The market calendar for the upcoming week will be particularly eventful and volatile as four of the biggest central banks are expected to announce their latest rate decisions. Central bank policy rates are starting to diverge from the Federal Reserve as a handful of emerging market central banks have already started cutting policy rates but the major central banks have not stepped out of line just yet but the Bank of Japan is expected to hike their rates from -0.1% to 0% this week while the Peoples Bank of China will most likely keep their loan prime rates unchanged at 3.45%.
All eyes will however be on the Federal Reserve which will announce their rate decision on Wednesday and as things stand there is no reason for the Fed to start cutting rates. The US labour market has proved its resilience in the current economic climate, US inflation is still well above the Fed’s 2% target and the fact that US stock indices have continued to grind higher in the 1Q2024 highlights that financial conditions are still loose and favorable. Again, the Fed will only start cutting rates in an emergency situation when there is severe stress in the US economy. The Federal funds rate is expected to remain unchanged at 5.50% which will add strength to the US dollar. Last week the latest US CPI and PPI prints came in higher than expected at 3.2% and 1.6%, respectively which highlights that the Fed is not out of the high inflation woods just yet. Additionally, the Bank of England is also expected to keep their policy rated unchanged at 5.25%.
Locally the most recent economic data has been mixed. The January mining production results showed a contraction of 3.3% while manufacturing posted strong growth of 2.6%. Looking at the week ahead the latest US CPI results for February will be released and expectations are pointing towards an elevated 5.3% year-on-year inflation rate, still well above the SARB’s midpoint target of 4.5%.
Diving into the charts, the dollar has managed to claw back some of its recent losses last week and it will be allowed to test the 50-day and 200-day MA resistance rates this week. A break above 103.69 and 103.55 will see the DXY move higher to re-test the downward red trend line at 104.20. This move is expected off the back of a Fed decision to leave their rates unchanged. A failed break above the MA’s will however allow the DXY to slide lower towards 102.20.
The spike in the US 10-year yield last week highlights that markets are expecting the Fed to hold rates unchanged. The break above the 200-day MA at 4.20% could allow yields to climb above the yearly high at 4.35%. A Fed pause will see yields continue to jump higher.
Similarly, the short end of the US yield curve is also not expecting any surprises from the Fed this week. The US 2-year yield tracks the US federal funds rate and it seems to be on its way higher towards the yearly high of 5.25%
As we have mentioned, the Federal Reserve’s fight against inflation is essentially its fight against crude oil. Brent crude oil made a sharp move higher last week which has allowed it to break above the 200-day MA rate of $82.45 per barrel. A move higher towards the 61.8% fibo rate of $87 per barrel is now firmly in its sights.
Looking over to the S&P 500, I’m still of the opinion that the US stock market is heavily overbought. There is major divergence between the price movement and the RSI index and a drop towards the 50-day MA at $4,962 seems like the next move given the Fed decision this week.
Closing the week off is our beloved rand. The rand hit the ground running in March which has seen the local unit appreciate roughly 2.5%. The rand did however give back some gains last week off the back of a broad based stronger dollar which has pulled the pair back above the 200-day MA rate of 18.72. A re-test of the 50-day MA rate of 18.89 is on the cards for this week if we remain above the 200-day MA. A failed break above the 50-day MA will however allow the rand to pull the pair below 18.50 in the 2Q2024 if precious metals maintain their current strong levels.
