Major currencies dropped against the US dollar this week with a red-hot job market, resilient consumer spending and persistent inflation, suggesting that the Fed will continue on its present path of hiking interest rates. Yet, this week, the Congressional Budget Office (CBO), confirmed that the US is on track to add nearly $19 trillion to its national debt over the next decade, $3 trillion more than previously forecast.
The CBO blamed the result on rising costs for interest payments, veterans’ health care, retiree benefits and the military for the growing debt burden. This comes on top of $31 billion in debt the US government has amassed over the past two decades in federal responses to the Global Financial Crisis and the Covid-19 pandemic.
The CBO has warned that the Treasury Department may run out of money to pay its bills between July and September. This sets the stage for a partisan tussle between Republicans and Democrats about the need to urgently raise or suspend the Federal debt limit, something which has played out on several previous occasions. Unless the parties reach an agreement, there is a risk the government will delay making payments or even default on its debt obligations – an outcome that we believe to be unlikely.
Even if Republicans and Democrats reach an accord, the US faces a long-term debt problem. This is at odds with the Fed’s present focus on fighting inflation. Higher inflation and an increase in the supply of money could benefit the Federal Government by reducing the real value of its debt and increasing nominal tax revenues. How this dynamic unfolds for the rest of the year will be instructive.
In the meanwhile, the rampant dollar is wreaking havoc on debt-laden countries’ currencies. Egypt, Pakistan, and Lebanon have all announced they will drop their exchange rates to unlock help from the International Monetary Fund (IMF). Around two dozen other nations are seeking rescue packages from the IMF and currency traders are bracing for a fresh wave of devaluations in the developing world.
“Not all debt is created equal, when we’re making critical investments, and stimulus, coming out of a recession, there are a lot of economic benefits to keeping money flowing in the economy, keeping unemployment from reaching astronomically high levels, keeping small businesses from defaulting.”
– Lindsay Owens, Economic sociologist and executive director of the liberal Groundwork Collaborative in Washington
Global News
- Still-elevated US inflation cooled slightly at the start of 2023 but the overall consumer price index climbed 0.5% in January, the most in three months, according to data released on Tuesday from the Bureau of Labour Statistics. The increase in US consumer prices, up 6.4% from a year earlier, combined with the US Producer Price increase rising 6% in January from the previous year, is a sign of persistent inflationary pressures that could push the Federal Reserve to raise interest rates even higher than previously expected.
- Combined with higher transportation and housing prices, the rising cost of food is being felt disproportionately by many lower-income households and seniors over 65 years, putting them under extreme pressure to stretch their budgets. Although food prices are expected to moderate a bit this year, these consumers will still feel squeezed. After climbing nearly 10% last year, food prices are expected to rise another 7% in 2023, according to the US Department of Agriculture.
- US retail sales rebounded in January rising by 3% as consumers increased spending on vehicles, furniture, clothing and dining out, according to the Commerce department. This is the largest monthly increase in nearly two years after declines in the final two months of 2022. A resilient labour market denoted by historically low unemployment and solid wage gains has allowed many Americans to keep spending on goods and services even as borrowing costs rise and inflation remains elevated.
- US regulators are trying to avoid a similar issue to the 2008 Great Recession by building a wall between regulated industries, such as banks, and the crypto market. This aggressive stance, driven by public and private pressure, could see new ventures smothered before they get off the ground, and banks and digital-asset companies are likely to scrap existing ones and upend business models. However, Bitcoin jumped to a six-month high on Thursday, and was trading this morning at $23,755. Bitcoin is closely correlated to equity markets and in particular the Nasdaq index. The Nasdaq is up 16% year-to-date whereas Bitcoin is up 49% this year, after falling 65% last year.
- Former South Carolina governor and United Nations ambassador in the Trump administration, Nikki Haley, has entered the race for president, the first major Republican challenger to former President Donald Trump.
- In the UK, the pound was pushed lower after softer than expected inflationary data, both year-on-year and month-on-month on headline and core inflation, respectively. Key contributors to the upside came from housing and household services (mainly from electricity, gas, and other fuels), and food and non-alcoholic beverages, while the largest downward funder stemmed from transport (particularly passenger transport and motor fuels), restaurants and hotels.
- Wind turbines and solar panels are now generating almost enough electricity to power every home in China, having jumped 21% last year to 1,190 terawatt-hours of electricity. Residential power consumption is at 1,340 terawatt-hours, a 14% increase on the prior year as more people spent time at home because of the government’s stringent virus restrictions.
