Shifting expectations…

Until late last week, investors were assigning only a very small probability to the US Fed hiking interest rates next month. But it all changed this past week as a drastic re-pricing caused the dollar to appreciate, US bond prices to fall and emerging market assets to sell off.

The main trigger was the Fed’s minutes from their last meeting which indicated policy makers’ willingness to raise rates in June if economic momentum continued to improve. Other data released this past week supported a potential rate hike. Consumer price inflation experienced its biggest month on month increase in more than 3 years when it rose by 1.1% from a year earlier in April. US retail sales also woke up from a slumber and showed significant growth – a sign that the consumer is benefiting from the strong employment backdrop.

The South African Reserve Bank will cast a close eye on the US Fed’s next move as it has the potential to weaken the rand significantly in the absence of any action on their own part. The rand started the week on the back foot as news reports of the potential arrest of Finance Minister Pravin Gordhan created shock waves through the investment community.

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