy, given the current disinflationary trend and structurally “sluggish” growth, but “by how much and in exactly which month—time will tell”. His colleague, Martins Kazaks, told Latvian TV that policymakers could take the next step to decrease rates in September, while adding that policy should only ease gradually.

• ECB Executive Board member Piero Cipollone told France’s Le Mondenewspaper that recent economic data so far had confirmed that inflation was slowing, giving scope for the ECB to lower borrowing costs. “There is a real risk that our stance could become too restrictive and harm the economy,” he said. However, Bundesbank’s Joachim Nagel continued to warn about premature easing, given elevated wage growth and services inflation, in an interview with the Faz

• China’s official manufacturing purchasing managers’ index (PMI) slipped to a lower-than-expected 49.1 in August from 49.4 in July, as production and new orders worsened (data provided by the National Bureau of Statistics). The PMI has hovered below the 50-mark threshold for all but three months since April 2023. In contrast, the non-manufacturing PMI,