The first cut is the deepest, Weekly News Flash

After months of speculation about the size and timing of the first interest rate cut in the US, the Federal Reserve slashed the rate by 50bps this week. Rather than regarding it as a sign of the Fed panicking about the state of the economy, most observers see it as an attempt to ensure a soft landing and continued strength in the job market.

The half-point rate cut comes at a time when the US economy is still growing with near-full employment, steady consumption, and rising wages. With this move, the Fed has not put its foot on the accelerator with stimulus but has merely lifted some of the pressure that it’s had on the brake lever, with rates remaining way above neutral and thus still restricting the US economy.

The era of above-neutral interest rates appears to be coming to an end, however, with Fed Chair Jerome Powell indicating that this rate cut has set in motion a cutting cycle, though it seems that markets may be expecting more cuts than the Fed intends to deliver. The more bullish forecasts see up to 150bps in cuts over the next 12 months, while the Fed expects only to reach that level by the end of 2025.

Since US-listed equities account for 42.5% of global market capitalisation, the Fed sets the pace for the rest of the world. A gradual lowering of interest rates over the next 18 months should make holding cash less attractive, potentially triggering inflows in a range of risk assets across the globe, although the question remains as to how much of this is priced in as the direction of rates has been well telegraphed.

Despite the rate fact that a rate cut was expected, the S&P 500 and Dow soared to new record highs on Thursday, and the Nasdaq also surged, banking on the lower interest rate delivering the much hoped-for soft landing. Big Tech stocks were the major drivers of rising equities, but the Russell 2000 index of small-cap companies also performed well. (In our News Flash on 6 September, we penned how a deeper rate on the back of softer employment numbers would paradoxically have a positive impact on equities market valuations versus a cut of 25bps in response to more robust economic data.)

Looking ahead, we would anticipate that the interest-rate-cutting cycle should help accelerate the rotation from tech stocks to other sectors that started in July. Riskier assets, particularly small and mid-cap equities and listed property may benefit from lower interest rates, while emerging markets may also start to benefit from a search for yield.

On the currency front, the dollar didn’t move much in response to the cut, indicating that currency markets had already priced this in. Equities markets will remain sensitive to Fed signals, but after a strong year of performance, there will be questions about just how much higher the tech sector can climb and to what extent the rally will extend to other sectors.

“The upside risks to inflation have diminished, and the downside risks to unemployment have increased”

