Our weekly podcast by Kevin Lings:

Middle East war will keep US inflation above 3% for some time  

In this podcast, STANLIB’s Chief Economist, Kevin Lings, analyses the increase in US inflation in March to 3.3% from 2.4%, largely due to oil price pressure –gasoline prices rose 21% in the month. Inflation is likely to stay above 3% for some time, above the US Federal Reserve 2% target. Inflation concerns are reflected in consumer confidence data. He also looks at the implications of the long-term decline in South African manufacturing data.

The focus areas during the week included:

• The S&P 500 recorded another solid gain, rising by 3.6%, which follows a rebound of 3.4% in the prior week. This largely reflects a de-escalation of the conflict in the Middle East (a two-week ceasefire was announced on 7 April) and a subsequent drop in the oil price. Enthusiasm for artificial intelligence-linked stocks also helped: several large-cap technology and semiconductor stocks rose due to increased optimism in that industry. Within the S&P 500 index, energy was the only sector to record negative returns. Despite the recent two-week rebound, the S&P 500 is still down 0.4% year-to-date, while the NASDAQ 100 is down 0.5%.
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• While global financial markets welcomed the two-week Iran/US ceasefire announced on 7 April, the situation remains fluid, especially since the negotiations between Iran and the US over the weekend appeared to deliver no meaningful progress. This highlights that investors will remain focused on how durable the ceasefire is likely to be and whether diplomatic progress can continue - as well as the ongoing risks to energy infrastructure and global supply chains. Recent incidents, such as a drone attack on a key Saudi oil pipeline, highlight that risks remain high even as broader tensions ease.
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• The STOXX Europe 600 Index ended the week up 3.1%, while Japan’s stock markets rebounded strongly: the Nikkei 225 Index gained 7.2% and the broader TOPIX Index was up 2.6%. Unsurprisingly, SA’s All-Share Index also benefited from the “de-escalation trade”, gaining 2.5% despite a holiday-shortened trading week.
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• In fixed income, the yield on the US10-year government bond eased to 4.31%, down marginally from 4.35% at the end of the previous week. While US inflation data for March was largely in line with expectations, the risks are skewed to the upside, which will keeps interest rates unchanged in the coming months. Kevin Warsh (President Trump's nomination for Chair of the Federal Reserve) has still not been confirmed. Warsh’s nomination hearing in the US Senate was scheduled for 16 April but was apparently delayed due to missing (complex) financial paperwork that Warsh has to submit. Also, Senator Thom Tillis has threatened to block the confirmation until the current criminal investigation into Jerome Powell is resolved.
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• In currency markets, the US dollar weakened as global investor sentiment improved, while many emerging market currencies - particularly higher-yielding and commodity-linked currencies -recovered, reversing earlier losses. The rand benefited significantly from the “de-escalation trade”, gaining 3.4% against the dollar the day after the two-week ceasefire was announced (the rand has not gained this much in a day since 14 December 2023) and strengthening by 3.7% in the week. Year-to-date the rand is up 1.1% against the dollar, having been down 3.5% as recently as 30 March. The rand lost 6.8% against the dollar in March but has gained 4.2% in the first 10 days of April. In comparison, the emerging market currency index lost a modest 3.3% against the dollar in March but has gained only 2.5% in April, highlighting the rand’s relative volatility.‍
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• In March 2026, US consumer inflation rose by 0.9% m/m, in line with market expectations. This pushed the annual rate of inflation up from 2.4% y/y to 3.3% y/y – the highest annual rate of consumer inflation since April 2024. Core consumer inflation increased by a more subdued 0.2% m/m in March, below market expectations for a monthly increase of 0.3%. That resulted in the annual rate of core inflation moving only slightly higher to 2.6% from 2.5% in February. A breakdown of the March data shows that gasoline prices (unsurprisingly) rose by 21.2% in the month (18.9% y/y), while airline fees increased by 2.7% m/m, which pushed the annual rate of inflation for airline fees up to 14.9% y/y. There was also a larger-than-expected increase in shelter inflation of 0.3% m/m, which kept the annual rate of shelter inflation elevated at 3% y/y. More positively, there was no increase in food prices, despite elevated concerns about higher fertilizer costs - although that could take a couple of months to reflect in the consumer price data. While core inflation has slowed from 3.3% at the start of 2025, it is, obviously, not yet in sight of the US Federal Reserve’s (Fed) inflation target. There is a risk that it will rise further over the next few months, given the potential “second-round" effects of the sharply higher fuel price. The tax rebates (at the household level) which are currently being processed could cause some additional inflationary pressures to emerge over the coming months.‍
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• US Personal Consumption Expenditure (PCE) inflation held steady at 2.8% y/y in February, in line with market expectations. A modest pick-up in goods inflation to 1.8% y/y was offset by a continued improvement in services inflation, which slowed to 3.3%, the lowest reading in five years. Importantly, housing inflation eased to 3.1%, a key driver in moderating services inflation. Core PCE inflation edged down to3%, although this is still well above the Fed's 2% target. Critically, PCE inflation is expected to reaccelerate next month as higher oil prices feed through into the calculation.‍
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• US weekly jobless claims increased to 219000 this past week, above market estimates for a reading of 210 000. In contrast, continuing claims fell more than expected to 1.79 million, suggesting more workers are finding new employment. Taken together, the data is consistent with a solid labour market performance.‍
