We have entered the last month of the first quarter of 2023. Market
activity was dominated by concerns about a re-acceleration of inflation
as economic data in the developed world came in better than
expected. This development led to an increase in volatility as investors
sold bonds and equities and yields spiked supported further by
hawkish central banks’ comments demanding the need to cool prices
as labor remains rather strong following another month where the US
economy created more jobs than expected but unemployment edged
higher slightly to 3.6%.
The above development managed to overlook positive development in
China, the second largest economy, reported on reconstruction and
recovery of economic activity in key sectors such as services and
manufacturing. China reported expansionary economic activity as new
domestic and foreign orders improved, keeping employment growth
and confidence at a decade high. This follows the exit from the zero
interest rate policy COVID.
From the above, investors are vacillating between stubborn inflation
and stable growth. Which of the two will last longer depends on what
the data signals.
Global Data Picture
The macroeconomic picture continues to point to mixed economic
sentiment, following recent attempts by central banks to cool demand
by tightening the supply of money due to higher global inflation.
The latest data signaled to warn that global manufacturing activity in
the U.S. and Europe continues to be negative as companies continue
to cut production to better meet weak demand in the first half of 2023.
Meanwhile, price pressures slowly increased as buyers and sellers
reached an agreement on future orders.
Meanwhile, the services sector, which accounts for a large share of
GDP in many countries, expanded in many countries
(US/Europe/China) as private activity is supported by improved
demand despite inflation spikes, as new orders increased and backlogs
of work decreased, boosting confidence in economic activity. At the
same time, the cost of doing business is rising, albeit at a slower rate.
The key finding from the February report is that business price growth
is slowing as demand worsens and supply chains improve. However,
productivity is also declining, which is hurting growth. With overall
stagnant to cooling costs and insufficient demand, there is a slowdown
in overall revenues/profits. So we are likely moving toward a period of
slowing growth and inflation. This is not a good sign.
Locally
South Africa's manufacturing sector posted a decline in February due
to power outages that continue to affect business. Many manufacturing
companies saw a decline in business activity, new orders, employment,
and inventories.
The ongoing load-shedding disruption that has affected business
productivity has materialized into negative growth for GDP for Q4 2022.
South Africa’s economy contracted by -1.3%, this was mainly driven by
load shedding affecting 7 of 10 activity sectors reporting a decline in
production. The main draggers were key sectors such as finance,
trade, mining, agriculture, manufacturing, and general government
services.
The deteriorating logistics infrastructure also contributed to negative
growth levels as exports contracted by -4.8% eating away 1.1% of the
growth contribution and government spending was of no assistance as
it was lower too. The two growth areas were Investments related o hot
money and increased transport equipment. Meanwhile, household
spending was up 0.9% as consumers made use of credit to support the
current standard of living despite higher rates and unemployment
levels.
Taking consideration of the above South African economy is now at
risk of going into technical recession before the end of June as load-
shedding persists throughout 2023 as a total of 7000mw is offline. The
economic growth has been rather flat since pre- pandemic as it only
expanded by 0.3% since 2019. The above lack of growth is a key
contributor to sticky unemployment.
South Africa's unemployment rate fell to 32.7% in the fourth quarter of
2022, its lowest level since the first quarter of 2021, down from 32.9%
in the previous period. The number of unemployed increased by 28
thousand to 7.753 million, the number of employed increased by 169
thousand to 15.934 million, and the labour force increased by 197
thousand to 23.688 million. The sectors that contributed positively to
employment included finance, households, trade, and transport, while
community and social services, construction and agriculture shed jobs.
Taking the above into account, the S&P credit rating agency
downgraded our already junk-status bonds from positive to a stable
outlook. The problems stated were mainly load-shedding and
infrastructure challenges that are capping potential growth and going
failure to deal with the governance and operations of our SOE.
At the current outlook, getting downgraded further is highly likely.
The above finding is that unemployment is persistent because the
majority of the unemployed are out of work for more than a year.
Therefore, the ability to not find work has increased. The number of
unemployed will remain high in the short term, primarily because
businesses must weigh whether to hire employees, purchase
machinery to improve operations, or purchase generators to keep the
lights on.
The stock market posted major losses of over 1%. The driving factor
was inflation and growth concerns. The weekly performance of the All-
Share Index was down 2.3%. All indexes were in the red with
commodity stocks being the major losers, down 4.0%, due to weaker
commodity prices, while the dollar rose above 105, supported by higher
short-term yields as central banks continue to adopt a restrictive
stance.
South African 10-year bond yields jumped to above 10%. This is the
highest level since January as foreign investors sell their bonds in favor
of more attractive developed market bond yields. Especially since the
country is on a "grey list"; but investors are still pleased with the budget
speech.
The performance of the rand is a good indicator of confidence, and a
commodity currency traded weaker driven by a stronger dollar,
downgrades, greylisting, and weaker economic outlook.
In the commodity market, dollar strength was the main cause of
negative price changes for all commodities. Brent crude oil prices
traded lower this week as investors were in a tug-of-war between
optimism about the reopening of the Chinese market and nervousness
about a hawkish Fed affecting the U.S. economy. Currently, oil is down
below its immediate support of $90.
Gold prices gained some momentum at end of the week as traders
bought some gold positions in their portfolios as bond yields weakened
at the back of growing concerns and credit risk in banking sectors.
Currently, the gold chart is still bullish from a trading and trend
perspective. Bitcoin negatively traded this week as economic data
weighed heavily on risk assets.
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