Over the past two years, the impact of interest rates on the US economy is a subject we have returned to multiple times in our newsletters. The conventional wisdom is that higher interest rates – which remain elevated in the wake of inflation – should dampen economic growth and equity markets.
Following this reasoning, we would expect equities to boom and economic growth to accelerate following interest rate cuts. Yet, inflation has taken longer to subside than markets predicted at the beginning of the year. What’s more, US economic indicators such as the health of the labour market and GDP growth remain surprisingly resilient, while the S&P 500 has recently attained all-time highs.
Some economists and analysts are proposing a counterintuitive theory to explain why the economy has not faltered since the Fed started increasing interest rates: What if the US economy is defying expectations of a slowdown not in spite of high interest rates but because of them?
It is an interesting idea, given that higher interest rates mean that many people are earning returns that beat inflation from bond investments and savings accounts for the first time since the Global Financial Crisis which ended in 2009. Indeed, cash investors earned close to zero interest on their dollar cash for many years. High interest rates, plus the fact that the savings people accumulated under lockdown are not depleted, could be fuelling the economy.
According to Greenlight Capital’s David Einhorn, as quoted in Bloomberg, US households receive income on more than $13 trillion of short-term interest-bearing assets, almost triple the $5 trillion in consumer debt, excluding mortgages, on which they have to pay interest.
This translates to a net gain for households of $400 billion a year. One factor that should also not be overlooked is that many Americans locked their mortgages in at low interest rates before the Fed started to tighten interest rates. As such, many retirees and homeowners are reaping the benefits of higher interest rates without the associated pain.
BlackRock’s Rick Rieder is another credible voice bucking conventional wisdom. He argues that goods prices have stabilised. Inflation is, instead, being fuelled largely by services spending by wealthier Americans who are benefitting from fixed-income investments. As such, an interest cut rather than a hold or hike could bring inflation down to lower levels.
The idea is still controversial and not everyone is convinced by it. Yet, it seems that decades-high interest rates are not as effective in dousing economic growth or inflation as they were in years gone by. The corollary is that lower interest rates might not boost the economy in the way expected when the Fed starts the cutting cycle in earnest.
Whether Einhorn, Rieder and other radical thinkers prove to be right or wrong, the behaviour of the equity markets in the face of a ‘higher for longer’ rate cycle is unusual. We expect equities to keep shifting in line with hawkish and dovish signals from the Fed. However, we also maintain that equities may not continue to rise at the same rate as in the past two years once the Fed finally starts to cut rates.
“When rates get below a certain amount, they actually slow down the economy. Things are pretty good. I don’t think that [the Fed is] really going to help anybody [by cutting rates].”
– David Einhorn President of Greenlight Capital
Global News
- US consumer confidence unexpectedly rose in May to 102 from an upwardly revised 97.5 in April. This is the first time in four months as views about business conditions and the labour market were less negative and beat all estimates in a Bloomberg survey of economists.
- On Tuesday, Federal Reserve Bank of Minneapolis President Neel Kashkari said that the US central bank’s policy stance is restrictive, but policymakers haven’t entirely ruled out additional interest-rate increases. Kashkari indicated more data is needed before a decision can be made. He noted that wage growth is still resilient.
- The US economy grew at a slower pace in the first quarter than initially reported, primarily reflecting softer consumer spending on goods. Gross domestic product rose 1.3% year-on-year in the first three months of the year, below the previous estimate of 1.6%, Bureau of Economic Analysis figures published on Thursday showed. The economy’s main growth engine of personal spending gained 2.0%, versus the previous estimate of 2.5%.
- JPMorgan Chase & Company CEO Jamie Dimon expects problems to emerge in private credit “there could be hell to pay,” particularly as retail clients gain access to the booming asset class that may not be as liquid as other investments. JPMorgan and other lenders have been competing with the $1.7 trillion private credit industry, with giants such as Apollo Global Management taking on ever-larger deals.
- Donald Trump has become the first former US president to be found guilty of crimes in a verdict that could reshape the political landscape five months before Election Day. After two days of deliberation, a jury of 12 New Yorkers found Trump guilty of all 34 counts of falsifying business records to conceal a hush-money payment to a porn star, a conspiracy that prosecutors said deprived voters of vital information before the 2016 election. Despite this verdict and the uncertainty around his sentencing, betting odds still see Trump as the clear favourite in the presidential race.
