Global Market Performance:
In June 2023, global markets witnessed a positive overall performance, with the MSCI All-Country World Equity Index rebounding by more than 5%. Investor sentiment improved as volatility in equities was suppressed, primarily due to the belief that inflation had peaked, and interest rates were stabilizing. Despite these positive factors, concerns raised by the influential bond market regarding growth outlooks were largely ignored by the equity market.
For example, The U.S. Treasury yield curve, specifically the 10s/2s spread, has surpassed -100 basis points. This significant decline in the spread is viewed as a clear indication of a growth recession warning from bondholders. This follows global weak manufacturing activities and a decline in consumer demand, further accentuated by bearish oil market prices falling below $70 per barrel. These factors have contributed to ongoing growth concerns, particularly due to China's economic uncertainties and the lack of aggressive pro-growth policy measures during a time when demand is required.
Meanwhile, central banks continued to raise interest rates in most economies, affecting consumer spending, and this, in turn, disrupts the business budgeting process.
Global Macroeconomic Picture:
The global macroeconomic outlook showed signs of deteriorating demand as central banks attempted to cool inflation.
The manufacturing sector contracted, particularly in the United States and the Euro Area. The US manufacturing business activity indicated the biggest contraction since December at 46.3 in the month of June 23, with weak demand linked to customer confidence and subdued foreign demand. Services business activity in the US remained in expansion at 54.1, although growth output slowed, reflecting hesitancy among customers and inflationary concerns.
In the Euro Area, manufacturing business activity also experienced contraction at 43.4, with output and new orders declining at a significant pace. Input costs dropped, and business confidence reached a seven-month low. However, services business activity remained in expansion, albeit at a slower rate, as consumer spending lost momentum and new business activity eased, impacted by the European Central Bank's aggressive interest rate hiking campaign.
China's economic recovery showed signs of slowing momentum, with the manufacturing sector experiencing a third consecutive month of contraction at 49. New orders, buying, and export sales declined, and export numbers fell by 7.5% year on year. The services sector in China also witnessed slower growth declining to 53.2 from 54.5, with new orders remaining weak and sales shrinking for the second consecutive month.
Local Market:
The South African economy followed the global trend of a weaker manufacturing sector, with activity declining for the fifth month in a row, now at 47.6 in June from 49.2 in May. Weak demand, both domestically and in export sales, contributed to the decline. However, there were indications that business conditions would improve by the end of the year, with production numbers also improving.
In the credit market, Private-sector credit growth in South Africa cooled to a three-month low, as it rose to 6.85%, this easing in financial conditions was influenced by poor economic growth prospects and a tight job market that impacted business and consumer confidence.
Household credit growth has eased to a one-year low of 6.7%. This decline can be attributed to weaker household finances, higher interest rates, and fading consumer confidence. Specifically, home loans and vehicle finance have decreased to 6% and 7.6% respectively, down from 6.4% and 7.8%. On the other hand, personal loans have remained subdued at 8%, while overdrafts have increased to 4.5% from 3.4%, supporting distressed borrowing. Growth in credit card usage has also slowed down to 8.9% from 9.1%.
Corporate credit extension has lost momentum, with the year-on-year growth rate declining to 7.7% after nine consecutive months of double-digit growth. The largest categories contributing to this downward pressure are general loans, with annual growth decelerating to 7.2% from 10.5%, and commercial mortgages easing to 6.2% from 6.5%. Additionally, corporate overdrafts have seen a sharp moderation to 9.4% from 22%.
The tightening lending conditions have had an impact on inflation numbers, as the annual inflation rate further eased to a 13-month low of 6.3% in May 2023. This slowdown in prices is primarily observed in the food & non-alcoholic beverages sector and transportation, attributed to cooling fuel prices.
Considering the risk range of inflation and the effects of recent interest rate hikes on financial conditions, it would be appropriate for the South African Reserve Bank (SARB) to maintain the interest rate unchanged at the current level. However, the SARB strongly believes that the risk of inflation is still upward, and given the weaker rand, it may be necessary to raise interest rates again in July.
These developments in household credit growth, corporate credit extension, inflation, and interest rate policy should be closely monitored as they can significantly impact economic conditions and financial markets in the coming months.
These developments in household credit growth, corporate credit extension, inflation, and interest rate policy should be closely monitored as they can significantly impact economic conditions and financial markets in the coming months.
The Johannesburg Stock Exchange (JSE) recorded a 1.28% increase in June, resulting in a 4% gain for the first half of the year. The performance was driven by the industrial sector, which experienced a significant increase of 17.8%.
The South African rand traded at around 18.8 per US dollar. The rand's recovery in June was supported by improved load-shedding stages and President Ramaphosa's efforts to maintain neutrality in the Russia-Ukraine conflict. Further improvement in the rand is expected with China's recovery and potential improvements in commodity prices, benefiting South Africa as an exporting country.
South African 10-year yields recovered to the level of 10.5% end of June. This follows the South African Reserve Bank’s commitment to raise rates further into restrictive areas.
Commodities Market:
Brent crude oil prices traded around the $70 level in June, reflecting ongoing concerns about a demand-driven recession and clouded market fundamentals. Gold prices experienced a further decline, trading at $1920, as investors feared additional interest rate hikes. However, the easing of inflation expectations helped maintain a bullish trend for gold prices.
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