Households and businesses are no longer the only ones feeling the true impact of loadshedding…

...as last week, we saw the local currency also suffer losses over power uncertainties while most emerging economies continue to enjoy their best economic start to a year in over a decade.

In our last review, we touched on how the impacts of rolling blackouts could threaten to undo any economic progress made despite inflation showing signs of slowing, and last week we already began to see this unfold.

China’s reopening story has quickly become one of the most important trading developments this year, and while the overall mood is more optimistic, local currency investors are growing increasingly unsure of whether to stick or twist with a major power crisis hanging overhead.

Lots to dissect – so here comes the full review:

Key Moments (16-20 Jan 2023)

These were the main talking points from the last five days:

• Ramaphosa skips WEF - President Cyril Ramaphosa decided to cancel his trip to the World Economic Forum in Davos as he attempts to deal with SA’s ongoing energy crisis and bring calm as tempers flare over continued power cuts.
• SA Inflation edges lower - Statistics SA released its most recent batch of results which showed that the annual consumer price inflation eased for a second consecutive month to 7.2% in December.
• US retail sales declines- The growth path of the US has come under question, with retail sales falling by 1.1% in December as the effects of the US Feds' recent monetary tightening policies begin to show.
• US PPI improvement- The US producer price index for final demand dropped by half a percent in December, offering more evidence of inflation receding in the world's number one economy.

We set the ball rolling at home, where after a strong week last time around that saw the local unit break below the R17/$ psychological barrier, Rand bulls were hoping to follow up with another good week on the trading floors.

Spoiler Alert! It wasn’t to be.

After opening the week at R16.84/$, the Rand was quickly on the back foot as reports emerged on Monday morning explaining that President Ramaphosa had appaently canceled his trip to the World Economic Forum in Davos to deal with SA’s energy crisis.

The struggling state utility has implemented rolling blackouts every day this year, and households and businesses are noticeably beginning to grow more irritable as they are already struggling to make ends meet with soaring food and energy prices.

As if 6-12 hours per day without power isn’t enough, and to add to frustrations, last week, the newest electricity tariff increase was passed to the tune of 18.6% for 2023/24 and a further 12.74% for 2024/25!

After months of speculation, The National Energy Regulator of South Africa (NERSA) eventually granted the 18.6% increase in response to a 32% increase request tabled by Eskom.

The DA has since challenged the proposal, and party leader John Steenhuisen has launched legal proceedings for an interdict to stop the implementation of the exorbitant tariff increase.

Eskom has been living hand-to-mouth for a while now to obtain diesel to run its open-cycle gas turbines and is clearly failing at that task…

…but the President has “assured” the country (again) that they have a plan to make loadshedding a thing of the past in 12-18 months...

...were we not told the same thing a year ago?

...and the year before that?

Nevertheless, as long as the energy crisis continues to escalate, riots and protests will remain prevalent, with isolated reports of such incidents already being reported across the country.

The local unit will also not be spared from the fallout, with the Rand jumping to R17.11/$ by midday on Monday and remaining above R17/$ for the rest of the day.

On Tuesday, Stats SA released local mining results, which showed that production fell by 9% in the year to November, while mineral sales fell by over 15% in the same period.

The 9% decline is slightly better than the 11% dip seen a month earlier but is still a clear indicator of the hardship the sector faces in the wake of unreliable power supply, among a litany of other woes.

And to it has been reported that the 18.65% electricity tariff hike would increase the already struggling mining sector’s electricity cost by an estimated R13.5 billion by the end of 2024!

By Wednesday morning, the Rand opened just above R17/$ but dropped to R16.87/$ by mid-afternoon following the local CPI results…

…which revealed improved figures with consumer price inflation easing for back-to-back months to 7.2% in December from 7.4 in November.

Despite the minor headline improvement, food and non-alcoholic beverages showed to have increased by 12.4% on a yearly basis and contributed 2.1% of the total 7.2% annual rate…

…once again, illustrating that while headline figures do show improvements, the underlying (and perhaps more important) figures tell a different story altogether.

