US Treasury yields surged as January CPI inflation exceeded expectations, reinforcing the Fed’s cautious approach to rate cuts. Core CPI rose 0.4% m/m and 3.3% y/y, while headline inflation increased 0.5% m/m and 3% y/y – the highest monthly gain since August 2023. Shelter costs drove nearly 30% of the rise, alongside updated consumer spending weights and five years of data revisions. With inflation elevated and the labour market resilient, the Fed will likely delay rate cuts, especially given the uncertainty around Trump’s potentially-inflationary tariff policies. Markets now expect just one Fed rate cut this year, shifting from September to December. While conditions may evolve, the USD is likely to stay supported as the Fed remains less dovish than other major central banks.
Meanwhile, regarding local data, the SACCI Business Confidence index showed South African business sentiment remained more or less stable in January after reaching a decade-high late last year, reflecting continued optimism about economic prospects and the coalition government’s direction. The business confidence index eased slightly to 120 from 121, which compares to an average of 112.6 for 2024 – an improvement from 109.6 in 2023. SACCI noted that expectations of a more market-friendly policy environment are driving confidence, despite ongoing challenges. Additionally, reforms at Eskom that have reduced power shortages have also contributed to improved sentiment. However, recent criticism from US President Trump over South Africa’s land policies and foreign relations, along with his suspension of US aid, could weigh on business confidence moving forward.
ZAR Markets
Despite higher-than-expected US inflation and rising Treasury yields, the USD has weakened as investors question the strength of the US economy for the rest of the year. While yield differentials remain a key factor, broader economic concerns are now influencing market sentiment. With the USD on the defensive, the ZAR is finding some stability, trading within a range as investors assess market direction. The USD-ZAR is hovering around 18.4500 this morning, with recent lows around 18.3200 likely to be the line in the sand below, while its topside range is less limited given recent moves north of 19.0000.
Global FX Markets
The U.S. dollar held near a one-week high against the Japanese yen on Thursday after hotter-than-expected inflation data, reinforcing expectations that the Federal Reserve will keep interest rates higher for longer. The dollar stood at 154.33 yen, slightly lower but near Wednesday’s peak of 154.80 as U.S. Treasury yields climbed. U.S. consumer prices rose 0.5% in January, the biggest increase in nearly 1.5 years, with core inflation up 0.4%, both exceeding forecasts. This has led markets to price in fewer rate cuts from the Fed, with only 28 basis points of cuts expected in 2024, down from 37 basis points previously. Fed Chair Jerome Powell reiterated that the central bank is in no rush to cut rates, and markets are now eyeing the Producer Price Index release for further inflation clues. Meanwhile, the euro edged higher to $1.0398, supported by news that Washington is initiating talks with Russia to end the war in Ukraine. The Russian rouble surged to a 4.5-month high. Trade tensions remain high as President Trump announced reciprocal tariffs on countries imposing duties on U.S. imports, fuelling fears of a global trade war. The U.S. also imposed new 25% tariffs on steel and aluminium imports, with additional tariffs on Mexican and Canadian goods delayed until March 4.