Fixed Income Trading at Prescient Securities believes that America’s Consumer Price Index (CPI) release last week of 4.2% year on year is good news for South Africa’s inflation outlook.
Image: File
South Africa's inflation and bond market outlook received a boost after the latest United States inflation data showed underlying price pressures easing more than expected, although economists warn that risks linked to oil prices, the rand and global uncertainty remain.
According to Prescient Securities, the US Consumer Price Index (CPI) data for May provided some relief for global financial markets and emerging economies, including South Africa, by reducing fears of a more aggressive interest rate response from the US Federal Reserve.
Kristof Kruger, head of fixed income trading at Prescient Securities, said the headline inflation figure came in broadly in line with expectations, while the more closely watched core inflation reading was softer than anticipated.
“That distinction matters for global rates, emerging-market currencies, and South African bonds. Headline CPI printed at 4.2% year on year, in line with consensus, while headline CPI month on month printed at 0.5%, also in line. Core CPI was the more important number for markets. Core CPI printed at 2.9% year on year, in line with expectations, but the monthly core print came in at 0.2%, below the 0.3% estimate,” he said.
Kruger added that the softer core print suggests that underlying inflation pressure in the US is not broadening as aggressively as markets had feared after the strong payrolls number.
“Headline inflation remains elevated, but the latest move appears more closely linked to energy than to a broader demand-driven inflation impulse. This outcome is better for bonds than a hot core print would have been.”
Kruger said that before the CPI release, markets were still digesting a stronger payrolls print and a more hawkish rates repricing.
“A stronger core CPI number would have reinforced that move by suggesting that labour-market strength and underlying inflation were both moving in the wrong direction. Instead, the data is more nuanced,” Kruger said.
“Headline inflation is still high, but core inflation was softer than expected. That creates a more complicated policy backdrop for the Fed. If the inflation shock is primarily energy-led, further tightening risks leaning too hard into a supply-side shock.”
Kruger added that a softer US core print is helpful because it reduces the risk of a more aggressive Fed response.
“That supports emerging-market carry, eases some dollar pressure, and gives South African bonds a better external backdrop. However, South Africa’s inflation problem is not identical to the US inflation problem,” he said.
“In South Africa, the market is still dealing with an oil-sensitive inflation channel, rand sensitivity, fuel-price dynamics, elevated breakevens, and the Sarb’s focus on anchoring inflation closer to 3%. That is why the local follow-through has been limited.”
Kruger said that oil remains central to the South African inflation outlook.
Professor Waldo Krugell, an economist at North-West University, said that if inflationary pressure is easing in the US and South Africa is raising interest rates, this will benefit the rand and the local bond market.
“It does leave Fed Reserve Governor Kevin Warsh in a tricky situation as there is some pressure to cut interest rates,” Krugell said.
“If inflation was higher, he wouldn't have to worry, but now it looks like he would cut interest rates prematurely as it doesn't look like America has reached its inflation peak, but currently, it's still good news for South Africa.”
According to Annabel Bishop, Investec's chief economist, rising inflation and interest rate expectations have lifted bond yields this year on the back of the oil crisis.
However, Bishop said South Africa’s stronger investor climate over the year and a half before the war has aided greater resilience for its bond market (and currency) than would have been experienced without the gains that have been made.
“The Middle East war is expected to wind down this quarter and see drops in fuel prices leading to lower inflation, although there are upside risks,” Bishop said.
“However, upside risks persist for the inflation outlook in 2027, and in particular include a developing super El Niño weather phenomenon, which could push CPI inflation to double digits.”
BUSINESS REPORT