The last month of Q1 2024 witnessed a positive trend in global markets, with the MSCI world index recording a quarterly gain of 2.9% and a 7.8% increase in the month of March. This upward momentum was largely driven by the strong performance of US indices, fuelled by expectations of future interest rate cuts despite some cautionary communication from central bankers. The surge in commodity prices, particularly in oil and copper, contributed to this trend, reflecting a rebound in global industrial activity across regions like China, Europe, and some other Emerging Markets. However, concerns about sticky inflation emerged, supported by rising bond yields.
While inflationary pressures raise concerns, they are also indicative of a growing economy driven by both monetary policy and actual growth. The positive aspect of inflationary pressures is that they signify a robust economic environment, with global manufacturing activity picking up to support the service sector that showing signs of fatigue.
Despite the ongoing positivity, market participants are still faced with global political tensions in the Middle East. In addition to upcoming elections, which is keeping the risk-on attitude muted.
In summary, the global market is gearing up for a period of growth accompanied by persistent inflation, which may lead to prolonged periods of higher interest rates. While this poses challenges, it also presents opportunities for investors to navigate the market strategically, for example Investing in what gets you paid in a reflation environment (Energy/Industrial/Tech). Investors should approach the current market environment with caution, considering the implications of inflationary pressures and potential interest rate hikes.
Global Economic Trends: Manufacturing Recovery, Service Sector Challenges, and Inflationary Pressures
Globally, weakening demand, driven by central bank measures to curb inflation has become pale and fading away. This has been signaled by the leading indicator being the rebounding commodity prices that have gained momentum.
The data coming in is becoming evident, The ISM Manufacturing PMI in the United States increased to 50.3 in March 2024. This marked the first expansion in the manufacturing sector after 16 months of contraction. There were positive trends in demand, with indicators such as the new orders Index, and new export orders Index, reflecting expansion. Meanwhile service sector is still showing expansion in business activity but at a slowing rate. The ISM Services PMI in the US fell to 51.4 in March 2024 from 52.6 in February, pointing to the weakest growth in the services sector in three months, as new orders rose less and inventories fell.
On the hand The unemployment rate in the United States dipped to 3.8% in March 2024 as economies able add more jobs but unfortunately, their economy resilience comes with sticky inflation. Annual inflation rate in the US accelerated for a second straight month to 3.5% in March 2024, driven by energy costs.
The SP500 is up 3.1%, Nasdaq up 1.1%, and Dow Jones Industrials up 2.0%
While the manufacturing sector shows signs of recovery, the slowdown in the service sector and persistent inflationary pressures raise concerns about the sustainability of economic growth especially throughout short to medium term.
Trends in the Euro Area: Sentiment, Business Activity, and Inflation
EuroArea economic sentiment improved to 96.3 marking a slight uptick supported by confidence rising among manufacturers, service providers and consumers. This was evident as the overall business activity for the region significantly improved into an expansion in March to 50.3 points. Although the overall increase in business activity was modest, with manufacturing output still in decline at 46.1 and the services sector showed improvement at 51.5. This growth was supported by stable demand and efforts to clear work backlogs. Additionally, there was a third consecutive month of net job growth in the eurozone, as businesses expressed rising confidence in the economic outlook.
On the other hand, the consumer price inflation rate in the Euro Area declined to 2.4% year-on-year in March 2024, matching November's 28-month low, supported by energy prices cooling, food and non-energry industrial goods being moderated. To no surprise The European Central Bank maintained interest rates unchanged, said it may consider reducing the level of policy restriction, if it becomes more confident that inflation is moving steadily toward the 2% target.
The investors were happy about the development and in addition to the looked the global narrative of interest cutting period. The German index was 4.6% benefiting from rebounding commodity prices and CAC was up 3.5%.
The improvement in EuroArea economic sentiment and business activity, coupled with declining inflation, indicates a positive trajectory for the region's economy. The region's potential is expected to have a positive Q2.
UK Economy: Business Activity, Inflation Trends, and Market Sentiment
The The UK economy business activity was slightly revised down to 52.8 in March indicating a solid upturn in private sector business activity despite the decrease from February's nine-month high of 53. Output growth expanded from the service industry (PMI at 53.1) to manufacturing (PMI at 50.3), marking the first increase in manufacturing production since February 2023. New business volumes saw a broad-based rise in March, with services growing faster than goods. Employment in the private sector remained stable, with slight job creation in services but continued layoffs in manufacturing. Input costs continued to be high, particularly in services due to increased wages, but the rate of inflation eased from the previous month's six-month peak. Prices charged also rose at a slower pace, driven by a slowdown in the service industry.
inflation rate dropped to 3.4% year-on-year in February 2024, down from 4% recorded in both January and December. It was a slowdown in price increases for food and non-alcoholic beverages housing and utilities and transport. Meanwhile, Retail sales remain under pressure.
The FTSE stock market was up 4.2%, increase reflects investor confidence in the overall economic outlook with positive signs of growth in both the service and manufacturing sectors. The easing inflation rate provides some relief, although input costs remain a concern.
