We’re back!

Thanks for joining us for another episode of your favourite Weekly Rand Review!

A lot happened while we were away with the long weekend and all, and as Q2 ticked past the halfway mark, several data releases over the last week pointed to cooling US inflation which provided a trigger for the US dollar to give up ground to most of its peers.

And then, on the global front, there have been warnings over poor worldwide production, which has put a bit of a damper on sentiment…

…while locally, the energy crisis (still with no solution in sight) continued to keep investors at bay. It was a shortened trading week for some economies due to Easter, but there were several key data points expected that would likely dictate the trajectory of the Rand.

Here’s how the last five days played out.

Key Moments (10-14 Apr 2023)

This is what grabbed the headlines over the last week:

• Local Mining and Manufacturing - The crucial mining and manufacturing sectors showed notable drops in performance in February, providing further signs that the local economy is likely to be in the throes of a recession, potentially sooner than some may expect.
• Stage 10 Loadshedding Warnings - Stern warnings were provided by the electricity minister Kgosientsho Ramogopa in the week stating that the country is on the cusp of a massive energy deficit in the approaching winter months.
• US Inflation Improvements - Data releases in the week pointed to signs of cooling inflation in the world's top economy, which has once again fuelled expectations that the US Fed may be coming to the end of its aggressive monetary tightening cycle.
• UK Economic Growth Stalls - Britain’s economy ground to a halt in February as a wave of strikes in the country’s public sector dragged on activity, offsetting a recovery in consumer spending.

Just before the Easter weekend, in increasingly risk-averse markets, the Rand was being pushed backward and weakened above R18.60/$ before heading into last week. By the first call on Monday morning, the local unit had managed to take back some ground from the previous week...

...and opened trade at R18.26/$, with several key data points expected in the week.

However, before any new data could be unravelled, the local unit was on the back foot right away as loadshedding reared its ugly head (once again) with Stage 5 power cuts re-implemented. The issue was exacerbated by the newly-appointed electricity minister’s damning announcements in the week, indicating that the incoming winter months are going to be a very difficult period for Saffers.

As if it wasn't already?!

The energy minister went on to detail the country’s historic consumption levels during the winter months, which ultimately boils down to the following:

Eskom can only generate 27,000MW (best case scenario), while peak demand can go up to 37,000MW during winter months, leaving a deficit in supply to the tune of 10,000MW, according to their projections.

What does that mean in simplest terms, you ask?

Well… each stage of loadshedding is roughly equivalent to 1,000MW, so 10,000MW = 10 stages of loadshedding!

ALERT: Cold winter incoming!

Last week, the former CEO of Eskom, Andre De Ruyter, provided an affidavit to courts that detailed no fewer than 10 instances of criminality, widespread sabotage, and destructive unlawful industrial action that fueled the collapse of the power utility…

…but in contrast, the electricity minister, in his brief, took a different narrative, pinning the blame on “technical and operational issues, particularly in Eskom’s coal fleet.”

Ultimately, regardless of the source, the overarching facts are that SA’s power crisis continues, stage 10 loadshedding is a possibility, and there is no confirmed end date in sight.

Case closed; let’s move on...

In light of the uncertainty around the energy situation, investors' appetite for the risk-sensitive local unit turned sour, and the Rand breached above R18.50/$ by Monday afternoon. In terms of local economic data, the major releases for the week came in the form of mining and manufacturing results.

Stats SA unveiled that the once-towering mining industry experienced its 13th consecutive month of contraction, falling by 5.0% YoY in February and 4.9% on the month. Coal output was the most notable contributor to the loss, falling by 12.6% YoY.

Manufacturing output results weren’t much better and showed a 5.2% decrease in the year to February, with food and beverage contributing the lion's share to the negative print, down by 6.1%, followed by metals and machinery, which fell by 5.3% over the same period.

The poor mining and manufacturing data are the most recent (and quite clear) signs that the local economy is contracting …quickly.

However, despite these results, investor sentiment improved as the local unit traded in the R18.30s for most of Tuesday and Wednesday. Meanwhile, over in the US…

…annual inflation edged lower to 5.0% in March, marking the slowest pace for price increases since 2021, when they first began their ascent. Core inflation, on the other hand, has proven to be a scourge and remains steady at 5.6% versus 5.5% in February, signalling that the slowing pace of the headline figure could be attributed heavily to comparisons against soaring gas prices a year ago.

Housing led the contributors to the price increases, rising by 0.4% for the month and 8.2% for the year, offsetting the impact of decreasing energy prices which came down by 6.4% for the year.

Despite the overall cooling in inflation, many still feel that it will not sway the Fed, who has been eyeing further rate hikes, despite the dire risks it brings to a debt-laden economy.

In the direct aftermath of the banking debacle last month, the Fed increased rates for a ninth consecutive time in a move that was largely seen as both conciliatory and assertive at the same time…

…while the FOMC minutes from last month showed that several members strongly considered halting further rate hikes but ultimately concluded that the high inflation rate needed tackling.

With the latest data releases pointing to cooling US inflation, hopes of a slowing in the rate hiking cycle were reignited…

…and investor’s increased appetite for riskier assets gave emerging currencies - especially the Rand - a huge lift.
The local unit gobbled up almost 2% on the greenback, falling from R18.40/$ in the morning session to R18.20/$ after lunch and onward to R18.04/$ by the close of play on Thursday.

What a volatile and turbulent economic environment we live in!

Before we sign off on the week's news, let’s take a quick look at some highlights from around the globe:

• Eurozone retail sales results for February were released in the week, showing a decline in performance and reversing the uptick from a month earlier. The volume of sales across the bloc’s retail sectors fell by 0.8% in February, following an increase of the same level in January, while a 3.0% reduction was observed on the year. High inflation and choking financial conditions contributed heavily to the struggles in the retail sector, which is also having to contend with dwindling consumer confidence while staring a fifth consecutive quarterly contraction in the face.
• The UK’s recovery to pre-pandemic levels continues at the slowest pace of all G7 nations, as the economy recorded growth of 0.0% in February, with an increase in public sector strikes weighing on activity. Despite the flat performance, Brit officials argued that the economic outlook is brighter than expected and went further to indicate that the country was set to avoid recession this year, making a complete u-turn from the expectancy of a year-long recession they announced in January.

The final piece of data for the week came on Friday from the US, where retail sales results showed a drop in activity by 1.0% in March, with a notable drop in big-ticket item sales.

Retail sales are a major driver of a healthy economy, and the full percentage drop serves as another reminder of just how inflation is eating away at household incomes, drying up savings, and making bigger items more expensive to afford. Unfortunately, while the underlying inflation pressures have eased somewhat, they are far from over…

…and the Fed has made it clear that they will stay the course, come what may.

The local unit, meanwhile, held its gains from the previous day, ending the week in the green at R18.08/$, with the all-important local inflation results due next week.

The Week Ahead (17-21 Apr 2023)

Here’s a peek at what we’ll be keeping an eye on over the next five days:

• SA: Inflation Rate YoY (MAR), Retail Sales MoM (FEB)
• UK: Unemployment Rate (FEB), UK Inflation Rate YoY (MAR), EU Inflation Rate YoY Final (MAR)
• US: Building Permits Prel (MAR)

Local CPI results will dominate the focus of most next week as local unit investors search for clues around the trajectory of interest rates…

…while battered consumers will be hoping for some good news and possible reprieve after what must feel like an eternity of battering.

As for us?

We’ll be relying on our forecasting models to help us navigate these tricky times. Don’t forget to check them out if you haven't already done so.

Until then, catch you next week 🙂

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To your success~

James Paynter