- Houses for sale in Britain hit an eight-year high in May. Property portal Zoopla showed the average UK estate agent had 31 homes for sale in the four weeks to 19 May, the most since the firm started collecting such data in 2017 and a 20% increase from the same period a year earlier. That suggests homeowners are regaining confidence after last year’s interest-rate increases prompted many to delay listings, although prospective buyers are still cautious due to high finance costs.
- The International Monetary Fund expects China’s economy to grow 5% this year, raising its forecast from 4.6% a few weeks ago. It has also raised its GDP forecast for next year to 4.5% from 4.1%. China is targeting growth of around 5% this year. In the first quarter, it reported a better-than-expected expansion of 5.3%, although a drawn-out slump in housing continues to weigh on domestic demand.
- Catering to the ultra-rich is a booming business in Australia as there’s a new sign that the Perth elite are starting to become much richer, and properties are being advertised as: “Perfect for a family office.” Single-family offices typically cater to a single $100 million-plus family with services that can include managing money, taxes, charitable donations, and even household help. Since 2019, the number of family offices worldwide has more than tripled, to almost 4,600 last year, according to investment data provider Preqin. (Dynasty acts as a multi-family office for several high-net-worth families).
- Elon Musk plans to build a supercomputer dubbed the “gigafactory of compute” to support the development of his AI startup xAI. The supercomputer, which will string together 100,000 Nvidia chips, should be operational by fall 2025. The planned supercomputer would be at least four times the size of the biggest GPU clusters that exist today such as those used by Meta to train its AI models.
- A younger group of EV makers are on the verge of the industry’s next growth spurt in the US. Six of the 10 biggest EV makers in the US saw sales grow at a scorching pace compared to a year ago, up anywhere from 56% at Hyundai-Kia to 86% at Ford. A sampling of April sales similarly came in hot. Other EV makers such as Tesla have seen declining volumes as consumers are turning their backs on cars with inferior battery range, slower charging, and high prices.
- Apple’s iPhone staged a rebound in China last month with shipments rising 52% as retail partners implemented discounts. 3.5 million units were from foreign brands, according to a Bloomberg calculation, with iPhone accounting for most devices with its bounce back coming after it registered growth in March following steep declines in the first two months of the year.
- The government of South Korea’s capital Seoul has said that children’s products sold by the Chinese-founded online shopping giant Shein contained toxic substances in amounts hundreds of times above acceptable levels. Shein’s explosive growth has also led to increased scrutiny of its business practices and safety standards.
- Walgreens is joining other retailers Target, Walmart, and Amazon in cutting prices across the board, from snacks to toiletries, to lure back inflation-weary shoppers turned off by high prices. Prices are dropping immediately on more than 1,500 items online and at its stores, including name and store brands.
- As at Thursday’s close the S&P 500 was down 1.2% for the week.
Local News
- As of 15h00 this afternoon, vote counting was at 63.71%, with ANC support at 41.86%, the DA at 22.88%, with MK (11.8%) ahead of the EFF (9.5 %). 58.57% of eligible South Africans went to the polls. Results show the ANC is haemorrhaging support in Gauteng and KwaZulu-Natal and the party is poised to lose its majority for the first time. Analysts are coalescing around the view that the election is going to leave the ANC with a stark choice — to jump left and ally with one or both populist parties – the EFF and MK – or the centre-right DA. However, other scenarios may unfold, including the formation of a minority government.
- The rand has fallen by more than 2.7% since Tuesday, firstly on a stronger US dollar and US inflation data, but then also on the back of uncertainty surrounding the ANC’s choice in terms of coalition partners. The JSE also suffered a pullback on election updates with the country’s largest lenders, FirstRand, Standard Bank, Absa, Nedbank, Investec, and Capitec, losing R52 billion in market capitalisation in aggregate, causing the banking index on the JSE to drop 4%.
- Ahead of election day, primary dealers placed orders for R16.2 billion in debt on Tuesday, more than four times the R3.75 billion rand of securities on sale. This compares with a bid-to-cover ratio of 3.6 at the previous auction, according to central bank data compiled by Bloomberg. However, these portfolio inflows that we have seen over the last month can be very fickle and can be reversed very quickly, as noted above.
