Our weekly podcast by Kevin Lings:

US inflation stays low; SA’s mining, manufacturing output disappoints

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses two topics: The latest developments in the Middle East and their effect on the oil price;  and disappointing US labour market data. Escalation of the Middle East conflict has resulted in a dramatic increase in the oil price, which could see petrol and diesel prices shoot up in April and cause upward inflation pressure.

The focus areas during the week included:

Most major US equity market indexes finished a volatile week lower as investors digested the impact of the war in Iran, especially rising energy-driven inflation risks, and some mixed economic data. The S&P 500 ended the week down 2.0% and down by 1.5% year-to-date. Uncertainty about the conflict’s duration and its potential impact on energy markets also drove US bond yields higher as investors reassessed the upside risk to inflation and the outlook for Federal Reserve (Fed) monetary policy. US market shave pushed expectations for the next interest rate cut out to September of this year and the second cut to 2027, aligning with the Fed’s most recent Summary of Economic Projections (SEP). In addition, inflation expectations, a key component of bond yields, have risen. For example, the market-implied 10-year inflation expectations in US Treasury Inflation-Protected Securities (TIPS)markets have climbed about 5bps since late last week to roughly 2.3%.

After several consecutive weeks of gains, the STOXX Europe 600 Index fell by a substantial 5.5% in the week as risk appetite in Europe deteriorated significantly. Japan’s stock markets also fell sharply over the week, with the Nikkei 225 Index declining 5.5% and the broader TOPIX Index down 5.6%. The Japanese economy relies heavily on oil and gas from the Gulf region. The SA All Share Index lost 9.2% of its value in the week, hurt by a 10.1% decline in the Financial 15 index, a massive 13.8% loss in the Resource 10 index, and a 4.1% sell-off in the Industrial 25 index.

Since 28 February 2026, the rand has weakened by around 4.3% against the US dollar and by 2.1% on a trade-weighted basis. In comparison, the emerging market currency index has depreciated by amore modest 2.0% over the same period. Interestingly, the rand is the third-worst-performing emerging market currency in March. This is largely understandable given the country’s vulnerability to a spike in international oil prices. On a year-to-date basis, the rand and emerging market currencies are down 0.4% and0.5% against the US dollar respectively. In contrast, the US dollar has gained1.3% against the euro since the end of last year.

US employment declined by a shock 92 000 jobs in February 2026, which was well below market expectations for an increase of 55 000 (Bloomberg). The job losses were broad, with declines across both the private and government sectors, while the previous two months’ employment data was revised down by 69 000. In addition, the unemployment rate increased to 4.4%, up from 4.3% in January. The consensus expectation was for the unemployment rate to remain unchanged at 4.3%. Overall, the February 2026labour market report was very disappointing, especially as there were no offsetting factors other than a month-long strike involving 30 000 nurses and healthcare workers associated with Kaiser Permanente in California and Hawaii. The ongoing loss of employment in manufacturing (12 000 job losses) during February is a specific concern, given that higher tariffs were designed to boost US industrial activity. Since the beginning of 2005, the manufacturing sector has shed a total of 120 000 jobs. The US economy has shed 32 000 jobs over the past nine months, which includes a net gain of 315 000 jobs in healthcare! The latest employment report creates a problem for the Fed given that the weakness in the labour market should prompt a cut in interest rates, but the sharply higher oil price (due to the war in Iran) is likely to fuel concerns about higher inflation over the next couple of months. On balance, the argument to cut interest rates is more compelling than the concern about higher inflation, mainly because the higher oil price will be seen as having a relatively short-term effect on inflation.

US weekly jobless claims held steady at 213 000 this past week, slightly below market expectations for claims to increase marginally to 215 000. Continuing claims – reflecting the total number of people receiving benefits each week – rose modestly to 1.87 million, suggesting that on average, workers are taking longer to find new employment.

Private sector payroll processing firm ADP reported that private sector employment increased by 63 000 jobs in February, above the consensus estimate for a gain of 50 000 jobs, and up from January’s downwardly revised increase of 11 000 jobs. This was the highest monthly increase in employment since November, driven by job gains in construction, education, and health services. Small businesses (employing between one and 19 people)accounted for the bulk of the monthly increase (+58 000 jobs).

The US ISM manufacturing index was recorded at 52.4 in February, down marginally from 52.6 in January, but above expectations of51.5. This is the manufacturing sector’s second consecutive month of expansion and just the third month over the key 50 index in the last 40 months. A breakdown of the data shows a notable month-over-month improvement in employment, while the prices paid component of the index hit the highest level since June 2022.

The US ISM services PMI surprised on the upside in February 2026, rising a substantial 2.3 index points to 56.1, ahead of market expectations of 53.9. February’s level is the highest since July 2022. In addition, February was the 20th consecutive month of expansion in the US services sector. Strength in new orders, business activity, and employment supported the headline figure, while the increase in prices paid persisted, but eased somewhat from January 2026.

