On Thursday (May 12), an already fragile lead returned to the ropes in trading, put there by a strong dollar that benefited from risk aversion.
Bloomberg reported that Wednesday’s warmer-than-expected US inflation reading rekindled fears of a 75bp rate hike by the Fed, rather than the 50bp pace markets have been reckoning with. .
Concerns about the impact of rate hikes on economic growth, combined with the war in Ukraine and slowing Chinese demand amidst Covid blockades, are hurting risk assets, he said.
“We are seeing the beginning of the capitulation and the big reset, if you will, in prices,” Virginie Maisonneuve, chief global investment officer for equity at Allianz Global Investors UK, told Bloomberg Television. “The big question right now is peak inflation.”
US inflation remains consistently high, raising the prospect of aggressive Fed rate hikes and keeping the dollar at the fore, Treasury One noted.
It noted that US CPI grew 8.3% yoy compared to market estimates of 8.1%, but the concern was more about Core CPI, which jumped 0.6% year on year. monthly compared to the expected 0.3%. The rand, which had stabilized below R16.00 earlier, weakened to reach R16.17 levels after CPI data, before closing higher at R16.09 later in the day.
“This morning we see increased risk aversion as the dollar strengthens further and we have the rand trading significantly weaker at R16.21.”
Bianca Botes, director of Citadel Global, said global markets expect the Fed’s aggressive tightening to continue due to rising U.S. inflation, with increases of 50bps at each of the upcoming Federal Open Market Committee meetings. (FOMC) this year.
“The dollar saw some weakness across the board yesterday, but quickly recovered during Asian trading this morning. We will also be keeping an eye on the US PPI and jobless claims this afternoon, ”Botes said.
The rand traded at the following levels against the major currencies:
- Dollar / Rand: R16.20 (0.86%)
- Pounds / Rand: R19.76 (-0.19%)
- Euro / Rand: R16.95 (0.22%)
Relentless cost pressures for agriculture
Following the finance minister’s generous settlement of a nearly two-month fuel price suspension that resulted in a 1.50 Rand cent per liter reduction in the general fuel tax, farmers will face a hefty fuel bill next month. fuel as the intervention period expires, noted Paul Makube, a senior agricultural economist at FNB Agri-Business.
“R1.50 cents / liter will return in the fuel calculation and considering the exchange rate depreciation of 9.0% monthly (m / m) and 11.4% yoy (y / y) so far with crude oil weakening of 5.4% m / m and 59.0% y / y, A further In June 2022, increases of R3 / liter of fuel are possible if relief measures are not extended or a new fuel pricing is implemented, “he said.
Furthermore, indications indicate that interest rate hikes will be aggressive in the future after a second 25bp hike in March that took the buyback rate to 4.25%.
“Farmers therefore face higher debt service costs in an environment with record input costs,” Makube said.
“We are moving towards more activity on the agricultural calendar and fuel demand and consumption are high. Escalating fuel costs does not bode well for producers as production costs are likely to increase across value chains that manifest themselves differently from planting, harvesting, distribution and packaging. “
Makube said the summer harvest of cereals and oilseeds is in its infancy and will start growing in June, while the cultivation operations for winter crops are currently in full swing. Grain producers and logistics companies in the agriculture value chain will feel the pain as nearly 80% of the grain is transported by road.
“Livestock and horticulture with citrus harvesting in its infancy will also be affected in terms of countrywide distribution and exports. This will obviously push food inflation to stay above 6% in the short term, “the economist warned.
Notice of social rest
Rising international food prices will hit African economies hardest and could spark social unrest if governments fail to soften the blow, according to a report by Oxford Economics Africa.
Food has a greater weight in the inflationary baskets of African nations than those of advanced economies due to purchasing patterns.
In advanced economies it accounts for up to 15% of the basket, while in Africa it exceeds 25%, with some countries including Ethiopia, Zambia, Sudan and Nigeria with food weights over 50%, economists Jacques Nel and Petro van Eck, in Oxford Economics Africa said in a research note.
The war in Ukraine, bans on exports of food such as palm oil, supply chain problems and drought holding back the grain harvest in the United States have sent prices skyrocketing, Bloomberg said. The UN FAO food price index rose 13% in March, the fastest pace on record, before slowing slightly in April.
Rising food prices, coupled with rising fuel bills and rising unemployment, create an unstable political environment on the continent and have prompted governments to react even at the expense of fiscal consolidation, Nel and van said. Eck.
Egypt and Nigeria delayed plans to end expensive food and fuel subsidies, while Morocco, Kenya and Benin raised minimum wages and South Africa extended monthly unemployment subsidies and cut its general fuel tax for two months.