- Regular BusinessLIVE columnist Justice Mahala argues that backroom deals will dominate our politics in the coming days and weeks. He says politicians will discuss deals that may not previously have seemed possible over the next few days, such as an ANC and DA collation. “There’s going to be so much whiplash you will need a neck brace.”
- The roles of ministers of both public enterprises and trade, industry, and competition portfolios – two vital departments in the economic cluster – will hinge on the outcome of Wednesday’s national and provincial elections. Public Enterprises Minister Pravin Gordhan announced his retirement early in March, which was followed by Minister of Trade, Industry, and Competition Ebrahim Patel saying that he would also not be available to serve in the new Cabinet.
- Interest rates have been kept unchanged at 8.25%, representing a 15-year high for the past 12 months. This was in line with economists’ expectations. Despite inflation’s downward trend of late, the central bank’s targeted range for inflation is 3% to 6%, with CPI still higher than the targeted midpoint of 4.5%. Inflation is expected to hit the South African Reserve Bank’s target at 4.5% in the second quarter of next year instead of March 2025.
- The Supreme Court of Appeal rejected the medical scheme regulator’s latest attempt to avoid handing over its records on low-cost benefit options to the Board of Healthcare Funders, one of South Africa’s key industry associations. The board hopes the documents will reveal why the Council for Medical Schemes took so long to finalise its position on low-cost benefit options, which proponents say could help millions of low-wage earners access primary healthcare in the private sector. The council took the regulator to court in 2022 for allegedly stalling the implementation of the low-cost options.
- BHP Group has walked away from its $49 billion plan to take over rival Anglo American on Wednesday, which rejected a last-ditch request for more time, ending for now its six-week pursuit. BHP had proposed a range of “socioeconomic measures” in South Africa to sweeten its bid to buy Anglo American, which aimed to improve its chances of getting local regulatory approval while addressing other concerns. However, BHP was not prepared to overpay for the company.
- In an announcement on Monday, the Ackerman family said they would relinquish control of the group after 56 years as part of a R4 billion rights issue. Chair Gareth Ackerman will step down next year. Pick n Pay CEO Sean Summers aims to take on Shoprite, as he is confident that he can turn the “ship” around, even in the face of intensifying competition from the likes of Shoprite. Pick n Pay delivered a R3.2 billion full-year loss in 2024 but managed about R112 billion in sales in the last year.
- Transnet will institute legal proceedings against Nedbank “imminently” after the bank told the rail operator it is not willing to take responsibility for the governance failures that led to Gupta-linked Regiments’ looting of the coffers of the state-owned entity. Nedbank said the mediation talks between it and Transnet had collapsed, largely due to the insistence by the state-owned enterprise that Nedbank accept it acted in a corrupt manner in respect of interest rate swap transactions in 2015 and 2016.
- Investec CEO Fani Titi is close to completing the restructuring of the Investec Group after six years leading the bank. It’s now a cleaner, more focused business than the one he took over from the entrepreneurial founding generation. Titi has enhanced the group’s earnings with a R7 billion share buyback programme that is almost complete, having already bought back R6.8 billion worth in stock. Investec’s latest results were boosted by a 15% depreciation in the rand against sterling over the year. Adjusted earnings came in at 78.1p, an increase of 13.4% in sterling and 30.8% in rand.
- Discovery Bank wants to disrupt South Africa’s R1.4 trillion mortgage market through a new home loan product that offers dynamic interest rates that will change depending on how clients manage their money. It has identified around 20% of Discovery’s clients that have existing home loans with other financial services providers whose mortgages are mispriced and present a huge opportunity.
- Shares in Woolworths Holdings fell as much as 9% in early trade on Thursday after it warned of lower earnings for the full year. The group said that it expected its earnings for the 53 weeks to June 30 to be more than 20% lower than those reported for the previous year. The decline is partly a result of the inclusion of the David Jones business and the profit on disposal of that business in the group’s 2023 results.
- Industrial and logistics group Barloworld reported that it suffered a revenue decline as mining companies cut equipment orders as the bottlenecks caused by the railway and ports crisis persisted in the six months that ended in March. Group revenue fell 8% to about R19 billion and operating profit from core activities 12% to R1.9 billion.
- As at the time of writing the rand was 1.3% weaker and the ALSI was 2.2% down for the week.
Sources: Dynasty, News24, Bloomberg, AFP, Reuters, BusinessLIVE, Business Report, CNN, Moneyweb, Daily Investor, Daily Maverick, etc.
