It has been an exciting year so far, with numerous bouts of volatility as US nominal and real yields rose sharply amid expansionary US fiscal policy and strengthening macro data. Excess liquidity has flamed fears of rapidly rising inflation. The initial repricing in inflation expectations was positive for risk assets, as it accompanied better growth prospects, but the expectation of earlier Fed hikes quickly reversed EM asset price performance. Policy makers had to deal with various political, exchange rate, and fiscal fires, with Brazil and Russia opting to hike rates in the face of FX weakness, while Turkey’s central bank governor got the boot. The 1.75% level on the UST 10-year yield seemed to be the tipping point, as rates have eased off that level to flatten the yield curve and reignite risk appetite.
During March and April, the Fed successfully placated fears of earlier policy normalisation, despite US inflation jumping to 4.2% y/y – the highest rate since 2008. While much of this was due to base effect distortions when WTI traded negative last year, the inflationists currently have a lot of ammunition in the debate. Commodity prices are roaring, breakeven inflation is rising unabatedly, and stimulus cheques are being spent, albeit much of this on Wall Street rather than Main Street.
In SA, markets were fired up about imminent SARB rate hikes, but the March MPC meeting and the SARB’s Monetary Policy Review poured cold water on the idea of pre-emptive tightening. Alongside downside surprises in consumer price inflation, the rand roared ahead of the EM pack. Who would have thought that the ZAR – which is usually the high-beta EM play – would be up 3.5% year-to-date and the top performer of the major emerging market currencies? Better fiscal data, the booming terms of trade, and upward revisions to SA GDP growth forecasts should help to lift confidence despite renewed fears of load shedding and the dreaded third wave.
The stronger rand has certainly taken the edge of nascent inflation fears, but the SARB and investors, remain vigilant, as always. While the jury is still out on the inflation/deflation debate, given the risk of global overheating, it pays to be nimble and liquid.
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