The SA petrol price increased by 20c/l on 4 March, and the diesel price rose by between 62c/l and 65c/l. The increase mainly reflects the rise in the international oil price during February (up 4.8% m/m). The latest price adjustment follows a decline in the petrol price (65c/l) at the beginning of February, and a drop of 65c/l at the beginning of January. Importantly, February’s decline is not yet reflected in SA inflation data. Unfortunately, the recent US/Israel attack on Iran and its subsequent attack on numerous countries in the Middle East have pushed the oil price significantly higher (Brent oil is up 43.7% year-to-date and 25.9% over the past year. In comparison, SA’s annual rate of fuel inflation was -10.9% y/y in February 2026). At the same time, the rand has weakened measurably against the dollar (mainly because of dollar strength). The result is that the daily under-recovery on SA’s petrol price has jumped to 387c/l, while the daily under-recovery on Sa's diesel price is now a massive 700c/l. These estimates do not consider further increases in the oil price today, which suggests that the fuel price under-recovery could increase further in the short term. If the daily under-recovery on the petrol and diesel price remains unchanged at 387c/l and 700c/l respectively, then in April, SA CPI will rise by 1.0 percentage points more than the current estimate for the monthly increase, taking the annual rate of inflation up from a forecast 3.3% to 4.25%, which would reduce the scope for SA interest rate cuts in the short- to medium-term depending on the duration of the Middle East conflict. We are still working on the assumption that if the conflict is resolved within the next week or two, the oil price should adjust lower. We will monitor the under-recovery estimate each day as developments unfold and the oil price and rand exchange rate adjust.

China outlined its economic priorities for 2026 at the National People’s Congress, the annual policy-setting parliamentary meeting. China set a GDP growth target range of 4.5% to 5% for 2026, the lowest since at least the 1990s and the first reduction since 2023. The budget deficit is projected at around 4% of GDP, roughly in line with last year, while the consumer inflation target remains at 2%. The targets mark the first year of China’s new five-year plan through 2030. Policy makers signaled continuity in their strategic focus on technology self-sufficiency and strengthening leadership in advanced manufacturing, even though headline growth expectations have been moderated.

Premier Li Qiang said in the annual government work report that China must “hone our capabilities to navigate external challenges”. He cited boosting domestic demand as the country’s top policy objective in 2026, with renewed emphasis on expanding investment. Beijing unveiled new financing tools to boost investment worth 800 billion yuan ($116 billion) from 500 billion yuan in 2025. Local governments will be permitted to issue 4.4 trillion yuan in special-purpose bonds to fund investment projects. The government also plans to issue 1.3 trillion yuan inultra-long special sovereign debt, and 250 billion yuan in special bonds will be earmarked to continue its consumer goods trade-in programmes, down from 300 billion yuan allocated last year. Defense spending is set to rise 7%, the slowest increase since 2022.

China’s manufacturing data for February 2026 provided a mixed picture, highlighting resilience in external demand alongside softer domestic conditions. The official manufacturing PMI edged lower to 49.0 from 49.3 in January, although the reading may have been affected by the timing of the New Year. In contrast, the private sector Rating Dog PMI, compiled by S&P Global, rose to 52.1 from 50.3 previously. The divergence mainly reflects differences in survey composition – the official gauge is skewed toward large, state-owned and domestically oriented firms, while the private survey captures smaller, export-focused companies.

Data released by Eurostat indicated that consumer inflation in the euro area rose from 1.7% in January to 1.9% in February. This was above market expectations that it would remain unchanged at 1.7%. The larger-than-expected increase is a concern, as this occurred before the Middle East war started. Once the data was released, market expectations for monetary policy shifted dramatically, with the probability of the European Central Bank raising rates increasing to more than 50%.

The seasonally-adjusted unemployment rate in the euro area fell to an all-time low of 6.1% in January 2026. Analysts had expected the unemployment rate to remain unchanged at 6.2%, although the December reading was revised up from 6.2% to 6.3%. Youth unemployment also declined in January to 14.8% from 15.0% in the prior month.

Bank of Japan (BoJ) governor Kazuo Ueda said that while the conflict in Iran clouds the outlook for Japan’s economy, the BoJ will continue to raise interest rates if the economy and prices move in line with its quarterly projections.

The Japanese Trade Union Confederation (Rengo) asked its member unions to demand an average wage increase of 5.94% this year, only slightly lower than last year’s 6.09% request. Japan’s spring “shuntō” wage negotiations between labour unions and company management are closely watched by the government and the BoJ as they are a clear annual signal of whether wage growth will result in sustained higher inflation.

The war in Iran, which started on Saturday 28February, is in its 10th day. Understandably, the market’s attention is mainly centered on four key uncertainties: The duration of the conflict, the risk that the war spills over into a much more significant regional conflict, the extent of the disruption to oil supply and the movement of other goods moving through the Strait of Hormuz (see chart of the week), and the implications for the oil price.

Iran is a sizeable oil producer, the fourth largest within OPEC, accounting for roughly 4% of global oil supplies, with about 80% of its exports going to China. The country also sits in a strategically important position since (in the past) it has been able to control access to the Strait of Hormuz, a critical choke point through which approximately 20% of the world's oil supply passes, as well as a meaningful share of global liquefied natural gas (LNG) production.

Regionally, it can be argued that Asia and Europe are particularly exposed to the conflict given their reliance on imported oil that moves through Middle Eastern shipping lanes. In contrast, the US has been a net oil exporter since 2019, and the economy is far less energy-intensive than in the past. Since 1950, the energy needed to produce one unit of GDP has fallen by about 70%, driven by efficiency gains and the expansion of the services sector.

Markets responded quickly to the outbreak of war. Oil prices moved higher on fears of supply disruptions, energy equities outperformed, broader global equity markets saw increased volatility and periods of risk aversion, while safe-haven assets, including the US dollar, attracted inflows. The oil market entered this episode in a modest over supply position and with some spare capacity, suggesting that the oil price reaction partly reflects a much higher risk premium and not just the physical disruption to supply.

Below are some of the key price movements over the past week since the Iran war started: