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Week in Review: Central Banks in the Spotlight

At its two-day meeting that concluded on Wednesday, the Fed kept interest rates near zero and pledged to keep them there through at least 2023, until inflation is on track to moderately exceed the central bank’s 2% inflation target and U.S. full employment is intact. However, the Fed also warned of risks to the economy without additional fiscal stimulus, suggesting that the Fed had done much from a monetary policy perspective, asking for more fiscal help.

To date, the U.S. recovery has come through faster than the Fed’s initial expectations and the central bank now expects a GDP decline of 3.7% versus an earlier forecast of 6.5% for 2020. The OECD’s latest forecast for global growth also showed that the global recession may not be as bad as expected, forecasting that the world economy will shrink by 4.5% this year, less than its June prediction for a 6.0% decline.

The Bank of England (BoE) left its key policy measures unchanged, as expected. However, monetary policymakers indicated that the central bank was ready to take further action if needed. The BoE also said it would “begin structured engagement on the operational considerations” of negative interest rates.

In South Africa, Reserve Bank Governor Lesetja Kganyago, kept the repo rate unchanged at 3.5% and signaled that the rate cutting cycle may be over for now, after already cutting interest rates by 300 basis points this year. The Reserve Bank revised SA’s 2020 GDP forecast lower to -8.2%, compared to July’s forecast of -7.3%.

On the Covid-19 vaccine front, Pfizer’s CEO said in an interview that the company could begin distributing a vaccine in the U.S. before the end of the year. To date, more than than 30 million people have been infected with the coronavirus since it appeared. A “second wave” of infections appears to be playing out in Europe as the number of new coronavirus cases reported weekly, hit 300,000 for the first time. In the past two weeks, more than half of European countries had registered a greater than 10% increase in coronavirus infections.

Trump’s administration continues to ramp up tensions between the U.S. and China, banning Chinese-owned WeChat and TikTok apps from U.S. app stores as of Sunday, while reserving the right to enforce a ban on TikTok’s video-streaming until it can finalise a deal to satisfy U.S. national security concerns. Earlier in the week, shares in Oracle rose following reports that it had reached an agreement to operate TikTok in the U.S., but was premature as Trump’s administration said it would reject the deal.

Global equity markets ended the week slightly softer. In the U.S., the Dow Jones (-0.03%), S&P 500 (-0.64%) and Nasdaq (-0.56%) Indices were all marginally in the red. Similarly, the Euro Stoxx 50 (-0.97%), FTSE 100 (-0.42%) and Nikkei 225 Index (-0.20%) were all negative, compared to the Shanghai Composite Index (+2.38%) which managed to end the week in positive territory. Brent crude oil rose after Saudi Arabia expressed its determination to stop OPEC+ members exceeding their output quotas.


Market Moves of the Week:

Locally, President Cyril Ramaphosa announced that South Africa will move to a level 1 lockdown restrictions from midnight on Sunday, 20 September. At the height of the storm, South Africa was recording around 12 000 new cases a day. Currently, the country is on average recording less than 2 000 cases a day.

The economic fallout due to lockdown restrictions continues to reflect in data releases. July retail sales in South Africa registered a decline of 9.0% (annualised), more than an expected 5.0% decline. This follows a 7.2% decline in June.

The JSE All Share Index ended the week down -2.52%, with all three of the major sectors including industrials (-3.02%), financials (-3.55%) and resources (-1.52%) weaker. Despite this, the rand was well bid throughout the week, strengthening against all of the major currencies. By Friday close, the rand traded at R16.33 to the U.S. Dollar and R21.08 to the Pound Sterling.

Chart of the Week:

What the chart is telling us:

This week’s chart looks at South Africa’s change in the price of electricity compared to overall headline inflation (total inflation, comprising of a basket of commodities) over the past 10 years. The cost of electricity has increased by 177% compared to overall inflation increasing by 69%. The poor performance of Eskom over the past decade has not only constrained economic growth, it has also negatively impacted overall inflation in South Africa.

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