Global Markets Performance:
Global markets have faced a challenging month, marked by uncertainty over the direction of inflation and economic growth worldwide.
Investors grappled with mixed signals, leaving them uncertain about future policy actions. The MSCI All-Country World Equity Index experienced a significant decline, falling by 3% and erasing the gains from the previous month. This decline affected both emerging and
developed markets, as concerns grew that the largest economy might not be able to achieve a soft landing.
A key indicator of these concerns was the bond market, where yields reached new highs. This increase in yields supported the strength of the dollar and reflected a prevailing sentiment of pessimism about the economic outlook. Several factors contributed to this sentiment: US Credit Rating Downgrade: Leading rating agency Fitch Ratings downgraded the long-term credit rating of the US government. This move followed expectations of fiscal deterioration in the short term.
It's noteworthy that the interest payments on U.S. government debt are expected to exceed $1 trillion annually. Additionally, US household debt reached a historic high of approximately $17.1 trillion. These factors contributed to an inverted yield curve for 10-year and 2-year bonds, a situation not seen in over 40 years. Despite these developments, the US economy is still seen as resilient, with better- than-expected GDP growth in Q2, largely driven by significant government spending.
Interest Rate Uncertainty: The equity market experienced increased volatility, following a bearish trend. This was exacerbated by the US Federal Reserve's signals of higher interest rates for a longer period.
Many analysts pushed back their expectations for interest rate cuts. It's widely understood that interest rate cuts would require inflation to reach the Feds 2% target, which is not anticipated to happen anytime soon, particularly as oil prices surged to $86 per barrel due to supply cuts.
China's Economic Challenges: China, the world's second-largest economy, also faced concerns. Its economic growth was slowing, and inflation presented challenges. However, the Chinese government initiated efforts to stimulate the economy. The People's Bank of China unexpectedly reduced its one-year key policy rate by 15 basis points to 2.5%.
Additionally, tax charges on stock trading were lowered to encourage capital flow into Chinese markets.
While the US and China were areas of concern for investors, the globaleconomic landscape remained uncertain, and market volatility persisted as investors sought clarity on key economic indicators and policy actions.
Global Macroeconomic Picture:
The global macroeconomic landscape is witnessing signs of weakening demand, largely influenced by central banks' efforts to combat inflation. The industrial sector is grappling with a recession, while the service sector is losing momentum, inching closer to contraction, which is providing diminishing support.
European Economic Downturn: The European industrial recession persisted through August, with industrial production showing a concerning -1.2% YoY figure. Across business activity indicators, all eight major Services and Manufacturing PMIs for Europe dipped below
the critical threshold of 50, indicating contraction. This trend aligns with the August Eurozone Consumer Confidence data, which declined from -15.1 in July to -16.0. These factors collectively underscore the negative and weak economic data in the Eurozone, reflected in a 3% drop in the German stock market.
China's Economic Headwinds: China, another vital player on the global stage, reported weaker economic data in August. Slowing growth and inflation numbers are particularly concerning, with consumer prices decreasing by 0.3% YoY in July, marking the first drop since February 2021.
Factors contributing to this slowdown include cooling spending, especially in the property market. China's status as a significant manufacturing hub has also led to contraction due to challenges in both local and international markets, largely influenced by inflation and interest rate dynamics. However, expectations are building for stimulus measures from Chinese leadership to reignite demand. Key growth metrics show slower numbers in Industrial Production, Fixed Asset Investment, and Retail Sales.
On a more positive note, private business activity in August inched up to 51.3 compared to the previous month's 51.1, with factory activity contracting at a softer pace, thanks in part to stimulus efforts from Beijing and support from the Chinese Central Bank. The service sector, meanwhile, continued to expand for the eighth consecutive month, albeit at a slower pace.
