What’s next for US interest rates; SA’s tax collection ahead of budget

In this podcast, STANLIB’s Chief Economist, Kevin Lings, examines the US Federal Reserve’s (Fed) decision to cut interest rates by 25 bps and the caution about future cuts that the Fed expressed in its press conference. He also highlighted SA’s encouraging fiscal position, with tax revenue collection ahead of budget across all major categories, and government spending likely to remain within budget.

The focus areas during the week included

• The S&P 500 index gained 0.7%. It rose by 2.3% in October after increasing by 3.5% in September. Year-to-date the S&P 500 is up 16.3%, but it ended the week slightly off the record high established on Tuesday. The market continues to be boosted by the mega-cap technology companies, which are benefiting from investments in artificial intelligence.

• Incredibly, since the low in October 2022, the S&P 500 has gained 90%, or 98% if you include dividends. While this is an impressive gain, this bull market is not necessarily an outlier in its total gain or duration of the upswing. Over the past 80 years, the 12 prior bull markets (excluding the current one) have averaged a gain of about 200% and lasted five years. Notably, eight of those made it past the three-year mark, with the longest (2009 to 2020) stretching over 11 years. This bull market is neither young nor old – it is somewhere in the middle.

• Japan’s stock markets climbed to fresh record highs, with the Nikkei 225 Index gaining 6.3% and the broader TOPIX Index 1.9%. The Nikkei’s monthly increase of 16.6% in October was the biggest since January 1994. The Bank of Japan’s (BoJ) decision to leave interest rates unchanged and hopes of a large-scale economic stimulus package buoyed market sentiment.

• In contrast, the STOXX Europe 600 Index ended the week 0.7% lower, after rallying to a fresh high on Monday, as expectations of more interest rate cuts by the European Central Bank (ECB) waned. SA’s All-Share Index ended the week down 1.1%, hurt by a broad-based decline in most of the main indices. Year-to-date the local equity market is still up 29.9%.

• US bond yields ended the week higher. The yield on the 10-year rose from 4.02% to 4.11%, while the two-year yield jumped from 3.48% to 3.6%. The weakness mainly reflected the tone of the US Federal Open Market Committee’s (FOMC) decision on Wednesday as well as the hawkish comments by US Federal Reserve (Fed) Chair Jerome Powell in the FOMC press conference.

• In the two months from August to September 2025, foreign investors bought a total of $4.45 billion of South African government bonds. This is the largest two months of foreign purchases since at least 1994.
  
  
• The US government shutdown remains in place and has now been in effect for the past 33 days (making it the second-longest in history). Since 1 October, at least 29 major economic data releases have been delayed. The US Senate has voted 13 times to try to end the filibuster and resolve the shutdown, but none of the attempts got close to achieving the 60 votes needed to end the debate. Given the lack of progress in resolving the shutdown, the use of the “nuclear option” has probably become a lot more tempting for the Republican Senators, despite the obvious drawbacks. The pressure to resolve the shutdown will continue to increase, given its negative impact on salary payments and social support. Approximately 670 000 federal employees are furloughed, while around 730 000 other government employees deemed essential, such as air traffic controllers, transportation security, medical staff etc, are working without pay. These estimates exclude the military/law enforcement officials who also continue to work.

• Much of the market’s attention was focused on Thursday’s meeting in South Korea between US President Donald Trump and Chinese President Xi Jinping to discuss trade relations between the two countries. The leaders agreed to a one-year trade truce, which will see a reduction of US tariffs on Chinese imports (the US will cut fentanyl-related tariffs from 20% to 10%, reducing overall tariffs on China to 47% from 57%), a suspension of China’s export controls on rare earth materials, and a resumption of China’s purchases of US soybeans and other agricultural products. While the concessions in the agreement were relatively modest and left room for further trade war escalation in the long term, the outcome provided some temporary relief and helped to boost sentiment. Separately, the US and South Korea finalised a trade deal under which Seoul will invest $350 billion in the US in exchange for tariff relief.
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• On Wednesday, the FOMC decided to cut the Federal Funds target interest rate by 25 bps to a range of 3.75% to 4%. This was in line with market expectations. The Fed started to cut interest rates in September 2024 and, since then, has cut rates on five separate occasions and by a total of 150 bps. Two members of the FOMC dissented. Fed Governor Stephen Miran preferred a rate cut of 50 bps and Kansas City Fed President Jeffrey Schmid argued for interest rates to remain unchanged. The dissents highlighted the divide between Fed officials as they attempt to determine an appropriate monetary policy, given persistently above-target inflation and a weakening labour market. The FOMC also announced that it will end Quantitative Tightening (QT) on 1 December. This was largely expected. At the FOMC press conference, Powell highlighted that there were “strongly divergent views” among the FOMC members about the interest rate decision on 10 December and that another rate cut at the central bank’s December meeting “is not a foregone conclusion”. Powell suggested that, given the lack of economic data due to the ongoing federal government shutdown, policymakers could take a more cautious approach in December.

• The ECB kept the key deposit interest rates unchanged at 2% for a third consecutive meeting,  in line with market expectations. Inflation in the Eurozone has remained around 2% for the past eight months. In making the decision, the ECB reiterated its policy guidance: decisions will be made meeting by meeting, they will be data dependent, and there is no precommitment to a particular rate path. ECB President Christine Lagarde said that the inflation outlook is broadly unchanged and that the economy continues to grow. She also acknowledged that the external outlook remains uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.

