Our weekly podcast by Kevin Lings

US signals change in emphasis on interest rate policy

In this podcast, STANLIB Chief Economist, Kevin Lings, talks about Federal Reserve Chair Jerome Powell’s recent address at the Jackson Hole Symposium, where he indicates a notable shift in the Fed’s policy emphasis from managing inflation risks to addressing emerging weaknesses in the US labour market. This could signal the beginning of a new interest rate cutting cycle, with markets now pricing in a high probability of a rate reduction at the upcoming Federal Open Market Committee (FOMC) meeting.  Kevin also discusses SA’s July Consumer Price Index (CPI) data, noting a significant month-on-month increase driven by electricity, water, fuel, and food prices. While core inflation remains contained, the upward trend in headline inflation raises concerns about sustained price pressures in the months ahead.

The focus areas during the week included

• The S&P 500 Index surged by 1.5% on Friday, following Federal Reserve (Fed) chair Jerome Powell’s speech at the Jackson Hole Symposium in which he signalled a 25bps interest rate cut at the next Federal Open Market Committee (FOMC) meeting on 17 September. During the first four trading days of the week, the S&P 500 index was down 1.2%, which means that the gain on Friday pushed the index into positive territory for the week. Year-to-date, the S&P 500 index is up a respectable 10.0%, although it remains far behind the performance of the SA All Share Index, which rose by a further 0.8% in the week (in rands) and has delivered an incredible return of 31.8% year-to-date in dollars (excluding dividends). There has, however, been a significant divergence in investment performance between SA asset managers during the first eight months of 2025.

• The US Treasury market had largely recorded flat returns during the first four days of the trading week. However, Powell’s comments on Friday regarding monetary policy and employment also sparked a rally in US government bonds, with the yield on the US 10-year government bond falling from 4.33% on Thursday to end the week at 4.26%.

• The recent adjustment to the Fed’s interest rate policy stance (as signalled by Powell during his keynote address on Friday) resulted in the US dollar resuming its weakening bias, declining by 0.9% against the euro on Friday. Year-to-date, the dollar has lost 11.6% of its value against the euro, albeit from a position of being significantly overvalued. Unsurprisingly, the rand gained 1.5% against the weaker US dollar on Friday. Year to date, the rand and the emerging market currency index are both up 7.6% against the US dollar.

• In his speech, Powell acknowledged that the combination of upside risk to inflation and downside risk to employment posed a policy challenge for the FOMC in the pursuit of its dual mandate. However, Powell highlighted “that downside risks to employment are rising” and that “the shifting balance of risks may warrant adjusting our policy stance”. This indicates a high probability that the FOMC will resume its interest rate cutting cycle at the next policy meeting on 17 September. While a rate cut next month isn’t guaranteed (there is one more CPI and one more employment report due for release before the September meeting), it would be very awkward for the Fed to reverse this signal. Market pricing now reflects an 84% chance (22 August) of a 25bps cut on 17 September, up from a low of around 72% last week.

• The S&P Global US Composite Purchasing Managers Index (PMI) surprised to the upside in August 2024 at 55.4. This is the 31st consecutive month that the composite PMI has been above the key 50 index level. While the services sector PMI moderated from 55.7 in July to 55.4 in August, the manufacturing PMI rose to a 39-month high of 53.3 – well in excess of market expectations. It appears that the need to rebuild inventories, as well as some increase in demand for locally-produced goods because of the higher import tariffs, helped buoy the manufacturing PMI estimate. However, it is concerning that companies in the manufacturing and services sectors collectively reported the steepest increase in input prices since May. Tariffs were cited as a key driver of higher costs.

• The minutes from the July FOMC meeting showed that most Fed officials felt that risks to inflation outweighed concerns over the labour market. However, to be fair to the FOMC, the weaker-than-expected July labour market report, released after that meeting, has likely shifted the balance of risks for most FOMC members.

• US weekly jobless claims increased to 235 000 in the week ended 16 August. This is up 11 000 from the prior week. A Bloomberg survey of economists reflected a median forecast of 225 000 initial jobless claims. Continuing unemployment claims were also reported higher at 1.972 million in the week ended 9 August, an increase from the 1.942 million registered the week before, highlighting that it has become more difficult for people to find a job.

• In July 2025, South Africa’s headline CPI inflation increased by a substantial 0.9% month-on-month, which was in line with market expectations. This pushed the annual rate of inflation up from 3.0% to 3.5%. From October 2024 to June 2025, SA’s inflation rate remained in a narrow range of 2.7% to 3.2% but has now broken to the upside and is expected to continue to drift higher over the next 12 months. The large monthly increase of 0.9% was driven mainly by electricity, water, food and fuel, with the most concerning component being the increase in food prices. Encouragingly, although core inflation rose by 0.4%m/m in July, the annual rate rose only marginally from 2.9% to 3.0%. Core inflation has been well contained at around 3.0% in recent months, which should help to control inflation expectations.

• The Euro-area Composite PMI Output Index rose to 51.1 in August 2025, up from 50.9 in July. The increase was driven by manufacturing, which grew at the fastest rate in almost three-and-a-half years, helped by the fact that new orders rebounded after 14 months of decline. This is the third consecutive month that the Euro-area Composite PMI has been in expansion territory.

• Consumer confidence in the Euro-area weakened in August to -15.5, down from a four-month high of -14.7 in July. This measure of consumer confidence is well below its long-term average, according to data provided by the European Commission.

• Japan’s exports declined by 2.6%y/y in July 2025, hurt by the higher import tariffs imposed on Japan by the US. The decline was worse than the consensus forecast for a fall of 2.1%y/y. In June 2025, Japan’s exports contracted by 0.5%y/y. Key areas of export weakness, especially to the US, included vehicles, vehicle parts and microchips. Unfortunately, Japan’s exports to China, the European Union, and the Association of Southeast Asian Nations also fell during the month.

• From 1 September 2025, the Canadian government will remove some tariffs on goods imported from the US (mainly goods that comply with the North American free-trade pact). Import tariffs on steel, aluminium and vehicles will remain in place. The announcement was made one day after Canadian Prime Minister Mark Carney and US President Donald Trump spoke on the phone. Carney highlighted that 85% of Canada’s trade with the US is tariff-free. In response, the White House said the move was “long overdue” and that Carney’s statement paved the way for “continuing our discussions with Canada on the administration’s trade and national security concerns”.

• Sweden’s central bank, the Riksbank, left its policy interest rate unchanged at 2%, although it reiterated that a further interest rate cut this year is still possible. Policymakers are trying to balance higher-than-expected inflation in recent months with weak economic activity.