We ended 2022 on an unsure footing. The momentum from the much-anticipated Fed pivot waned as the Fed minutes downplayed the notion of an imminent end to the hiking cycle. This was despite a softening in the US data surprise index, which has turned negative.
Negative data surprises and a softening labour market should inject renewed doubt about the ability of the Fed to engineer a soft landing. Yet at the same time it should give some comfort that inflation will moderate towards 2.0%.

The key question is whether this disinflation will be durable or whether a premature pause in policy tightening and easing financial conditions reignites demand and inflation pressure. This could lead to a stop-start hiking cycle, which is currently not discounted by the market. If anything, the market is now slightly less hawkish than the December dot plot with a peak at 5.0% and rate cuts starting in 4Q23.

In addition to the Fed pivot, risk assets rallied in Q4 amid speculation of faster reopening in China. While this has transpired, the support for commodities and risk assets waned over December– a classic case of “buy the rumour, sell the fact”. Yet a lower oil price and softer dollar should give the global economy some breathing room.

South Africa faces an interesting 2023. Not only must we contend with the potential headwind of a global recession, but we must also manage renewed political uncertainty.
A global recession would have the benefit of disinflation and an easing DM central banks bias, which would give rates and the rand room to rally. However, the disinflation would result in part from lower commodity prices, which would threaten the fiscal position and limit the extent of any bond market rebound.

In addition, the ANC’s rhetoric has a populist bias, which could entail more laxity on the spending front. Borrowing costs have risen in general, which would limit the ability to stabilise the debt ratio, particularly in a lower growth/lower inflation environment.
The SARB will continue to send a hawkish message, even if it is now plausible that the January MPC meeting could deliver the final hike in this cycle. Central bank independence has come under pressure across the globe, which could lead to complacency on the ANC’s affirmation to nationalise the SARB.