Our weekly podcast by Kevin Lings

SA’s inflation pressures increase; US Fed revises economic forecasts

In this podcast, STANLIB’s Chief Economist, Kevin Lings, points out that SA’s May CPI rate, at 2.8%, shows inflation remains well under control, although there is likely to be pressure in coming months from higher food and oil prices. He discusses what this means for the SARB’s plans to launch a new inflation target of 3% later this year.

The US Federal Reserve’s latest decision to keep interest rates unchanged was not surprising, Kevin says. More interesting was that the Fed reduced its forecasts for US economic growth and raised its estimate of US inflation for 2025, and what this means for US interest rates.

The focus areas during the week included

• The S&P 500 index ended the holiday-shortened week down 0.2%, after declining by 0.4% in the prior week. Some of the news flow was positive, including a statement on Thursday by President Trump suggesting that there was a “substantial chance of negotiations” with Iran in the near future (which was clearly undermined over the weekend). However, this was insufficient to offset further evidence of an economic slowdown in the US or heightened concern about the Israel/Iran conflict. Interestingly, of the 45 equity indices we monitor around the world, 30 declined in the week, including SA’s All-Share Index (-0.6%), the Stoxx 600 (-1.5%), UK FTSE (-0.7%), and Shanghai Composite Index (-0.5%).

• The US bond market strengthened, with the yield on the 10-year government bond ending the week at 4.38%, down from 4.41% at the end of the previous week. The two-year bond ended at 3.9%, down from 3.96% the prior week. The US bond market is pricing in a faster pace of monetary policy easing than the Federal Open Market Committee (FOMC)’s projection. This probably reflects recent better-than-expected inflation data, coupled with growing geopolitical concerns and weakening economic data.

• The rand continues to underperform its emerging market peers. For example, year-to-date it has strengthened by 4.3% against a much weaker dollar, while the emerging currency index has gained 6.5% against the dollar over the same period. Many individual emerging market currencies are up more than 10% against the dollar. They include the new Taiwan dollar, the Czech koruna, the Brazilian real, and the Hungarian forint.

• The US FOMC kept the Federal Funds target interest rate unchanged at a range of 4.25% to 4.5%. This was in line with market expectations. This is the fourth consecutive meeting at which the central bank has opted to leave its policy rate range unchanged. At a press conference after the meeting, Federal Reserve (Fed) Chair Jerome Powell noted that “despite elevated uncertainty, the economy is in a solid position”. He said the Fed remains “well positioned to respond in a timely way to potential economic developments”.

• The FOMC released its updated projection for the Federal Funds rate, known as the “dot plot”, which continues to reflect two rate cuts this year. The forecast for next year was reduced to one rate cut, down from two in the March forecast. The FOMC also reduced its expectations of real GDP growth, while estimates of inflation and unemployment rose marginally.

• In a Friday morning interview with CNBC, Fed Governor Christopher Waller made comments suggesting the central bank could be in a position to cut rates as soon as July, which appeared to provide some support for stocks early on Friday.

• US retail sales fell by 0.9% m/m in May, below market expectations for a decline of 0.7%. The decline was largely driven by weaker spending on building materials and motor vehicles. Lower vehicle sales are likely to reflect some give-back after surging in March as consumers tried to pre-empt higher tariffs. In addition, retail sales growth in April was revised down from a 0.1% gain to a 0.1% decline. Interestingly, the control group of retail sales, which excludes spending on more volatile categories such as gasoline stations, motor vehicles and building materials, performed a bit better. It rose by 0.4% m/m, in line with market expectations, suggesting ongoing resilience in the retail sector.

• The US National Association of Home Builders (NAHB) reported that its Housing Market Index reading, which gauges the overall sentiment of home builders, fell to 32 in June, down two points from May and the lowest reading since December 2022. Readings below 50 indicate that a majority of builders hold a negative current and near-term outlook for the housing market. According to NAHB Chairman Buddy Hughes, “buyers are increasingly moving to the sidelines due to elevated mortgage rates and tariff and economic uncertainty”.

• The US Department of Housing and Urban Development reported that construction of new homes fell by 9.8% m/m to a seasonally-adjusted annual rate of 1.26 million in May, the lowest level since May 2020. This is another indication of a weakening US housing market.

• US initial jobless claims declined to 245 000 in the week, slightly below estimates for 250 000 claims. Continuing claims, which measure the total number of people receiving benefits, ticked down to 1.94 million from 1.95 million the prior week. Importantly, the number of jobless claims has been trending higher in 2025, indicating that the labour market remains healthy but is gradually softening. The US unemployment rate remains low at 4.2%, and the 7.4 million job openings still exceed the 7.2 million people that are unemployed. Finally, wage growth is expected to remain above inflation, providing support for consumer spending.

• The US Conference Board’s Leading Economic Index (LEI), which is intended to provide an early indication of significant turning points in the business cycle and where the economy is heading in the near term, fell marginally by 0.1% in May to 99. This was below market expectations for the index to remain unchanged. The decline in the index was mainly due to lower consumer confidence and a fall-off in the new orders component of the ISM manufacturing index. The key positive was a rebound in the S&P 500 equity index. Although the decline in the leading indicator triggered the recession signal, the Conference Board noted that it does not expect a recession. It forecasts that the economy will slow to about 1.6% real GDP growth in 2025.

