Macro Pulse Episode 26

Hello and welcome to Macro Pulse. Equity markets came under pressure over the last month. Global equity markets dropped about 5%. But did recover over the last few days. The fact is driving this initial selloff was firstly ongoing concerns about unsustainable AI CapEx, high valuations within the large consumer tech stocks in the US, as well as concerns around credit stresses, particularly in the private debt space.

The second factor, the fact that the market was pricing out a potential Fed rate cut at the 10th of December. However, towards the end of last week, the New York Fed president John Williams, came out and said he sees some scope for rate cuts in the near term. And we also had a series of data points that came out on the weaker side.

When we look at the economic data, we agree that the scope for rate cut, we had weak retail sales number, consumer sentiment remains very depressed, we had the delayed non-farm payrolls number of September and that showed large revisions to July and August numbers, meaning that the labor market was actually weaker than the market was seeing at that stage. We also saw that the unemployment rate went up to 4.4%, and we are not going to get any new information before the Fed meeting. The new non-farm payrolls number, as well as inflation numbers, will only come out after the 10th of December. So we believe the scope for the Fed to cut rates on the back of this weaker economic data, the slack building in the labor market, which means that inflation pressures may reduce over coming months. And therefore we think that the Fed will continue to cut rates over the next year.

Sticking with the Fed we also saw that Kevin Hassett has now been seen as the frontrunner to take over from Jerome Powell next May as the new Fed chair. Now the market might take this as a dovish signal, but I think given the fact that you have 12 Fed voting members, one person, even the chair is not going to sway the vote in either direction. I think the more important signal that we can get from this nomination is that he is potentially the least independent candidate of the candidates that was put forward, and there would be some concerns around fit credibility. It’s interesting that you saw the gold price actually moved higher and the US dollar weakened after this news broke. Then when we look at South Africa, we also had the South African Reserve Bank cutting interest rates by 25 basis points to 6.75%.

There was some surprise in the fact that all members voted for this cut, and the governor also mentioned that policy rates were still restrictive. They also made marginal adjustments to the inflation outlook, bringing it slightly lower. That means that the stance is probably still on the side of providing more easing over the coming quarters. However, what would be important is the Bureau of Economic Research inflation expectations data comes out on the 12th of December, because that could determine the pace at which the SARB can continue to cut interest rates.

In our view, we believe that the inflation path would allow for the SARB to continue to cut rates over the next 12 to 18 months to potentially below 6%. So with rate cuts, a positive terms of trade and also slow economic reforms shaping up, we see this as positive for both the consumer and businesses. And let’s not forget that this has been an exceptional year for South African investors.

When we look at the equity market and the overall index on a year to date basis, and we compare that with prior year, we see that this has been the best year in decades for the equity market. We can do the same on the bond side. Bond returns year to date has been the best in decades, and so there’s an overall positive wealth effect that we believe could provide some support for consumption and for economic growth.

Indeed, if we look at 2025, consensus expectations of growth, this year is already starting to turn to the upside again. And we think expectations for 2026 will also start to rise over the coming months. That means that South African assets, which has outperformed many of its global peers over the last year can continue to outperform over the next year, driven by still a strong currency and local fundamentals that’s improving, as well as strong demand for emerging market assets. Outside of South Africa and the US we also tracking some other events that’s been happening. First of all, there’s ongoing negotiations about a Ukraine Russia peace deal. There are still some points of contention around Ukraine territory, the size of the Ukraine military, as well as potential negative membership. However we think that a peace deal is forthcoming within the next few quarters, so potentially in 2026, we could get a peace deal between Ukraine and Russia and that could support European assets.

Then in Japan, we had the new prime minister coming out and proposed a very bold fiscal package, as well as telling the Bank of Japan, the central bank, to remain accommodative. This has spooked the markets somewhat, but this plan hasn’t gone through the Parliament yet, and we still believe that the BOJ will continue to hike rates at its next meeting. Inflation remains high at around 3% despite the fact that growth is fairly weak.

Then in the UK, we had Chancellor Reeves provide, autumn budget this week. Overall, the markets took that as positive. She indicated that there’s more fiscal headroom than what was initially, anticipated. Also, the debt management office said that they would not issue or not sell as many, gilts as was initially feared. And so overall, the market took that as a positive. She did also announced quite a few tax hikes although those tax hikes is backloaded. And so some of this fiscal tightening will only happen a little bit later. So overall a step in the right direction. But maybe some of the urgency is still lacking. Well that’s all for this week.

Thank you for watching.