Market Commentary




2Q21 Money Market Commentary

The Federal Open Market Committee (FOMC) kept the Federal Funds target range unchanged at 0 – 0.25%. Their monthly asset purchases of at least $120bn, comprising of $80bn in US Treasuries and $40bn in mortgage-backed securities, was also left unchanged. It was the so called ‘dot plot’ that spooked the markets. As a reminder, the ‘dot plot’ are the individual FOMC member’s forecasts for the Federal Funds target rate. Members now expect US rates to rise by 50bps by the end of 2023. The move up in rates will come in two hikes of 25bps in 2023. In the past couple of meetings, the projections indicated no hikes at all until the end 2023 but now as many as 13 of the 17 members of the FOMC expect at least two interest rate hikes in 2023.

In the press conference following the meeting, Federal Reserve Board Chairman Jerome Powell emphasised that the committee is still concerned about the risk from the Covid pandemic; the market should treat the new forecasts with a ‘big grain of salt’ and the Fed would continue to monitor economic data. He also maintained the Fed’s view that this year’s sharp rise in inflation will be temporary and is expected to ease in the coming months. The other key policy markets should focus on is that no decision was taken on when to begin tapering off the bond purchases. The tapering debate should be on the table in upcoming meetings as well as the notion of when and how to start signalling to the markets sufficiently in advance with regards to tapering. Markets reacted with a selloff in equities; the 10-year Treasury yield shot upwards by 9bps, to 1.58%, from 1.49% the previous day and the US dollar strengthened.

The South Africa’s Monetary Policy Committee (MPC) meeting was not as dramatic as the US one. In a unanimous vote, the committee left interest rates unchanged. As a reminder, the Repo Rate is at 3.5% and the Prime Rate at 7.0%. Unlike its global counterparts, our Reserve Bank is comfortable with the inflation outlook and is not expecting a sustained increase above the mid-point of their 3% to 6% target range. CPI is expected to average 4.2% in 2021 and 4.4% in 2022. The South African Reserve Bank (SARB) lifted their GDP growth expectations to 4.2% (3.8% in March) for 2021 but lowered 2022 growth slightly to 2.3% (2.4% in March). Whilst the SARB’s Quarterly Projection Model (QPM) and FRA curve point to two 25bp increases in the second half of 2021, the MPC will deviate from the interest rate path predicted by its model given the weak state of the SA economy and benign inflation, by most likely holding rates for the remainder of 2021.

Most Emerging Market (EM) currencies weakened against the USD in June. The ZAR depreciated by 3.7% in June after having been one of the best-performing EM currencies in May. The currency weakness was driven by the hawkish Fed and strong USD as investors began to price tapering by the Fed. Risk sentiment also deteriorated as more countries reported the more infectious Delta variant COVID-19 outbreaks during the third wave.

On the performance front for the quarter, the Fund returned 1.05%, bettering the benchmark, Alexander Forbes Short-term Fixed Interest Composite Index (STEFI), by 12 basis points.