Mixed Signals from the US: In the United States, mixed signals are becoming more prevalent, indicating growing weakness. Inflation accelerated to 3.2% in July 2023, up from 3% in June, moving further away from the 2% target. This shift was primarily driven by prices
declining at a slower rate, particularly in the oil sector. The labor market is also feeling the pressure, with reports of a slowing US jobs market, fewer job opportunities, and an uptick in the unemployment rate to 3.8%.
US Economic Activity: US manufacturing and service business activity registered at 50.4, falling short of performance expectations. This decline can be attributed to subdued client demand across the economy, resurging cost pressures, and the service sector experiencing the slowest increase in activity in six months.
Consumer Confidence: Consumer confidence in the US also took a hit, dropping from 71.6 in July to 69.5 in August. These economic indicators collectively paint a picture of an economy struggling to maintain growth while attempting to manage inflation.
Given this landscape, it is increasingly likely that the Federal Reserve will take a balanced approach, pausing interest rates to assess further economic data.
Local Market:
As we delve into the third quarter of the year, South Africa's economic landscape paints a picture of slowing growth and inflationary trends.
Let's break down the key highlights:
Unemployment Figures: In the second quarter of 2023, South Africa's unemployment rate registered at 32.6%, marking the lowest rate since Q1 2021. The number of unemployed individuals declined by 11 thousand to 7.921 million, while employment witnessed a growth of 154 thousand to reach 16.346 million. This positive shift coincided with a 143 thousand increase in the labor force, which now stands at 24.268 million.
Retail Trade Decline: The retail trade sector faced a tough time, with a 0.9% YoY drop in June 2023, marking the seventh consecutive month of poor performance. These challenges are rooted in persistently difficult economic conditions exacerbated by elevated interest rates.
Business Confidence: The business confidence index dipped to 107.3 in July 2023, down from June's 108.8. Several factors contributed to this decline, including lower exports, increased real financing costs, and a drop in the value of approved building plans, all weighing on overall sentiment.
Manufacturing Activity: Manufacturing business activity improved slightly in August, reaching 49.7 compared to 47.3 in the previous month. However, it's essential to note that this sector continued its downward trend, contracting for the seventh consecutive month. This decline was influenced by rolling power cuts and the Western Cape taxi strike.
Inflation Moderation: July brought positive news on the inflation front, with numbers aligning more closely with the South African Reserve Bank's (SARB) target. July's inflation rate was 4.7%, down from 5.4% in the previous month. This decrease was primarily due to a notable
drop in transportation prices, particularly oil. Core inflation, which excludes food, non-alcoholic beverages, fuel, and energy prices, reached a ten-month low of 4.7% in July 2023, down from 5% in the prior month. Slowing money supply access contributed to this moderation.
Credit Market: Private-sector credit growth in South Africa slowed to 5.87%, falling short of market expectations. Banks are taking a more cautious lending approach to safeguard their portfolios against significant bad debts, given the challenging consumer and economic landscape.
Johannesburg Stock Exchange (JSE): The JSE faced a challenging month, closing 5.1% lower in August. Weakness mainly in the resources and industrials sectors played a significant role in this decline. Driven by global factors such interest rate uncertainty and weaker commodity prices but also local factors such as bigger budget deficit expected.
South African Rand Performance: The South African rand experienced a 5.7% depreciation against the US dollar in August. This weakening can be attributed to both local economic factors and the strength of the US dollar during this period.
Yields and Bonds: South African 10-year yields edged higher to 10.3%, influenced by investor optimism surrounding bond purchases. This sentiment was fuelled by expectations that the South African Reserve Bank would keep the repo rate unchanged at its September meeting,
following a significant decline in July's CPI inflation.
Commodities Market:
Brent crude oil prices closed the month at $86, underpinned by expectations of extended measures by OPEC+ to maintain tight oil supplies. Gold prices remained bullish, remaining above $1910 mark, as investors anticipated a halt to interest rate hikes, resulting in a drop
in Gold's Volatility (GVZ).
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