– Jerome Powell, US Fed Chairman

Global News

The Fed slashed interest rates by 50bps on Wednesday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs. This comes as interest rate policymakers feel that risks to achieving its employment and inflation goals are roughly in balance as inflation moves sustainably to 2%. The Fed’s policy meeting this week was its last before voters go to the polls in what is expected to be a close US presidential election on 5 November.
Stocks surged to record highs on Thursday as Wall Street bet the Fed could steer the US away from a recession with its new easing cycle. The S&P 500 rose 1.7%, marking its 39th record of 2024 and pushing this year’s gain to around 20%. Tech stocks led the rally, with the Nasdaq 100 up 2.6%, and the Russell 2000 of small caps climbing for a seventh straight session. Bitcoin also jumped 5%. The Fed’s aggressive rate cuts and commitment to staying ahead of the curve sparked optimism for a soft landing. Thursday’s data showed jobless claims fell to their lowest since May, indicating a healthy labour market despite slower hiring.
US housing started bouncing back in August with new home construction gaining 9.6% last month, the fastest since April, according to government figures released on Wednesday. The median estimate of economists surveyed by Bloomberg called for a 1.32 million rate. The report showed overall building permits, a gauge of future construction, rose 5%, while single-family permit authorisations increased to a four-month high.
US retail sales unexpectedly rose in August, supported by online purchases that masked more mixed results at other merchants. The value of retail purchases, unadjusted for inflation, increased 0.1% after a revised 1.1% gain in July, Commerce Department data showed on Tuesday. Excluding autos and gasoline stations, sales advanced for the fourth month. E-commerce merchants posted a solid 1.4% gain.
US industrial production rebounded in August after sliding due to Hurricane Beryl in the previous month, reflecting a pickup in manufacturing and mining output. The 0.8% month-on-month increase in production at factories, mines, and utilities followed a downwardly revised 0.9% decline in July, Fed data showed on Tuesday. The August gain exceeded all estimates in a Bloomberg survey of economists.
The Bank of England has held interest rates at 5% on the back of some areas of inflation, such as the services sector, remaining sticky. It anticipates being able to “gradually” cut rates “over time”. The Bank expects growth of 0.3% in the third quarter, slightly lower than the 0.4% forecast in August. Inflation is expected to end the year at 2.5%. Following this announcement, the pound hit the highest level against the dollar since March 2022.
According to Bloomberg News, global leaders will need to act with renewed urgency to reduce their dependence on technologies from other nations after thousands of pagers and other devices exploded in Lebanon this week. This marked a new and deadly escalation in the use of supply chains against adversaries. While booby-trapped devices have been used in spycraft for years, the attacks in Lebanon alarmed even some seasoned officials who fear that the globalised supply chains that help produce cheap goods and power global growth could become weapons in the hands of foreign adversaries.
Intel is eligible to receive as much as $3 billion in US government funding to manufacture chips for the military under the Secure Enclave. This aims to establish a steady supply of cutting-edge chips for defence and intelligence purposes. This is separate from a possible $8.5 billion grant from the 2022 Chips and Science Act that would support Intel’s commercial factories across four US states. Intel shares rose 6.4% on Monday on the news, but the stock remains down 58% this year.
The EU has warned Apple to open up its highly guarded iPhone and iPad operating systems to rival technologies, or eventually risk significant fines under its flagship digital antitrust rules. The Brussels-based authority gave the company six months to comply with the bloc’s Digital Markets Act or face the threat of future penalties. The matter is not yet a formal investigation.
Amazon.com is cutting management layers and ordering employees to return to the office five days a week beginning in January as CEO Andy Jassy moves to streamline the world’s largest online retailer and cloud-computing company. Jassy aims to remove inefficiencies such as endless deliberation, unnecessary meetings, and layers of approval.
Microsoft raised its quarterly dividend by 10% and unveiled a new $60 billion stock-buyback programme. The share repurchase agreement, which has no expiration date, replaces a buyback programme announced in 2021 that had the same value of $60 billion. However, the buyback agreement represents less than 2% of Microsoft’s market value. The stock is up 1.9% for the week and is the largest holding in Dynasty’s house view global equity fund.
Nike gained 2.5% this week as it brought longtime executive Elliott Hill out of retirement to replace CEO John Donahoe in a bid to return the struggling athletic brand to its glory days. Hill will take over on 14 October. The stock has tumbled 25% this year as the sneaker giant struggles with falling sales and customer defections to upstart athletic brands.
Tupperware, known the world over for its plastic food storage containers, has filed for bankruptcy after years of falling popularity and financial troubles. Entering Chapter 11 bankruptcy will enable it to be flexible as it pursues strategic alternatives to support its transformation into a digital-first, technology-led company, the company explained on Tuesday.
As at Thursday’s close the S&P 500 was 1.4% up for the week.

