From South Africa to the United States, monetary policy has been in the spotlight as central banks aim to achieve their objectives in challenging environments. Portfolio manager Thalia Petousis explains.
It is proving to be a challenging year to decode the forces underlying US inflation and economic growth, which, in turn, has complicated the job of the US Federal Reserve (the Fed) when setting a so-called neutral policy rate of interest. Fed chair Jerome Powell summed this up quite succinctly in September with the comment: “It’s not incredibly obvious what to do.” After a hiatus through 2025, the Fed delivered a 25-basis point interest rate cut in September, taking the federal funds rate to 4%. While it cited a softer labour market in coming to this decision, this comes with quite a few caveats. From a peak of more than 300 000 jobs being added in a single month in 2024, only 22 000 were added in August of 2025. This is among the lowest numbers of monthly job additions seen in recent history outside of major US recessions. By contrast, the overall US unemployment rate remains near a healthy multidecade low of 4.3%, or more than 2% lower than that seen in the decade pre-COVID-19.
What is going on underneath the data?
The answer to the US labour market conundrum may lie in what has been taking place at its borders. To say that they have simply closed understates the situation. A mix of border closures, visa restrictions, voluntary exits and deportations should see the US experience negative net migration this year, meaning that more people are departing the country than entering it. This is a phenomenon not seen in almost 70 years and is in sharp contrast to the approximately four million workers who migrated to the US from 2022 to 2024, when one needed to add over 100 000 jobs each month just to break even with the rate of migration. In a negative net migration environment, one’s “breakeven” new job listings figure to maintain employment is naturally materially lower, accounting only for people entering the labour force for the first time. The market’s mindset has arguably not adjusted to that economic reality and instead responds to lower monthly job creation figures as being indicative of a near-term recession and a steep lowering of interest rates. This thinking is hugely at odds with wage growth that is still running ahead of the Fed’s consumer price index target, particularly among part-time workers, which could, in turn, be a harbinger of trouble for consumer prices.
US inflation has been creeping higher towards 3% even with the full impact of tariffs still unrecorded. In such an environment, further rate cuts run the risk of stoking pricing pressures unless the Fed can be reasonably certain that a near-term recession will crush demand and prices. In some ways, such a recessionary forecast might be a dangerous bet against the near-term effects of the AI investment supercycle. Capital expenditure being laid out for new AI data centres this year is on track for US$600bn of spend, or double the average pace of manufacturing investment that took place in the US in the prior decade. This spending, in fact, contributed more to real economic growth early this year than personal consumption.
While the near-term effects of increased capital expenditure are to raise economic growth, some of the boost to production will occur outside the US due to imported components like computer chips. The medium-term impact of an onslaught of capital expenditure into an industry which is still nascent in terms of establishing a resilient revenue stream is also less clear. For companies like Amazon, Google, Microsoft, Meta and Oracle, capital expenditure is now consuming more than 50% of their operating cash flow. This was addressed recently by Sam Altman, CEO of OpenAI. In an interview, he stated, “You should expect OpenAI to spend trillions of dollars” on data centre construction in the “not very distant future and you should expect a bunch of economists to wring their hands and say, ‘This is so crazy, it’s so reckless, and whatever. And we’ll just be like, ‘You know what? Let us do our thing.’”
Perhaps telling was that Altman responded in the affirmative that AI is the most important thing to happen “in a long time,” but also in the affirmative to the idea that we are in a phase whereby investors as a whole are overexcited by AI, adding that some companies will “get burned”. Suffice to say, there will be big winners and big losers in this space, as seen in previous technological disruptions and investment bubbles, and the rising AI tide cannot lift all boats.
SA bonds retain their investor appeal
While I can make a good case for why US interest rates are being cut at a time when wage and pricing pressures make it imprudent to do so, there is arguably no such case to be made in local interest rate markets. South Africa’s inflation has been languishing at around 3% in a low oil price, stable rand, low growth and low investment environment. Even though South Africa’s gross domestic product (GDP) and investment spending remain lacklustre since the formation of the government of national unity, foreign investors have supported RSA government debt auctions this year. This in itself presents a marked shift from the ownership de-gearing they exhibited from 2019 to 2023. While last year’s foreign purchase underpin seemed to sharply turn in favour of South Africa post-elections, 2025’s purchasing behaviour is seemingly in keeping with the insatiable offshore appetite for high-yield debt that has seen even Ghanaian Eurobonds trade at US dollar yields as low as 6.5% – a country that not so recently defaulted. Although one might consider “hunt for yield” behaviour to coincide with a lower federal funds rate than that of 4%, the market has taken the recent cues from the Fed and so-called weakness in the US labour market as signs that dollar rates will fall further. While 2024 was the strongest single year for SA bonds in twenty years, the FTSE/JSE All Bond Index’s track record for the first three quarters of 2025 is thus coming in at a close second.
While the FTSE/JSE All Share Index is also reaching new highs this year, the specific constituent shares leading to recent gains have swung decidedly in favour of gold miners and against the locally exposed SA Inc shares that contributed to the 2024 rally. Gold’s allure in the age of fiscal dominance is unpacked in the latest episode of The Allan Gray Podcast.