• In May 2025, SA’s headline CPI inflation increased by 0.2% m/m, which was slightly above market expectations for an increase of 0.1% m/m. A breakdown of the CPI data reveals that food inflation rose by a further 1.2% m/m in May. This follows a monthly increase of 1.3% in April, pushing the annual rate up from 3.3% to 4.4%. Despite the slightly larger-than-expected monthly increase, the annual rate of inflation remained unchanged at 2.8%. Over the past eight months, SA’s headline inflation rate has remained in a narrow range of 2.7% to 3.2%. Ordinarily this would encourage the Reserve Bank to cut interest rates further – even though inflation is expected to trend higher in the second half of 2025. However, the timing of a meaningful reduction in SA’s inflation target remains unclear, which, together with the escalation of the Israel/Iran conflict and potential further rise in the international oil price, will probably encourage the Reserve Bank to maintain a cautious approach to monetary policy.

• SA’s retail sales rose by a welcome 0.9% m/m in April 2025 after contracting by -0.3% m/m in March and -1.1% m/m in February. Over the past year, sales have risen by an impressive 5.1% y/y (real), partly boosted by subdued inflation and a low base of retail activity a year ago. A breakdown of retail spending by major category highlights that a significant portion of the increase in retail sales continues to be channelled into clothing and footwear. For example, over the past year, retail spending at clothing/footwear stores increased by 12.5% y/y (in real terms), contributing around 41% of the annual increase in total retail sales. In contrast, sales by hardware stores have continued to struggle (down 8.3% y/y in real terms), together with sales of jewellery, sporting goods, and some smaller categories.

• The Bank of England (BoE) held interest rates steady at 4.25%. This was in line with market expectations. The Monetary Policy Committee (MPC) cited elevated global uncertainty and persistent inflationary pressures. Policymakers were split 6-3 over the decision. BoE Governor Andrew Bailey said: “interest rates remain on a gradual downward path” although the central bank would take a “gradual and careful” approach to further rate cuts.

• The Swiss National Bank reduced its policy interest rate by 25 bps to 0%. The decline in Swiss interest rates has been due to low inflation as well as the strength of the Swiss franc. The bank said it was willing to intervene in currency markets if necessary to keep inflation on track.

• Norges Bank (the central bank of Norway) unexpectedly cut its key interest rate by 25 bps to 4.25%. This is the first interest rate reduction in Norway in five years. The Central Bank highlighted that inflation has decelerated.

• German investor confidence (as measured by the ZEW Research Institute) rose far more than expected in June 2025 to 47.5 index points. This is up from only 25.2 index points in May and ahead of market expectations for the index to improve to 35. The improvement comes after the government approved a huge tax relief package earlier this month.

• The Bank of Japan (BoJ) left its policy interest rate unchanged at 0.5%, as expected, and signalled that it would slow the pace of tapering its purchases of Japanese government bonds (JGBs) from April 2026. The latter decision, while also anticipated, suggests that the BoJ is concerned about disrupting markets after JGB yields rose sharply in late May, partly on concerns that the BoJ may be tapering its purchases too aggressively. Some hawkish market participants argued that the BoJ may still hike interest rates once more this year. The yield on the 10-year JGB ended the week at 1.42%, up from 1.4% at the end of the previous week.

• Unfortunately, the US and Japan failed to reach an agreement on tariffs at the recent Group of Seven summit in Canada. Most analysts expected that a trade deal would be announced. At this stage the US is set to return its reciprocal tariffs to their higher levels on 9 July, which would increase the levies on Japanese imports to 24% from the current 10%. Japan’s top trade negotiator, Ryosei Akazawa, said that 9 July is not a deadline for the US/Japan negotiations, that both countries have national interests that cannot be compromised, and that it is in Japan’s interest to protect the profits of its key automotive industry. Scott Bessent from the US previously indicated that ongoing trade negotiations would override a return to the initial reciprocal tariffs for that particular country.

• Japan’s core consumer price index rose by 3.7% y/y in May, slightly ahead of market expectations for an increase of 3.6% and also higher than the April reading of 3.5%. The primary driver of the increase was non-fresh food, notably a surge in the price of rice.

• New home prices in 70 Chinese cities fell by an average of 0.2% m/m in May, the largest month-on-month decline in seven months, while used home prices fell 0.5%, the steepest decline in eight months. The latest housing data suggests that the recent fiscal and monetary policy stimulus measures have had only a limited impact.

• In the first four months of 2025, foreign ownership of US government debt rose by a net $455 billion, taking the total foreign holding of US government debt up to just over $9 trillion, which is close to the record high achieved in March 2025. This is despite China selling a very modest $1.77 billion in the first four months of the year, which reduced its total ownership of US government debt to $757.3 billion or 8.4% of total foreign holdings. Japan remains the largest foreign investor, with $1.134 trillion. Numerous countries increased their ownership of US government debt in the first four months of the year, including the UK ($84.9 billion), Japan ($73 billion), Norway ($38.3 billion), UAE ($35.8 billion), France ($28.3 billion), Taiwan ($16.3 billion) and Israel ($15.5 billion).

• According to the UBS 2025 Global Wealth Report, global wealth grew 4.6% in 2024 after increasing by 4.2% in 2023. However, the rate of increase was far from uniform, with North America accounting for the majority of the rise. Adults in North American remain the wealthiest on average ($593 347) in 2024, followed by Australia/New Zealand ($496 696) and Western Europe ($287 688). Despite this, Switzerland continues to top the list of countries for average wealth per adult, followed by the US, Hong Kong SAR and Luxembourg. The US, mainland China and France have the highest number of dollar millionaires, with the US accounting for almost 40% of the total.