US inflation came in hotter than expected in April, causing US treasury yields to rise above 3% amid growing fears of the threat of stagflation — when GDP grows at a slower rate while inflation accelerates.
The higher-than-expected US inflation figures have seen calls for even more aggressive action from the US Federal Reserve (Fed), which recently raised its lending rate by 50 basis points to a range of 0.75% to 1%, its biggest increase in more than two decades.
The move, which has seen the dollar gain against most other currencies as money moved to its perceived safety, has pushed emerging market assets, including the rand and the JSE, lower, in a trend which is set to continue.
As US treasury yields rise the premium offered by investing in countries such as SA narrows, resulting in more money leaving local shores, threatening both further weakness and volatility in the rand.
US inflation for April came in at 8.3%, above economists’ expectations of 8.1%, but an improvement on March’s 8.5%. This has compounded upside risks to the local inflation outlook.
Nedbank chief economist Nicky Weimar told Business Day on Wednesday the higher inflation in the US could see the Reserve Bank accelerating the pace at which it moves “to tighter monetary policy”.
The Bank will need “to ensure inflation expectations remain anchored, offer compensation for the higher risks inherent to SA assets, and ensure some measure of financial stability”, Weimar said.
Africa economist at Oxford Economics Jee-A van der Linde told Business Day SA’s interest rate is set to increase further, partially accelerated by the Fed’s “expeditious policy tightening”.
Van der Linde said that while the Bank will focus on containing the longer-term impact that higher prices will have on spending power domestically ahead of its upcoming meeting, policy members will also carefully consider real interest rate levels and potential risks of portfolio outflows and rand depreciation.
IG senior market analyst Shaun Murison said US inflation data continues to track uncomfortably high. He told Business Day this will see more pressure on local policymakers to tighten at a faster pace.
“Interest rate differentials between our local market and the US are starting to narrow. This is reflected in interest rates increasing quicker in the world’s largest economy than in our own.
“This means our interest bearing assets [will start to] find less appeal on a relative basis, and concern is drawn around capital outflows, which is of course also a negative catalyst for the rand,” Murison said.
SA consumer inflation is already within touching distance of the upper end of the central bank’s 3%-6% target band, which policymakers have said they expect to be breached during 2022, before returning towards the midpoint in 2023.
The Bank’s monetary policy committee (MPC) is set to meet next week, with a decision expected on Thursday.
There have been only a handful or so of times in the past forty years that SA’s inflation rate has lagging behind that of developed markets such as the US.
Thalia Petousis, portfolio manager at Allan Gray, told Business Day she feels the US monetary and fiscal policy has been imprudent.
“The Fed, European Central Bank, and Bank of England need to raise their inappropriately low interest rates if they have any hope of combating inflation, which is at levels that have not been seen since the 1970s,” Petousis said.
She said the Fed’s hike last week was a tiny step in the right direction, but it needed to be kept in mind that the last time US inflation was this high, in the 1970s and 1980s, its interest rates were above 15%.
She said the winding down of the Fed’s stimulus measures, which accompany rate increases, has the potential for a large spillover into international bond markets, with yields on SA 10-year bonds having risen consistently above 10% recently, a situation which was last seen in the first few months of the Covid-19 pandemic in 2020. Bond yields move inversely to their price.
“The market expects US overnight rates to reach 3% by the beginning of 2023,” Petousis said, when treasuries could be offering as much as 5%.
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