The US Federal Reserve's decision to lower interest rates by 50 basis points (bp) at its September meeting suggests a proactive approach to address economic challenges, particularly concerns about the labour market. A rate cut of this magnitude (larger than markets anticipated) signals the Fed's heightened awareness of potential economic slowdowns, even as inflation appears to be on track to meet its long-term target.
The 10-year benchmark yields across advanced economies fell during the month, with the US yield dropping by 12bp to a final reading of 3.78%. The moderation of the Personal Consumption Expenditures (PCE) Index to 2.2% year-on-year in August, down from 2.5% in July, signals a favourable trend for the Federal Reserve's inflation objectives. The PCE is the Fed's preferred inflation gauge as it captures a broader range of consumer expenditure and accounts for shifts in consumer behaviour, making it a reliable indicator of inflation trends. Inflation in the US continues to move closer to the Fed’s target of 2%, which bodes well for accommodative monetary policy.
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decision to reduce the repo rate by 25 basis points reflects a cautious approach aimed at balancing economic support with managing inflation. While the rate cut is intended to provide some relief to the economy, the MPC has clearly signalled that this is not the start of an aggressive easing cycle. The Committee emphasised that future rate decisions will depend on economic data and particularly the inflation outlook. Inflation risks remain, driven by factors such as global oil prices, exchange rate movements, and rising domestic costs. By maintaining a cautious stance, the SARB aims to manage expectations and prevent the market from anticipating a rapid series of cuts that could compromise inflation stability.
In the local bond market, the R2030 yield fell by 36bp and the long-dated R2048 yield dropped by 54bp. The FTSE/JSE All Bond Index (ALBI) returned 3.89%, with the 7 to 12 year and 12+ year segments of the curve returning 4.12% and 5.40%, respectively.
On the inflation-linked bond side, the front end of the yield curve saw an uptick, with the yield on the I2025 bond rising by 14.5 basis points. In contrast, the long-dated I2050 bond experienced a slight decline of 1 basis point. For the month of September, the Composite Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) delivered returns of 0.72% and 0.76%, respectively.
On the local money market, the 3-month and 12-month JIBAR rates fell by 18bp and 10bp to 8.05% and 8.23% respectively. The average yield on the 12-month T-bill was unchanged in September and stood at 8.30%.
The rand has strengthened significantly in recent weeks, gaining momentum after the unexpected 50 basis point interest rate cut by the US Federal Reserve. This sharp appreciation follows a more gradual strengthening trend that began after South Africa's national elections at the end of May. Improving economic activity has bolstered the domestic currency, further supported by reduced political risk. Additionally, increased foreign interest in South Africa’s portfolio assets has contributed to the rand's strengthening.
Looking ahead, we are mindful of the mounting global geopolitical tensions. Despite this, there are notable swings in sentiment on the back of the Chinese policy stimulus and US data releases that are supportive of growth. The next two years are expected to be shaped by central bank actions both locally and globally, as monetary policies are likely to be eased through rate cuts. Ongoing monitoring of developments, including global and local political dynamics and inflation trends, will guide the evaluation and adjustment of investment strategies to align with a long-term outlook.