- In the US, Ford Motor is investing $3.5 billion in an electric-vehicle battery plant, which it will operate with technology and support from a Chinese battery maker during a time of geopolitical tension. Meanwhile, Tesla has had to recall more than 362,000 cars after US authorities said its automated driving technology could increase the risk of a crash.
- As at Thursday’s close the S&P 500 was flat for the week.
Local News
- The rand, after a decline of -2.41% against the dollar in January, has weakened by a further 5% in February with it trading at R18,27/$ this morning. Our current fair value estimate for the rand is R17.22/$. It seems clear that this discount has been caused by a confluence of South African specific factors including the persistent electricity outages, the country’s possible grey-listing, a potential ratings review by Fitch, together with last week’s State of the Nation’s Address which lacked clarity on key issues facing the country. These negative influences on the local currency have been compounded by upward pressures for a stronger dollar. Should the dollar remain strong with the possibility of a Fed rate hike of 50bps next month, we would see little reason for domestic positivity that could cause the rand to strengthen significantly from current levels in the short-term.
- President Cyril Ramaphosa will postpone a much-awaited Cabinet reshuffle until after the National Budget announcement. This is according to members of the governing party’s national working committee, which was briefed on his plans on Monday.
- Responding to an acerbic two-day debate on his SONA, Ramaphosa addressed opposition criticism as a lack of appreciation for his administration’s achievements despite “extremely difficult circumstances” including the Covid-19 pandemic, public violence such as seen in KwaZulu Natal and state capture. It is ironic that all three of these matters were grossly mismanaged by the state under the watch of Ramaphosa’s leadership: Covid led to the declaration of a national state of disaster which served as a ruse for irrational legislation and large-scale corruption in PPE procurement; the scale of violence in the KZN riots of 2021 was a symptom of a poor special intelligence unit, while the police force was ill-trained to cope with the ensuing criminality; and it should be noted that Ramaphosa served as deputy president of the Republic from 2014-2018 to President Jacob Zuma, under whose nine-year tenure was marked by state capture.
- The rate of increase in the cost of living declined for the third month in a row to 6.9% from 7.2%, still outside the Reserve Bank’s target range of 3-6%. The biggest driver of the fall was a decline in the cost of fuel. However, food inflation locally has hit a 14-year high, putting many South Africans under immense financial pressure. All categories, from staples to fast food favourites, cost substantially more than a year ago. Vegetable prices rose sharply, at 5.2% between December and January. Bread and cereal prices rose by 22.1% in January compared to a year earlier and meat by 11.2%. Food makes up about a fifth of the basket that Statistics South Africa uses to measure inflation.
- The DA-run Cape Town is gearing up for a massive growth spurt that could see it becoming home to as many as 5 million people by 2025 as people migrate there. However, this is going to require a huge investment in infrastructure. The city has unveiled a R120 billion infrastructure plan for the next decade, which could see it far outstripping any other state infrastructure investment across South Africa.
- A new World Bank report states that, over the next five years, South Africa should show rapid growth when it comes to energy storage demand from sectors such as electric vehicles. The development of a battery market and value chain in South Africa could create a lucrative industry capable of generating up to $2 billion in revenue a year by 2032 and tens of thousands of jobs.
- Standard Bank has warned that the current dire domestic situation could see skilled South Africans departing the country, adversely affecting the tax base. However, South African Revenue Service Commissioner Edward Kieswetter said this concern is “overstated” and that about 6,000 people left the country’s tax base last year.
- Following the news that Transnet will be finally sharing its network with a company called Traxtion, questions are being raised as to whether it will successfully induce private-sector players to run its trains after a similar attempt failed a few months ago. Instead, Transnet wants to partner with the private-sector operators and keep them on a short leash but allow them to run trains and unlock maintenance investments in the rail infrastructure for two decades.
- Telkom is frantically scrambling for cash as it plans to cut as many as 1,700 jobs, or 15% of its staff. It will also sell its device credit book for R1 billion as rolling power cuts and heavy spending on the mobile network have increased costs, biting into profitability. Its announcement stemmed from the publication of its trading statement for the three months to December, at the same time opening a bidding war for its fibre company, OpenServe, which will be taking on a minority shareholder. Concurrently, the embattled Post Office will cut 6,000 employees, according to the Communication Workers’ Union.
- As at the time of writing, the rand was 1.9% weaker for the week and the ALSI was 0.9% stronger.
Sources: Dynasty, BusinessLIVE, Daily Maverick, Bloomberg, Reuters, FX Street, Daily FX, BusinessTech, Euronews, Biznews.com, New York Times, WSJ, etc.
