SA40 Index price forecast ahead of the SARB rate decision

SA40 Index analysis

• Inflation nears the upper limit and retail sales data disappoints but beats prior figure

• SARB weighing up inflation risks vs growth concerns

• SA40 Index: key technical levels ahead of the SARB meeting

Inflation nears upper limit and improved retail sales data

Earlier today we saw inflation print at 5.9% for the third time in the last 5 months. The SARB’s monetary policy committee will be monitoring the inflation print which has been running extremely close to the upper target of the 3% to 6% band ahead of the interest rate announcement tomorrow.

Elevated fuel prices continue to place downward pressure on disposable income, but retail sales data suggests spending has picked up from February. The March figure of 1.3% is a sizeable improvement on the 0.9% contraction the month before.

SARB weighing up inflation risks vs growth concerns

The SARB, which first hiked rates back in November 2021, is expected to up the pace of the May hike to 50 basis points instead of the usual 25 basis points in an attempt to get ahead of the aggressive hikes seen in developed countries and support the value of the rand. A 50 bps hike would see the repo rate (SA base rate) go from 4.25% to 4.75%.

The issue with a large hike or successive smaller hikes is the negative effect it could have on local economic growth. Higher rates disincentivize borrowing and spending while elevating the attractiveness of saving money as the interest received on deposits rise. The local economy has also had to deal with spates of load shedding and is in the process of rebuilding after the KZN floods which has had a significant impact on the fiscus. Therefore, do not disregard a cautious 25 bps hike.

SA40 Index technical outlook

The South African equity market has risen recently, alongside global equities as risk sentiment appears to have temporarily eased. The weaker rand has also helped support rand hedges within the index. However, the outlook for the SA40 and global equities has changed from ‘buy the dip’ to ‘sell the rally’ as major central banks around the world continue to hike rates aggressively to calm inflation.

Therefore, the technical setup sees a significant zone of resistance at current levels, more specifically around the 63,020 prior spike low and the 26.3% Fibonacci level (62,797) of the 2020-2022 major move. A lower move focuses sees 62,280 as immediate support followed by 60,910

In the event of a breakout, the psychological level of 64,000, which also happens to be the level that capped gains throughout the majority of 2021, appears as the nearest resistance.

SA40 daily chart

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