COLUMN - The rand dipped below R18 to the USD last week.
It seemed like just the other day it was above R19. It goes to show that the market and currency move quickly.
So, what happened?
Well, US inflation data came out last week showing inflation coming in lower than expected.
Have a look at the chart below –
The chart below shows the longer-term trend. We always knew inflation was coming down but didn’t expect it to come down this quickly.
Chart: 5 years of US inflation
The result? Well, the US fed will still likely hike rates by 25bps at the end of the month (the SARB makes their decision next week and we expect another 25bps hike), but it could be the last hike on the table.
Halting rates hikes sooner means more chance of a soft landing or no recession.
This obviously has an immediate effect on the market, as we have seen in the currency.
Have a look at the South African 10-year bond yield curve. Look at that sharp decline in the past 2 days. That happened exactly as the lower US inflation data came out. Bond holders are happy – that’s capital appreciation.
We see how responsive our yield curve is to the US inflation data. We can see the exact moment the data came out there was a sharp decline in the yield (and sharp appreciation in capital price). This is good news for all SA bond holders.
It is also going to be good news if inflation continues to go down and we see the Fed and interest rates coming down.
As an aside, it is never good to have all your eggs in one basket. While decreasing inflation is good for bonds, have a look at what the S&P 500 (US stock market) has done while everyone was waiting on the sidelines for a recession. It’s up almost 18% in dollars.
Have a look at what the tech heavy Nasdaq has done year to date –
Did I mention the market moves quickly?
Just goes to show that waiting on the sidelines is almost never a good idea. There are always going to be naysayers predicting doom and gloom. At the start of the year, headlines screamed imminent recession.
My experience of the outcome of these predictors of market crash has been something along the lines of
Wrong
Wrong
Wrong
Wrong
Wrong
Right! (I told you so!)
Wrong
Wrong
Wrong again
So, there you have it. The market moves quickly, but it's not always a bad thing. If you have a good strategy and focus on asset allocation, you'll be well-positioned for whatever the future holds. Now go have a cup of tea and relax.
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