The benchmark for international bond markets, the US 10-year bond, experienced its biggest correction in history, with yields up nearly 1.3% (bond yields move inversely to prices) at almost 3%.
These are all amazing moves and have made 2022 one of the toughest years for investors since the financial crisis. But one comparative backwater of international finance has remained perfectly calm and oblivious so far: South Africa.
Until mid-April, South African market commentators spent their time trying to figure out why domestic markets had been so relatively spared. The JSE Top 40 index remained stable, supported by commodity producers and resilient financials. The rand showed atypical resistance, trading below 14.50 rand for the greenback. And South African government bonds remained virtually unchanged from levels at the start of the year, with the 10-year down significantly below 10%.
In the past two weeks, all of this has happened. As always with the markets, irrationality can linger for a while but the accounts, when they inevitably arrive, are always more violent than one might have imagined.
The main protagonist of these swings in South African capital markets is the Federal Reserve in Washington, DC. Although a number of national factors have been cited for this recent tectonic shift, and recent events such as the catastrophic floods in KwaZulu-Natal and the Eskom load shedding have acted as catalysts, these national factors have not served as a final excuse for investors to sell and the markets to return to more realistic levels.
Like a distant undersea earthquake, the ensuing tsunami is only now hitting South Africa. There is no need to make it more complicated than necessary. The markets have had a tough few weeks, months, years – because the Fed is getting more hawkish on inflation.
This Volckerian double-punch — simultaneously aggressively raising rates and selling bonds on its balance sheet — is having a deadly effect on nearly every asset class, from bonds to stocks to real estate.
The Fed is deflating asset prices by sucking large amounts of cash out of markets while aggressively applying the handbrake to the economy.
The market is now integrating a Fed that cares little for the cries of anguish coming from Wall Street. Unlike the classic “Greenspan Put,” which referred to then-Fed Governor Alan Greenspan cutting rates and giving asset prices a boost whenever things faltered, investors might have to start refer to the “Jay Powell Call”.
However, what the market still seems too complacent about is the effects of this unprecedented monetary tightening on the economy. Markets indicate that an economic slowdown is likely, but not a recession. US stock indices are still a third higher than pre-pandemic levels, while corporate bond yields are tighter.
The JSE Top 40 is still more than 20% higher than before the pandemic. The yield curve is flat, but not inverted and flashes red.
This is a potentially naïve assumption that can start to sound wildly optimistic. In a recent paper, Alex Domash and Larry Summers found that there have been eight cases since 1955 where wage inflation was above 5% and the unemployment rate below 4%, as it is now .
In all eight, a recession followed within two years. As the Fed is now finding out, engineering a soft landing when the air break is pulled so hard and so late is very difficult. Usually, after a sudden stall, the plane crashes. The Fed now runs the risk of doing just that to the global economy.
It is simply amazing that after two years of (largely unwarranted) monetary policy largesse, the Fed has made a precise 180° turn in less than six months.
Calling it a rash would be way too nice; it’s just plain unprofessional and irresponsible – on a global scale. Many thought the years of the Fed discounting inflation, only to cripple the economy in a vain attempt to catch up, were over. Unfortunately, they were denied. South Africans, as recent weeks have proven, will directly experience the vicious effects of this recklessness and neglect.
A recession in the United States will almost certainly mean a recession – or at least a prolonged downturn – in South Africa. History has proven that to be the case.
South Africans hoping for a resurgence of fortune after the devastating recessions of the Zuma years and the Covid-19 pandemic may well be disappointed.
Unfortunately, not only is the economy paying the price for incompetent and incompetent policymakers at home, but it is also about to suffer from similar incompetence abroad, except in the form of clumsy U.S. monetary policy. . There is almost certainly more pain to be felt. BM168
This story first appeared in our weekly newspaper Daily Maverick 168 which is available for R25 from Pick n Pay, Exclusive Books and airport bookstores. To find your nearest retailer, please click on here.