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Rising inflation fears, monetary policy tightening and a new COVID variant add to market volatility

30 Nov 2021

Wikus Furstenberg, Yunus January, Daphne Botha, Aidan Kilian, Rhandzo Mukansi / Interest Rate Team

Economic & bond market review

Monetary policy tightening continues to gain traction

Unsurprisingly, more central banks, including the South African Reserve Bank (SARB), are now applying the proverbial monetary brakes with a greater degree of conviction. As we’ve highlighted in the past, the global supply chain remains strained - a textbook example of the downside risk to global interconnectivity, which, for over three decades allowed for more efficient allocation of global production factors. The persistent supply constraints continue to contribute to upward price pressures, which are lasting longer than initially anticipated. Moreover, this is unfolding against a backdrop of generally improved economic growth and a more sustained recovery in labour markets, particularly in advanced economies.

Inflation views are “transitory” no more

As a result, the word “transitory” is now used more sparingly when expressing inflation views, both by market participants and central banks. The Federal Reserve has recently been sounding the more hawkish horn about a potential faster tapering off and an earlier onset to policy rate increases, with Chair Powell quoted as saying that economic conditions have largely met objectives allowing for the removal of the word “transitory” when referring to inflation developments. In the case of South Africa, the SARB opted to increase the repo rate by 25 basis points (bps) to 3.75% at the November Monetary Policy Committee meeting, a well-motivated response to rising inflation risks. In stark contrast, the upside-down response by the Turkish central bank, by having cut rates by a total of 400 bps in the face of sky-high inflation offers a textbook example of macro policy mismanagement as a result of political interference. It therefore comes as no surprise that the Turkish Lira is leading the pack of worst performing currencies by a clear margin.  

A hint of global risk aversion, US dollar strength and a new COVID strain contributed to local market volatility

Locally, the rand continued to lose ground against a resilient US dollar, which was partly the result of an increasingly hawkish Federal Reserve and the concomitant prospect of higher US rates somewhat earlier than initially expected. An acceleration of rand depreciation, rising local inflation, the sustained net selling of local currency bonds by foreign investors and the re-introduction of travel bans to and from Southern Africa by the UK and other countries following the news of the OMICRON COVID variant, combined to force local longer-dated bond yields higher. The sell-off lost some momentum at month end on the back of strong local buying interest into bouts of weakness in response to improved market valuation.

Local nominal bonds managed to recover earlier losses, while inflation-linked bonds marginally underperformed

The month-end pull-back in bond yields allowed the FTSE JSE All Bond Index (ALBI) to show a decent recovery and a cash-beating return of 0.66%. In contrast, inflation-linked bond yields lost some ground despite reasonable inflation carry. As a result, the FTSE JSE Government Inflation-linked Index (IGOV) rendered a return of -0.08% for the month. Even so, this asset class managed to retain its first position for the first eleven months of this year, with the IGOV returning 10.52% compared to 5.56% and 3.21% for the ALBI and cash, respectively.

Figure 1: Bond market index returns (periods ending 30 November 2021)

Source: JSE Futuregrowth


Risk appetite was negatively impacted by rising concerns about the persistence of inflationary pressure, hence the timing and strength of monetary policy response. While global bond yields headed higher in response to more hawkish expectations, commodity market gyrations and a stronger US dollar contributed to significant rand depreciation. As a result, nominal bond yields initially drifted higher, before strong local buying interest into weakness allowed for a late partial recovery. In contrast to the preceding three months, inflation-linked bonds lost some ground as nominal bonds appear to offer better value following the recent upward correction.

Key economic indicators and forecasts (annual averages)


    2017 2018 2019 2020 2021 2022
Gobal GDP   3.5% 3.2% 2.6% -3.6% 5.8% 4.0%
SA GDP   1.2% 1.5% 0.1% -6.4% 5.6% 2.3%
SA Headline CPI   5.3% 4.6% 4.1% 3.3% 4.4% 4.5%
SA Current Account (% of GDP)   -2.4% -3.0% -2.6% 2.0% 4.5% 0.5%

Source: Old Mutual Investment Group