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• The US ADP weekly employment report showed that the private sector added an average of 26 000 jobs a week in the four weeks ending 21 March. This is the third consecutive weekly improvement and the strongest rate of increase since the weekly ADP series began in September 2025. While the recent rise in energy prices poses downside risks to both the economy and the labour market, the pace of hiring remains broadly consistent with expectations of monthly job growth of around 50 000 to 80 000. This would keep the rate of unemployment relatively low, given the slowdown in population growth because of a decline in net migration and the aging labour force.‍
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• New orders for US manufactured durable goods (items that are meant to last three years or more) declined by 1.4% m/m in February to $315 billion, a weaker-than-expected result and the third consecutive monthly decline. Transportation equipment was the main area of weakness, declining by 5.4% m/m, with non-defence aircraft orders especially weak. Excluding the volatile transportation sector, new orders increased by 0.8%m/m, above market estimates, suggesting underlying demand remains firmer than the headline figure implies.‍
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• The University of Michigan reported that its preliminary estimate of Consumer Sentiment fell sharply to 47.6 in April. This is a 5.7 point drop from the prior month. All components of the index declined, with worsening sentiment reported in all demographic groups. Survey respondents noted “a substantial increase in concerns over high prices and weaker asset values". Expectations of inflation in the year ahead jumped to 4.8%, a full percentage point increase from March.‍
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• The US Institute for Supply Management (ISM) reported that its Services Purchasing Managers’ Index (PMI) declined 2.1 index points to 54 in March. This was slightly below market expectations for a reading of 55. More positively, the index has remained in expansion territory (above 50) for 21 consecutive months. The headline index was supported by continuing strength in business activity and new orders, while higher oil and fuel costs drove the prices index to the highest level since October 2022.‍
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• The US Bureau of Economic Analysis (BEA) released its third estimate of US GDP growth for the fourth quarter of 2025. It revised its previous estimate down to 0.5% from 0.7% and an initial estimate of 1.4%. The latest downward revision primarily reflects lower levels of investment.‍
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• South African manufacturing activity declined by a very disappointing 2.2% m/m in February 2026, after an increase of 1.9% m/m in January. Over the past three months the manufacturing sector has contracted by 2% q/q and it is clearly still struggling to gain any momentum. Over the past year production has fallen by 2.8%. A breakdown of the data by sector reveals that eight of the 10 major manufacturing groups recorded a decline in output in the past three months, including a 2.5% q/q fall-off in food production, an 8% q/contraction in steel output, and a 10.1% q/q decline in vehicle production.‍
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• In March 2026, China’s headline consumer prices cooled, reflecting normalisation in activity after the Lunar New Year holiday. Consumer inflation was 1% y/y, lower than the 1.3% y/y recorded in February, and below market expectations for inflation to ease to 1.1% y/y (Bloomberg). The deceleration in inflation was broad-based. Food, alcohol and tobacco led the deceleration, with prices rising only 0.4% y/y, a deceleration from 1.4% y/y in February. The pass through from higher oil prices to consumer inflation was muted, but the impact is likely to start to reflect in the data next month. Overall, there are still limited signs of reflation in China as the economy continues to struggle with soft domestic demand. Inflation has remained below the People’s Bank of China’s (PBoC) implicit target of 2% for more than three years.‍
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• China’s producer price index(PPI) increased by 0.5% y/y in March, exceeding market expectations for rise of 0.4% y/y. This is the first annual increase in PPI inflation in 41 months. The higher-than-expected PPI data was driven primarily by higher commodity and energy prices rather than a broad-based pick-up in demand.‍
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• China’s securities regulator implemented new rules, tightening oversight of short-term trading by major shareholders and company executives. The China Securities Regulatory Commission said that the rules apply to shareholders with a stake of 5% or more in a single-listed company, including foreign investors, executives of publicly-traded companies, and their spouses and children. The rules prohibit buying and selling the same stock within a six-month window and increase scrutiny of equities, depositary receipts, and convertible bonds, with clearer definitions and enforcement mechanisms.‍
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• Chinese leader Xi Jinping hosted the leader of Taiwan’s main opposition party (Cheng Li-wun, the chair of Kuomintang, KMT) for a rare meeting in Beijing on Friday and said that unification with the mainland was a “historical inevitability". While exchanges between KMT’s leadership and Chinese officials are not rare, no sitting KMT leader has met Xi since 2016. ‍
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• European Union (EU) Economy Commissioner Valdis Dombrovskis announced that the EU was preparing to cut its official growth forecast for 2026, citing the risk of a “stagflation Ary shock”. He noted that the war could cut 0.4% off EU economic growth this year, even if the conflict is short-lived. Dombrovskis also warned that an "more substantial" conflict could reduce the region’s GDP growth rate by 0.6%.‍
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• Japan’s Prime Minister Sanae Takaichi announced a further release of oil from Japan’s state reserves. This is part of Japan’s ongoing efforts to ensure a stable domestic crude supply, mitigate against oil-shock-driven price spikes and limit the domestic impact of higher energy costs.‍
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• Japan’s corporate goods price index (CGPI), a measure of wholesale inflation, rose by 2.6% y/y in March, above market expectations for a rise of 2.3% and up from 2.1% y/y in February. The larger-than-expected increase was mainly driven by higher fuel costs, with hydrocarbon chemicals the second biggest contributor.