South Africa’s PPI inflation for final manufactured goods rose more than expected to +1.1% y/y in January 2025, up from +0.7% y/y in December. This increase was primarily driven by a smaller decline in ‘coal & petroleum’ prices (-5.8% y/y vs. -10.0% y/y in December) as fuel costs climbed. Higher food inflation (+4.8% y/y vs. +4.5% y/y) also contributed, while other PPI categories showed mixed trends. Notably, intermediate goods inflation surged to +7.3% y/y from +5.8% y/y, marking its fifth consecutive monthly rise. Despite three months of increases, supply-side inflation remains subdued, supporting a moderate rise in consumer prices. However, persistent intermediate goods inflation and rising fuel costs could accelerate future PPI gains, potentially driving CPI higher later in 2025—especially with electricity price hikes set for April.
Today, the market will have the usual month-end data deluge to digest in the form of money supply numbers, government budget stats, and—perhaps most notably—the latest trade balance data. Recall that South Africa’s trade surplus narrowed to R15.5bn in December from a revised R34.0bn in November. However, for 2024 as a whole, the surplus improved to R196.1bn, up from R130.0bn in 2023. Looking ahead, the weaker rand should help sustain a trade surplus by boosting export competitiveness. However, this will be partially offset by higher oil prices and improved consumer finances, which are likely to drive increased imports. Additionally, January typically sees a seasonal deterioration in the trade balance, which could reflect in the upcoming data. Despite these fluctuations, ongoing trade surpluses remain a positive for South Africa’s struggling economy. They support economic growth and help mitigate fiscal pressures, providing some stability in an otherwise challenging macroeconomic environment.
ZAR Markets
Risk appetite has faded into the back end of the week as uncertainty has risen. Investors responded overnight by selling off equities—overvalued by almost any metric. US President Trump’s aggressive push for tariffs and a more sustainable fiscal policy is expected to weigh on GDP growth in the near term. At the same time, the Federal Reserve’s ongoing liquidity withdrawal has made economic strains inevitable. The pressures of the business cycle are now beginning to surface, adding to market volatility. Initially, this will likely hurt higher-risk assets such as the ZAR, but once economic weakness in the US forces the Fed to ease monetary policy, this dynamic may reverse. For now, the market remains in wait-and-see mode, sticking to familiar ranges. It may, however, find some fresh directional impetus when US PCE data are released later today, especially if any shocks are realised.
Global FX Markets
The U.S. dollar had a strong move to the upside yesterday as US Treasury yields steadied and the uncertainty over tariffs played into the dollar bulls’ hands. The USD Index cleared the 107.00 level after languishing at the bottom end of the 106-107 range for much of the week. Pulling back the lens, the threat of stagflation in the US remains a real concern as figures released yesterday confirming US growth slowing in the 4th quarter of 2024. How the Fed navigates these waters in the coming months remains to be seen. All eyes are on the PCE data to be released later today which is the Fed’s favourite measure of inflation. The single currency took it on the chin yesterday finishing the session below EUR/USD1.0400. The offered tone has continued this morning in the Asian session ahead of the key US PCE data which is due for release later this afternoon. Short term resistance can now be found at EUR/USD1.0400 while support is evident at EUR/USD1.0360. Trump Tariff guidance and uncertainty pushed cable longs into a corner yesterday with stale longs capitulating following a failed break of GBP/USD1.2700. This morning, we have the pair trading below GBP/USD1.2600 as the EU open beckons. GBP/USD1.2560 is the first line of resistance as we head into the London open, with a break of this level opening the door for a retrace towards GBP/USD1.2500 The market is short USD/JPY and this has been building since the US tariffs on Mexico and Canada were delayed. Many investors have been playing the game of narrowing US-JPY yield spreads adding to these shorts as it became apparent that the BoJ was becoming increasingly hawkish driven by the stronger inflation data out of Japan. The question we need to ask is whether or not this trade can last with a floor very much evident at USD/JPY149.00.