It’s been mixed reactions among investors globally in trading stocks.
World investors had received economic data pointing to the sentiment
that the world’s largest economy has a chance of a soft landing.
Meaning the US economy could avoid a recession. The strong labor
data and positive retail sales supported spending, especially in the
service sector. These developments saw trading volatility decline and
investors being bullish on stocks. However, this momentum was
overshadowed by hawkish commentary by central banks pushing for
more interest rate hikes as inflation was not cooling off meaningfully,
therefore, it ought to bring more pain for equities.
The above statement is supported by recent inflation data for January.
The annual inflation rate in the US slowed only slightly to 6.4% from
6.5%. This indicates that inflation is sticky, currently supported by the
demand side as labor is at full employment. The unemployment rate is
at its lowest at 3.4%, the lowest level since May 1969. This means we
must expect tighter financial conditions for some time, as the Fed waits
to see more compelling results. This could be higher unemployment
with rates this high.
Meanwhile, the bond yields are still inverted (-80) and continue to
signal a strong warning against a soft-landing narrative.
Our asset allocation remains within sectors that do well in cooling the
growth and inflation environment. We continue to take opportunities in
the precious metal sector and China-related stocks as the economy
recover from lockdowns. However, our portfolio remains overall in a
defensive position as the reality of the recession is still within our
scenarios.
Global Data Picture
The macroeconomic picture continues to indicate pressure points
following recent efforts by central banks to cool down demand by
tightening the money supply due to higher inflation globally. This has
now already made its way into the real economy as business activities
are still not signaling a strong trend.
Focusing on the week’s economic data, it proved that once again the
Good Economic Data is Bad News!
We had better-than-expected retail sales and Jobless claims from the
US, which supported that US consumers still have savings/credit to use
to overcome recent increased general prices that only declined slightly
by 0.1% to 6.4%. However, it also spiked the concerns that more
interest rate hikes are to come than expected. Especially with an
ongoing strong labor market.
Locally
South Africa's annual inflation rate eased for the third straight month to
6.9% in January 2023, from 7.2% in the prior month, as expected, but
still above the upper limit of the South African Reserve Bank’s target
range of 3%-6%. The easing inflation was supported by cooling prices
in fuel and restaurants and hotels. Meanwhile, faster increases were
seen for food & non-alcoholic beverages. The annual core inflation,
which excludes food, non-alcoholic beverages, fuel, and energy prices,
stood at a three-month low of 4.9% in January, unchanged from the
prior month.
Meanwhile, retail sales shrank by 0.6% from a year earlier in
December 2022 coming from the November figure that was higher,
supported by black Fridays specials. The biggest decline was sales in
retailers in pharmaceuticals, medical goods, cosmetics, toiletries,
household furniture, appliances, and equipment. As it stands Retailers
across the country are facing recurrent power cuts, with costs rising
sharply as they seek alternatives to keep businesses open. The effects
of these developments are lower business confidence as economic
growth for 2023 slows down.
The stock market managed to record slight gains. The driving factor
was support from the industrial sector exposure. The weekly
performance for the All-Share Index was up by 0.4%. The only loser
was the resource counters down 2.2%, driven by weaker commodity
prices as the dollar raises above 104 supported by higher short-term
yields as the central remain hawkish.
South African 10-year bond yields spiked higher to trade around 10%.
The highest since January as foreign investors sell them for more
attractive developed market bond yields.
Rand’s performance is a good indicator of confidence and a commodity
currency traded weaker again against the dollar due to a strong dollar
and added risk premium as we share energy crises.
In the commodity market, the dollar’s strength made it expensive to buy
commodities as they are negatively correlated. Brent crude prices
traded lower for the week, as investors feared a potential recession-
driven demand downturn and interest rate hike concerns as the US
economy reported higher-than-expected economic data. Currently, the
oil trade is bearish below its immediate support level of $90.
The Gold price also lost some momentum, as traders sold some
positions in Gold in their portfolios as bond yields and the dollar rose.
Currently, the gold chart is still bullish from a trade and trend
perspective. Bitcoin traded negative for the week along with risky
assets.
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