Week in Review: U.S. Begins Rate-Cutting Cycle

Last week saw significant monetary policy shifts across major economies, with the Federal Reserve and the South African Reserve Bank (SARB) implementing their first interest rate cuts in years. The U.S. Federal Reserve made its first rate cut in over four years, reducing its key lending rate by 0.5 percentage points to 4.75%-5%. Fed Chair Jerome Powell called the move "strong," citing the need to address easing inflation and growing concerns in the labour market.

In South Africa, the Reserve Bank lowered its repo rate by 25 basis points to 8.0%, bringing the prime lending rate to 11.50%. While further cuts are expected, the Monetary Policy Committee remains cautious, emphasizing close monitoring of inflation risks.

In contrast, the Bank of England held its interest rate at 5%, with an 8-1 vote from the Monetary Policy Committee, where only one member called for a cut to 4.75%. Similarly, the Bank of Japan maintained its monetary policy stance, avoiding further market disruption while leaving the option for future rate hikes open.

In related economic news, U.S. retail sales experienced a slight uptick in August, driven by solid e-commerce activity, which offset a decline in auto sales. This reflects stable consumer demand throughout much of the third quarter. Data from the Commerce Department showed that nominal retail sales increased by 0.1%, following a revised 1.1% gain in July. On an annual basis, retail sales expanded by 2.1% in August.

Concurrently, U.S. factory production rose in August, primarily driven by a rebound in motor vehicle output, although July’s data was revised downward. The Federal Reserve reported a 0.9% increase in factory output for August, following a downwardly revised 0.7% contraction in July. On a year-over-year basis, output rose by 0.2%. The manufacturing sector, which accounts for 10.3% of GDP, continues to face headwinds from elevated borrowing costs. However, the ongoing monetary easing by the Federal Reserve may alleviate some of these pressures.

UK inflation held steady in August, though services inflation, a key focus for the Bank of England, saw a notable uptick. The headline consumer price index (CPI) remained consistent with the previous reading of 2.2% in July. Core inflation, which excludes volatile energy, food, alcohol, and tobacco, rose to 3.6%, up from 3.3% in July. Services inflation—critical due to its prominence in the UK economy and its reflection of domestically generated price pressures—increased to 5.6% in August, compared to 5.2% in July.

A week after the ECB’s rate cut, inflation in the eurozone slowed to its weakest pace in three years. Eurostat reported that annual inflation in August was 2.2%, down from 2.6% in July and 5.2% a year ago. Services drove inflation higher with a 1.8% increase, while food, alcohol, and tobacco prices rose 0.46%. Core inflation, excluding food and energy, eased to 2.8%, approaching the ECB’s 2% target.

China’s industrial production growth moderated to 4.5% year-on-year in August, falling below the previous month’s figure and missing the 4.8% consensus forecast. The deceleration was driven by weakness in key sectors such as commodities and autos. Retail sales growth also softened, dropping to 2.1% from 2.7% in July, as weak car sales weighed on consumer demand. Meanwhile, the unemployment rate ticked up unexpectedly to 5.3% from 5.2% in July. The softer economic data further highlight a decelerating GDP growth trajectory for the third quarter, raising concerns about the country’s ability to achieve its 5% growth target for 2024.

U.S. indices hit record highs as investors embraced the start of what many anticipate to be a prolonged Federal Reserve rate-cutting cycle. The Dow Jones Industrial Average (+1.62%), Nasdaq Composite (+1.49%), and S&P 500 Index (+1.36%) all surged to new peaks. In Europe, gains were more subdued, with the initial rally following the Fed’s cut fading as investors grew cautious about future monetary policy. The pan-European STOXX 50 Index closed 0.57% higher, while the UK’s FTSE 100 Index slipped 0.52%.

Chinese equities rose in a holiday-shortened week, buoyed by the Fed's rate cut despite weak domestic economic data. The Shanghai Composite Index rose 1.21%, and Hong Kong’s Hang Seng Index surged 5.05%. Japan’s Nikkei 225 Index also posted strong gains, rising 1.57% for the week.

Market Moves of the Week

South Africa’s Consumer Price Index (CPI) slowed to 4.4% year-on-year in August, down from 4.6% in July, marking the slowest pace in almost three and a half years. This is the lowest level since April 2021, when it also registered at 4.4%. The data, released by Statistics South Africa (Stats SA), signals that the SARB’s monetary policy measures over the past 12 to 18 months are starting to take effect. With CPI remaining within SARB's 3%-to-6% target range for two consecutive months, inflation appears to be more firmly anchored.

Retail sales in South Africa advanced by 2% year-on-year in July, following a 4.1% rise in June, according to data from Stats SA. This marked the fifth consecutive month of expansion. Economic activity is expected to gain momentum heading into the year-end festive period, underpinned by easing interest rates and increased liquidity from workers accessing savings through the Two-Pot retirement system.

The JSE All-Share Index benefited from positive global trends and the SARB's interest rate cut, posting a weekly gain of 2.26%. Financials led the advance with a 2.52% return, while the Property sector experienced more modest growth, rising by 0.16%. The rand strengthened by 1.89% against the US dollar, closing the week at R17.41/$.

Chart of the Week

The Fed implemented a 50 basis point rate cut on Wednesday, marking the first reduction in over four years. The move was framed as a proactive measure to support the economy's resilience, rather than a response to recent labour market concerns. Investor expectations fluctuated leading up to the decision, with opinions nearly evenly split by the time of the announcement.