With headline inflation still well above the 3-6% target range, the SARB has indicated that it only expects inflation to reach a level of 4.5% by Q2 of 2024!

The prime rate has already gone from 7% in November 2021 to 10.5% currently, and it seems all but certain that another interest rate increase is expected at next week's meeting.

Following the local data releases, our focus shifted to the US producer price index and retail sales results to give us further clues on the state of the world’s leading economy.

As it turned out, it was a bit of a mixed bag of results.

Following a 0.2% rise in November, US PPI dropped by 0.5% in December, owing to minor gains in the cost of certain energy products and foods.

In the 12 months to December, PPI was up 6.2% after hitting 7.3 in November.

Retail sales, meanwhile, fell by 1.1% to record a second consecutive decline after a revised 1% loss for November.

The weak retail numbers may be a clear sign of savings drying up and consumers retrenching in a time of economic uncertainty…

…which spells a weaker growth path and increased recession risks for 2023...

Several Fed officials, including Dallas Fed President Lorie Logan, addressed media in the week to reinforce the importance of staying the course and making changes as necessary, based on ongoing careful assessments and ensuring that they can robustly manage the risks they face...

...brave words from the Fed, when history has shown that central banks merely follow the market, and then are generally late in doing so.

The improved PPI results in the US seemed to give emerging currency investors a bit of a lift, and the local unit followed suit, dropping to R16.87/$ by mid-afternoon…

…but it was short-lived.

Overnight, the Rand dropped steeply, opening at R17.12/$ on Thursday morning and continued on that trajectory to reach R17.37 by the evening trade session.

And then, in other news:

• The UK also received improved inflation results, albeit marginal, with CPI dipping to 10.5%, continuing its drop from 10.7% in November and 11.1% in October. However, the price increase of food and non-alcoholic beverages makes for grim reading, rising by a gut-wrenching 16.8% in the year to December. The results were released not long after Prime Minister Rishi Sunak announced that the cornerstone of his economic plans is to halve the rate of inflation in 2023. By the looks of it, it will be some feat if he can achieve it.
• After the high-profile shutting down of FTX last year, cryptocurrency lender Genesis Global Holdco became the latest firm to file for bankruptcy in the aftermath. Genesis had a portion of its funds held by FTX and had suspended withdrawals since November last year before eventually throwing in the towel last week. The crypto lender holds over 200 companies in its portfolio, the most notable of which is South Africas’s largest crypto platform, Luno.
  By Friday, the local unit was trading at R17.12/$ at the first call but spiked to hit R17.50 lunch before recovering to close the week in the mid-R17.10s.

A poor week, all things considered.

But as we know, things in the global economy can change in the blink of an eye.

As recently as Q3 in 2022, China was in the wrong place, recession was gripping Europe, and the central banks were caught with their pants down by soaring inflation…

...but within a few months, China’s growth path seems to looks promising, investors seem more optimistic about a recovery in Europe, and US inflation has largely been headed in the right direction.

Is the overall optimism warranted or a little premature and motivated by hope following a year of significant challenges?

We’ll find out in the coming weeks!

The Week Ahead (23-27 Jan 2023)

A relatively light week of data is expected, but we’ll be keeping our eye on the following:

• SA - Interest Rate Decision, PCE Price Index YoY (Dec)
• US - GDP Growth Rate QoQ (Q4), Initial Jobless Claims (Jan/21), PCE Price Index YoY (Dec)
• EU/UK - ECB President Lagarde Speech

So, if we sum up proceedings over the first few weeks of 2023, it looks like last year ended focused on the Fed and ECB normalization, while this year has been focused on Chinese normalization…

…and adds to the continuation of the East vs. West divergence.

Ultimately, China’s rise will likely spell good news for developing nations like SA, provided local forces don’t interfere too much.

Luckily, our Elliot-Wave-based analysis will be right with us to guide us through this tricky period, and give us and our clients some objective clues for the road ahead.

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