Markets were timid this week in anticipation of the Federal Reserve’s (Fed) upcoming interest rate decision scheduled for this week Wednesday where the Fed is expected to leave the Federal Funds rate unchanged between 5.25% and 5.50%. All other economic data prints will thus have to take a back seat this week.
The impetus will be on the tone from the FOMC statement regarding when the Fed is planning to start cutting rates. The most recent data from the US has however highlighted that the US labour market is strong, inflation is cooling and the US economy is proving resilient in the current high interest rate environment. Last week the official GDP for the US in 4Q2023 was a y-o-y growth rate of 3.3%, much higher than market expectations at 2.0%.
Additionally, the US core PCE index, personal consumption expenditures, dropped from 3.2% to 2.9% as inflation is crawling its way back to the Fed’s target of 2.0%. Everything seems to be aligning for the Fed’s “soft landing”, or is it… If we however take into account the amount that the US budget deficit grew in 4Q2023 the GDP print doesn’t look too rosy. The US budget deficit grew by roughly $510 billion, more than 50%. Putting this into context, it now takes $1.55 in budget deficit to generate $1 of growth, and more than $2.50 in new debt to generate $1 of GDP growth!
Locally there were positive data prints for the SA consumer along with a SARB decision to leave the repo rate unchanged at 8.25%. South African CPI fell to 5.1% in December, down from 5.5% in November, with the largest contributors being food and non-alcoholic beverages as well as housing and utilities.
Let’s jump into the charts by comparing the US and Chinese stock exchanges. The media has been preoccupied by the ongoing conflicts in Europe and the Middle East to notice but the disputes between the US and China are still alive and well. China has been desperately trying to lift their economy with rounds and rounds of stimulus but to no avail. While the US stock exchanges have been able to surge in the 4Q2023 and touch fresh highs this month, the Shanghai composite index has fallen roughly 15% from its highs in the 2Q2023.
This chart clearly illustrates economic warfare with funds fleeing from the East back to the West. In blue is the US S&P 500, which has gained roughly 18% since October 2023, and in red is the Shanghai Composite Index which has fallen roughly 14%.
The dollar will remain skittish around its 200-day MA mark at 103.50 while markets await the messaging from the Fed. The DXY is nearing overbought zones but it can still move higher towards the red downward trendline if the Fed messaging is hawkish. A dovish Fed tone will however see the DXY crash below the 50-day MA support at 102.83 and re-test the red support range. For now, our view remains in a wait-and-see position.
Looking over to the commodity space, Brent crude oil has broken above the 200-day MA resistance level of $81.28 this past week. We are however nearing overbought zones on the RSI which will strengthen the 23.6% Fibo rate of 84.47. The move towards $93.37 is still strongly on the cards for 1Q2024.
Closing out this week’s report is our beloved rand, the little currency that could. The move lower onto the 200-day played out perfectly last week after the pair failed to hold levels in the red resistance zone. The pair is working into a major wedge pattern and broad-based dollar weakness from a dovish FOMC statement this week will allow the rand to pull the pair below the 200-day and 50-day MA rates of 18.72 and 18.68. For now, the rand has room to appreciate but only if the dollar weakens across the board.
