Advice & comments
18 Jun 2024
Throughout Friday, the ANC/DA/IFP Government of National Unity (GNU) secured control of the country’s key legislatures.
Throughout Friday, the ANC/DA/IFP Government of National Unity (GNU) secured control of the country’s key legislatures. In parliament, Thoko Didiza of the ANC was elected Speaker with 284 votes, defeating the EFF’s Veronica Mente, while the DA’s Annelie Lotriet was elected as Deputy Speaker. President Ramaphosa was also comfortably re-elected for a second term late Friday night. These outcomes were made possible by the signing of a broad GNU agreement between the ANC and DA on Friday (which includes the IFP), following intense negotiations that lasted from Thursday night into early Friday morning.
The agreement includes clauses that will guide the composition of Cabinet and key provincial positions. It details the executive decision-making process, a conflict-breaking mechanism and provides guidelines for policymaking and the finalisation of the national budget.
The GNU also secured victories in KZN and Gauteng. In KZN, the ANC’s Nontembeko Boyce was re-elected as speaker, the DA’s Mmabatho Tembe was elected as deputy speaker, and the IFP’s Thami Ntuli will be the new premier, all winning with 41 votes to 39. In Gauteng, the ANC’s Panyaza Lesufi was re-elected as premier with DA support, and Morakane Mosupyoe, also from the ANC, was elected as speaker.
The National Council of Provinces (NCOP) held its first sitting on Saturday, June 15, where 54 permanent delegates from nine provinces were sworn in. Refilwe Mtshweni-Tsipane was elected Chairperson, and Kenneth Mmoiemang was elected Chief Whip for the seventh term of Parliament, both unopposed. The House will elect the Deputy Chairpersons and House Chairpersons of the NCOP at a later date. The NCOP ensures provincial interests are considered in national legislation and promotes a cooperative government. This first sitting, along with the National Assembly’s session, marks the establishment of the seventh term of Parliament.
The new president will be inaugurated on 19 June, leading to the dissolution of the current cabinet, with a new cabinet expected to be announced on 21 June. The next phase will involve a strategy session to outline government policy priorities. Despite policy differences between the ANC and DA, DA leader John Steenhuisen stressed that the GNU's success will require sustained hard work and pragmatic negotiation, while navigating opposition from the EFF, MKP, and dissenting ANC members.
On the economic data front, manufacturing production in South Africa (SA) surpassed consensus expectations, growing by 5.3% y/y in April after a 6.5% contraction in March, according to StatsSA’s recent Manufacturing: Production and Sales preliminary update for April 2024. Additionally, the Bureau for Economic Research (BER) Business Confidence survey reported that business confidence among manufacturers, while still subdued, increased by 7 points to 28%, the highest level in two years.
The JSE gained +0.26% over the week, with SA Inc. stocks (companies whose earnings are predominantly linked to the SA economy) rallying on Friday after news of the GNU spread. Financials (+8.27%) benefited the most, while Industrials (-1.46%) lagged following the decline of major stocks such as Naspers, Prosus and Richemont. The local currency strengthened against the U.S. dollar, benefiting from the “market-friendly” political outcome, falling to R18.34/$ from last week’s R18.86/$ level. SA government bonds also rallied, as yields on the 10-year fell -0.44% over the week.
Market Moves of the Week
Shortly before the U.S. Federal Open Market Committee met on Wednesday to set interest rates, consumer inflation data was released. Headline consumer price index (CPI) inflation remained unchanged in May for the first time in nearly two years. Core prices, excluding food and energy, increased by 0.2%, slightly below expectations and marking a seven-month low. Year-over-year, core inflation dropped to 3.4%, the lowest since April 2021. Soft producer price data on Thursday also eased market concerns that the disinflationary trend had stalled.
Despite benign inflation data, the Federal Reserve (the Fed) concluded its scheduled policy meeting on Wednesday with little change in its stance. Following the meeting, the Fed released its quarterly summary of economic projections. It showed unchanged median growth expectations but a rise in expectations for core personal consumption expenditure (PCE) inflation in 2024 from 2.6% to 2.8%.
While the Fed kept rates unchanged, officials increased their median expectation for the federal funds rate at the end of 2024 from 4.6% to 5.1%, implying only one cut later in the year. In their post-meeting statement, Fed officials acknowledged "modest further progress" on inflation, a shift from the previous statement's indication of "a lack of further progress" on May 1. Despite the Fed’s more cautious view, markets are nearly pricing in two full rate cuts before the end of the year.
In last week’s European Parliament elections, right-wing populist parties made minor gains, while in France, Marine Le Pen's National Rally Party scored over 30% of the vote, outperforming French President Emmanuel Macron's Renaissance Party. This prompted Macron to call for snap legislative elections on June 30 and July 7. The situation worsened for Macron as left-wing parties formed a unity pact, raising market concerns. If the unified left gains ground, Macron's centrist party could fall to third place, risking loss of parliamentary control. Despite remaining president until 2027, Macron could lose control over the domestic agenda. Markets fear Le Pen's party could lead to budget issues akin to the UK's during Prime Minister Liz Truss's tenure.
Britain’s economic recovery stalled before the general election, a blow to Prime Minister Rishi Sunak's campaign claims of economic improvement. GDP was flat in April, down from 0.4% growth in March, according to the Office for National Statistics. UK unemployment rose to a 2.5-year high of 4.4% through April, with easing pay pressures suggesting the Bank of England might cut interest rates later this year.
The Bank of Japan (BOJ) maintained its current monetary policy and decided to reduce its purchases of Japanese Government Bonds this week. Traders were caught off guard by the BOJ's announcement of a potential reduction in debt purchases, despite the absence of specific figures or a timeline. This delay in policy normalization led to renewed weakness in the yen.
Certain markets looked past a cautious Fed this week. The S&P 500 index and the Nasdaq composite touched new highs, rising by +1.58% and +3.24% respectively over the week, while the Dow Jones dipped -0.54%. Downside inflation data helped push the yield on the benchmark 10-year U.S. Treasury note sharply lower for the week, from 4.43% to 4.21%.
In Europe, the Euro Stoxx 50 index fell by -4.20%, fuelled by political uncertainty, whilst the UK’s FTSE 100 index dropped -1.19%. Japan's Nikkei 225 index rose +0.34%, while Hong Kong’s Hang Seng index fell -2.10% as deflationary pressures continued to weigh on China’s economy. Oil prices (Brent) rose +3.89% while Gold gained +1.70%.
Chart of the Week
Core services continued to rise last month, albeit more slowly, but a drop in energy prices offset this, bringing the overall month on month figure to nearly zero. Core goods (excluding food and energy), which drove the inflation spike in 2021 and 2022, saw their biggest year-on-year deflation in two decades, indicating inflation is hurting far less. Source: Bloomberg