• The annual rate of consumer inflation in the Eurozone slowed to 2.1% in October from 2.2% in September, and in line with market expectations. Higher services costs were offset by lower energy prices. The core rate of inflation held steady at 2.4%.

• Eurozone GDP grew by 0.2% quarter-on-quarter in Q3 2025, up from growth of 0.1% q/q in the prior three-month period. The Q3 growth rate was slightly faster than market expectations for growth to remain unchanged at 0.1% q/q. France (+0.5% q/q) and Spain (+0.6% q/q) drove most of the expansion. Germany recorded zero growth in the quarter, despite a fiscal stimulus package – which will obviously take time to have a meaningful impact.

• The BoJ kept the target interest rate unchanged at 0.5%, in line with market expectations. At the BoJ’s press conference, Governor Kazuo Ueda maintained his hawkish stance and reiterated that “the likelihood of a rate hike is increasing”. However, he dropped any reference to the underlying inflation rate that he had previously emphasised and instead stressed that there was a need to monitor developments ahead of the spring wage negotiations, particularly in the vehicle industry, which is heavily impacted by tariffs.

• SA National Treasury released the September 2025 statement of revenue, expenditure and borrowing. It showed that South African gross tax revenues were R165.1 billion in September 2025, accounting for 8.3% of the budgeted R1.99 trillion gross tax revenue for 2025/26. With half of the fiscal year gone, SARS has collected 46.6% of budgeted tax revenue, which is ahead of what was collected this time last year (45.6%). On an annual basis, gross tax revenue collection was relatively robust, growing by 10.4% y/y in September, the third consecutive month of double-digit growth and an acceleration from 10% y/y growth in August. This is well above the 7% annual growth required to achieve budgeted tax revenue for 2025/26, suggesting that tax revenue could outperform the 2025/26 Budget estimate. A key driver of the improved tax collection in September was corporate tax collection, which rose by a significant 14.8% y/y after increasing by 11.6% y/y in August. In addition, personal income tax (PIT) collection continued its recent solid performance, rising by 8.5% y/y, compared to 9.3% y/y in August. The growth in September was largely in line with the 8.6% needed to achieve budget. Lastly, VAT collection rose by a robust 11.8% y/y in September, up from 9.1% y/y in August. The more robust VAT intake was boosted by a rebound in import VAT collection (9.1% y/y) along with a continued strong rise in domestic VAT collection (7.7% y/y). In addition, VAT refunds continued to be slow, providing additional support.

• Government’s main budget expenditure surged in September as departments continue to catch up from a slow start to the fiscal year. It grew  by a substantial 16.4% y/y, well above the 7.8% reflected in the National Budget. A large portion of the increase was driven by the Department of Transport. The budget deficit was recorded at R15.4 billion in September, a significant surge from last year’s deficit of R4.4 billion, driven by the significant increase in expenditure.

• In September 2025, SA’s producer price index (PPI) fell for the second time this year, decreasing by -0.1% m/m largely because of lower fuel prices. In August 2025, PPI rose by 0.3% m/m. The decline in September was well below market expectations for prices to rise by +0.2% m/m (Bloomberg). Despite the monthly decline, the annual of PPI inflation accelerated to 2.3% y/y from 2.1% y/y in August, but it was below market expectations for an increase of 2.6% y/y. The main contributors to annual PPI inflation in September were food, beverages, furniture, and clothing. In 2024, producer inflation averaged only 3% from 6.9% in 2023 and 14.3% in 2022 (the highest producer inflation rate since 2008). Headline producer inflation is expected to drift slightly higher but remain well contained in a range of 2.5% to 4%.

• In September 2025, growth in SA’s broad money supply (M3) was 6.1% y/y, which is a slight deceleration from growth of 6.2% y/y in August. Growth in money supply has been on a downward trend since peaking at 11.2% y/y in June 2023.

• SA’s private sector credit extension rose by a significant R70.1 billion (+1.4% m/m) in September, following a robust increase of R69.6 billion (1.4% m/m) in August. Given the relatively large monthly increase, it is unsurprising that the annual rate of growth in private sector credit extension accelerated to 6% y/y from 5.9% y/y in August. This is the fastest rate of growth in credit since June 2023. Importantly, the breakdown of credit extension shows that corporate credit drove most of the increase, as it rose by R64.6 billion (+2.3% m/m) in the month. In contrast, consumer credit increased by a more modest R5.5 billion (+0.3% m/m) in September.

• China’s official manufacturing Purchasing Managers’ Index (PMI) contracted for the seventh consecutive month in October, sinking deeper into contractionary territory. In October the PMI deteriorated to 49 index points from 49.8 in September and below market expectations (Bloomberg) for the PMI to slip to 49.6. This suggest that the contraction was larger than the usual holiday-related dip but also highlights the weakness in underlying economic activity.

• In contrast to manufacturing, the expansion in the non-manufacturing PMI quickened in October. The index rose to 50.1 points, buoyed by the recent holidays and some early Singles’ Day promotions. This was up marginally from 50 in September, and in line with market expectations. The improvement in the non-manufacturing PMI was driven by the services PMI, while the construction component deteriorated.