China's Economic Recovery: Growth Trends and Optimistic Signals
China's economy is on the path to recovery after a two-year slowdown in business activity.
In March 2023, the Caixin China General Composite PMI rose to 52.7, up from 52.5 in the previous two months. This marked the highest reading since May 2023, indicating the fifth consecutive month of growth in private sector activity. Both manufacturing output and services activity expanded at accelerated rates, leading to an uptick in new orders, particularly driven by the strongest rise in export orders in 13 months. Moreover, input costs eased, with manufacturing input prices falling for the first time in eight months, and service cost increases slowing down. Additionally, sentiment among manufacturers and service providers improved, reflecting heightened optimism.
This growth surge is attributed to ongoing policy efforts aimed at stimulating economic growth.
Meanwhile, China's consumer prices saw a slight increase of 0.1% year-on-year in March 2024, compared to a 0.7% rise in the previous month. This slowdown was influenced by the diminishing effects of the Lunar New Year, resulting in easing non-food inflation, while transport prices experienced a further decline (-1.3% compared to -0.4%).
Chinese equities maintained their upward trajectory from the previous month, with the Shanghai Composite index rising by 0.9%.
The signs of recovery in China's economy are promising, with positive indicators such as increased private sector activity and improved sentiment. The easing of input costs and inflation provides a conducive environment for economic growth. The resilience of Chinese equities reflects investor confidence in the country's economic prospects.
South African Market: Challenges and Resilience
SA market has gone through a tough quarter-one period lagging gains of global markets. The JSE was down 2.7% as investors remained cautious on the timing of rate cuts as the June rate was a 50-50% chance and renewed inflation was gaining momentum. However, for the month of March, it reflected gains of 2.5%, supported heavily by the resource sector up 13.9% benefiting from renewed reflation in commodity prices. This momentum can be expected to hold in the short term.
The South African Reserve Bank unanimously decided to maintain its key repo rate at 8.25% on March 27th, 2024, marking the fifth consecutive meeting at 2009 highs, as expected. Policymakers highlighted that, on balance, risks to the inflation outlook were skewed to the upside with January print back up 5.6%. Driven mainly due to accelerated prices for transport via higher oil prices. The inflation projection for this year was slightly revised upward to 5.1%, compared to January's estimate of 5%. For 2025, it remained unchanged at 4.6%. Regarding economic activity, the SARB maintained its growth projections at 1.2% for 2024.
The higher inflation that continues to encourage higher interest rates, continues to hurt consumer spending with retail sales falling by 2.1% in January, as consumers spent less on textiles, clothing, footwear and leather goods, pharmaceuticals, and food, beverages & tobacco. With said consumers remain confident that in future as expected improved load-shedding will translate into growth.
Private sector credit expanded by 3.3% year-on-year in February 2024, surpassing market expectations of a 4.1% increase and representing the 32nd consecutive month of growth in private credit. However, the growth rate remains notably below the historical average of 8%, reflecting reticence among banks to extend credit to mitigate their escalating bad debts and a lack of corporate demand amidst an environment of inflation and modest economic growth.
On the latest, the country's manufacturing activity in March was in contraction after robust expansion in the previous month. Both the business activity and new sales orders index declined. Meanwhile, private sector business activity also declined into contraction. New order volumes fell at the sharpest rate in over two years, after signs of stabilization in the prior month. Stronger price pressures, load shedding, drought conditions and wider economic uncertainty contributed to decreased customer demand. Orders from foreign clients, however, fell at the softest rate in eight months. As a result, output saw its swiftest contraction in 2024 so far
The appreciation of the dollar during the month supported by better-than-expected economic reports from inflation and job data, exerted pressure on the South African rand, further on with interest rate cuts being pushed back due to sticky inflation South African 10-year yields spike back up 10 to 10.4% and can be expected to hold trend higher as investors' appetite for high-yielding bonds paused.
The South African market faces challenges stemming from inflationary pressures, subdued consumer spending, and weakening manufacturing activity. While the rebound in commodity prices provides some relief through our resource counters, uncertainties regarding interest rate cuts and inflation persist. Investors should remain cautious and monitor economic indicators closely for informed decision-making.
Commodities Market: Resurge into higher Trends Amid inflation expectation.
Oil prices surged during the month, reaching $87 per barrel, with a monthly gain of 4.6%. This bullish breakout was driven by ongoing tensions in the Middle East disrupting supply chains, coupled with strong global demand as business activity rebounds. Gold prices also soared, hitting all-time highs at $2254 per ounce, driven by increased central bank buying, heightened demand from money managers seeking to hedge against inflation, and geopolitical tensions.
Other industrial commodities such as copper and agricultural products also experienced significant price gains, fueled by expectations of inflation and anticipation of interest rate cuts, along with the momentum behind China's and global industrial activity.
The commodities market presents lucrative opportunities for investors seeking to diversify their portfolios and hedge against inflationary pressures.
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