While 2024 began with US markets forecasting 1.75% of rate cuts for the year, in reality only 1.00% worth of rate cuts materialised - taking the US federal funds rate from an upper bound of 5.5% to 4.5% by year end. While this in itself reflects a missed prediction for 2024, what has rattled markets even more are the comments made by US Federal Reserve (Fed) Chair Jerome Powell at the final Fed meeting of 2024, where he stated that their year-end inflation projection has 'kind of fallen apart'. At the December meeting, Powell acknowledged that inflation has not abated by as much as the Fed had expected, and that 'people are still feeling high prices'.

Indeed, after bumper years for inflation in 2022 and 2023, the US still recorded 3.3% core inflation in November (i.e. excluding food and fuel) off a high base in prices. Another grand market prediction that failed to materialise during the year was the forecast for a US recession. The outcome has been far from it.

The US continues to outperform other economies with close to 3.0% real GDP growth and an unemployment rate of just 4.2%.

As we wrote early in 2024, the market must awaken to the reality of a strong US labour market, low US unemployment and sticky inflation in US services. Such stickiness in US prices makes it incredibly difficult to cut interest rates excessively without lighting the flame of another round of inflation. The drivers of US services inflation cover quite a range of items, like costlier prices for elder care and domestic work, hospital and veterinarian services, financial services, and even admission to sporting events.

When an economy experiences an energy, food and fuel price shock, as seen in 2022, then it is natural to expect that a second-round shock via services-led inflation could follow. When prices have been high, workers demand higher pay. This is particularly true for an economy like the US with a shortage of low-skilled labour. When in short supply, lower-cost labourers have a lot of bargaining power.

US wage growth is unsurprisingly still running at an elevated 4.8% year-onyear with job openings of 7.7 million people versus only 7.1 million unemployed workers as at end November 2024. The narrative of a coming recession against such an economic backdrop was only ever that - a narrative - and certainly not one that was grounded in the actual economic data being observed.

South Africa, by contrast to the US, only experienced two interest rate cuts this year - taking the overnight repo rate from 8.25% to 7.75%. What is unusual about current SA inflation is how close it is to that seen in developed markets, running at only 0.15% higher than the US inflation rate. If one looks at inflation data over the 20 years to 2020, SA inflation ran at 3.47% higher than US inflation on average. Much of the current malaise in SA inflation can be attributed to weak local consumer health and low demand, in addition to a well-behaved rand exchange rate in 2024.

Another interesting data component is that the price of vehicles is also coming down locally as cheaper Chinese cars begin to flood the market. That said, the South African Reserve Bank remains cautious as ever on inflation, citing higher local water and electricity tariffs anticipated for the new year. The market forecasts that the US and SA overnight rates may be cut by just 0.50% each over the course of 2025, with the final rates at 4.00% and 7.25%. These are still well above their pre-COVID levels and, if they are accurate predictions, provide a healthy return in excess of inflation for money market savers.

Over the quarter, the Fund reinvested maturities at slightly lower rates given the rate-cutting cycle and its impact on the pricing of money market instruments. As such, and on a gross-of-fees basis, the Fund’s weighted average annual yield and weighted average effective yield ended the year at 8.4% and 8.7% respectively, versus an SA inflation rate for November 2024 of 2.9%.