May saw a welcome de-escalation in the US-China tariff war, as both nations agreed to significantly reduce tariffs on each other for a 90-day period. This development spurred a market rally, as it raised hopes of easing inflationary pressures and improving the outlook for global economic growth, which had been at risk of slowing.

As expected, the US Federal Open Market Committee (FOMC) kept interest rates unchanged during its May meeting. The Fed emphasised the uncertainty surrounding the impact of tariffs on US growth and inflation, noting that a cautious, wait-and-see approach is appropriate in the current environment. Meanwhile, across the Atlantic, the Bank of England (BoE) lowered its policy rate by 25 basis points (bps) to 4.25%, citing “continued progress in disinflation” as the rationale.

Locally, two key events took place in May i.e. the National Treasury’s Budget 3.0 and the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) rate decision. Budget 3.0, presented by the Minister of Finance, maintained the 15% status quo on VAT. This was an expected move given its contentious nature in previous iterations. Despite the absence of a VAT hike and weaker growth prospects, the budget deficit came in slightly higher, while the debt-to-GDP ratio was marginally better than expected.

The South African Reserve Bank’s Monetary Policy Committee reduced the repo rate by 25 basis points at its May meeting, signalling a more dovish outlook compared to earlier decisions. The vote was not unanimous, however, with five members favouring a 25bps cut and one member advocating a 50bps reduction. The rate cut reflects reduced inflationary risks, supported by declining oil prices, lower global and domestic uncertainties, and a relatively stronger Rand. The SARB also trimmed its growth forecasts and reduced its inflation projections implicitly announcing its preference for a lower inflation target.

Headline CPI inflation edged up to 2.8% year-on-year in April (vs. 2.7% in March), slightly above consensus. The main driver was a sharp rise in food and non-alcoholic beverages inflation (4.0% year-on-year, up from 2.7%). Fuel prices fell by 72c/litre, contributing -0.1% month-on-month to CPI and keeping overall inflation moderate. Year-to-date, fuel prices are down approximately R1.00/litre.

In the local bond market, the bulk of yield compression occurred at the medium to long end of the curve. The yield on the long-dated R2048 declined by 32bps in May, while that of the R2030 fell by 13bps. As a result, the FTSE/JSE All Bond Index (ALBI) delivered a total return of 2.70%, with the longer end of the curve contributing most of the gains.

Inflation-linked bonds delivered muted returns over the period. The short to medium end of the real yield curve detracted from overall performance, while medium to long-dated inflation linkers generated positive returns. The FTSE/JSE Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) recorded returns of 0.40% and 0.45%, respectively for the month.

Money market returns remained under pressure in May as short-term interest rates continued to decline. The 3-month JIBAR decreased by 22bps, ending the month at 7.325%, while the 12-month JIBAR dropped by 12.5bps to 7.70%, The Alexander Forbes Short-Term Fixed Interest (STeFI) index returned 0.61% for the month.

The Rand strengthened against the US dollar in May, with gains primarily driven by broad US dollar weakness related to tariff uncertainty. Additional support came from market expectations of a potential lower domestic inflation target. Despite the recovery, the Rand remains exposed to volatility across emerging market currencies and ended the month at 18.00/USD.

Looking ahead, we see local economic fundamentals supporting lower yields over the medium term. Domestic growth remains muted, while inflation is relatively benign in the short term. Monetary policy is expected to remain accommodative in the near term, providing scope for further downward momentum in yields. The global interest rate environment is less supportive, however, given ongoing uncertainty around potential tariff increases and the policy stance that central banks may adopt. We continue to adopt a holistic investment approach, grounded in macroeconomic fundamentals and responsive to shifting policy signals.