Local News

The South African Reserve Bank cut interest rates for the first time in four years yesterday, dropping them by 25bps, while indicating a more optimistic outlook for inflation. The cut, taking the repo rate to 8% and the prime lending rate to 11.5%, matched the median estimate of 24 economists in a Bloomberg survey. The rand hit a 19-month high of R17.38/$ on Thursday morning, prior to the cut, but was trading at R17.56/$ to the dollar at the time of writing.
Consumer inflation fell to 4.4% year-on-year in August from 4.6% in July, the third consecutive month of slower growth in the figure, taking it to a 3.5-year-low. In month-on-month terms, inflation was up 0.1% in August compared to 0.4% a month before. However, food price inflation edged up 4.1% in August after an eight-month downward trend.
Retail sales increased by 2% year-on-year in July after rising by 4.1% in June, marking the fifth consecutive month of increases. Economic activity is expected to ramp up towards the year-end festive season as interest rates decline and workers cash in savings from the Two-Pot retirement system.
South African consumer confidence surged in the third quarter to pre-pandemic levels, driven by increased optimism about personal finances which bodes well for household spending. The FNB/BER Consumer Confidence Index climbed to -5 in the three months through September from -10 in the previous quarter. It was the highest reading since the first half of 2019.
Deputy finance minister and chair of the Public Investment Corporation, David Masondo, has said that enabling the use of prescribed assets to prop up state-owned entities may provide a short-term lifeline to government entities, but that they would ultimately collapse. In turn, they would not be able to provide any returns on investment, nor repay it, which will then lead to the failure of the retirement funds.
National Treasury has defended the tax on withdrawals from the Two Pot system of retirement funds saying that it is progressive in that it benefits low income earners. There has been much dissatisfaction including by trade union federation Cosatu over the fact that withdrawals will be added to taxable income and could thereby push taxpayers into a higher tax bracket. In the 2024 Budget, an estimate was made that R5 billion in additional tax would be collected this fiscal year from the implementation of the Two Pot system.
The South African Revenue Service has used AI to detect over R10 billion in invalid VAT refunds and can now complete a tax assessment in under seven seconds, Ninety One reported this week.
Business Unity South Africa’s leadership is encouraged by the government’s “openness to engage” on the National Health Insurance Act and will be submitting a proposal to address its concerns. The body met President Cyril Ramaphosa, Health Minister Aaron Motsoaledi, his deputy Joe Phaahla, and senior officials from the presidency and the Department of Health on Tuesday to discuss the contentious legislation.
Electricity and Energy Minister Kgosientsho Ramokgopa has told MPs that several measures are planned to reduce the burden of electricity price increases, especially on the poor. He reiterated his previous comments that high electricity prices were untenable and unaffordable and had a profound effect on inflation and the cost of living. Eskom has proposed increases for next year ranging between 36% and 43%. This would be on top of the 12,74% increase this year.
The ANC in Gauteng will be afforded a last chance to convince its national leadership to give it a thumbs up to enter into a coalition that would unseat the DA in the City of Tshwane. The province’s ambitions for the capital city hinge on whether it will be able to convince the secretary-general’s office that the city is financially stable for the ANC to take over, according to sources.
Municipalities that owe water boards a combined R21.3 billion are seeking debt relief from the government similar to the R245 billion plan offered to power utility Eskom, according to deputy minister of water and sanitation, David Mahlobo. Debt restructuring would ensure the sustainability of the country’s 15 water boards. The boards do not receive money from the National Treasury and rely on revenue collected from municipalities, their main clients.
Emfuleni municipality finance MMC Hassan Mako has blamed high unemployment, which hampers revenue collection, for the municipality’s inability to pay the R8 billion it owes Eskom. The municipality’s bank accounts were recently attached to Eskom to ensure that the money collected for electricity is paid directly to the power utility.
President Cyril Ramaphosa has held talks with Elon Musk to get the billionaire’s satellite service, Starlink, to South Africa. The two will have further discussions. The government has come under pressure in recent years to license Musk’s service. South Africa is seen as being behind the curve in adopting the connectivity underpinned by low Earth-orbiting satellites
Discovery reported a 12% rise in annual attributable profit as new business grew 18%, boosted by a strong performance from Discovery South Africa and Vitality Global. It grew normalised profit from operations by 17% to R11.5 billion in the year to end-June, with strong contributions from Discovery South Africa and Vitality Global, increasing 16% and 57%, respectively. Discovery Bank’s new home loan product has taken off with data showing that clients have switched more than R650 million in mortgages.
Capitec is looking to incorporate more generative AI functionality into its customer service processes to help agents resolve customer queries faster. This could soon see it provide human customer services agents access to their set of generative AI tools and chatbots, akin to OpenAI’s ChatGPT, that “whisper to” call centre agents as they deal with queries, offering real-time assessment, guidance, and advice on how to quickly resolve an issue.
As at the time of writing, the rand was 1% stronger against the dollar and the ALSI was 2.6% up for the week.