Global markets performed well in July as more good news about inflation and the prospects of a soft landing in the US was well received. The strong returns in July may also indicate an adjustment in investor behaviour as investors “rotated” into different segments of the market, particularly since stock market gains have been too narrowly concentrated in a few mega-cap technology companies.
To kick off the third quarter of 2023, the market saw continued surprise economic momentum, reinforcing the soft-landing narrative, but not slamming the door on further Fed rate hikes just yet. The 25bps hike was widely expected but Chairman Powell noted the Fed’s 2% inflation target “has a long way to go.” Robust consumer spending continued along with optimism about the labour market and jobless claims which increased below forecasts. US equities reported negative results in rand terms, on the back of a weaker dollar but it’s tough to argue the performance of the S&P 500 finishing July higher for the 5th straight month, up 3.21%.
The British economy has contracted by 0,4% year-on-year in 2023. Despite economic growth in the UK slowing, inflation remains well above the Bank of England's (BoE’s) 2.0% target, which could see the central bank raising its key lending rate by a further 25bps at its August review. Further weighing on frail economic activity has been a weaker labour market where the unemployment rate in the UK increased to 4.0% in July, with average wages expanding above forecasts for the three months ending May 2023. Policymakers are now faced with the difficult task of bringing inflation back to within target range without tilting the economy into recession. At the risk of stating the obvious, if they don’t change direction, they are going to end up where they are going.
The European Central Bank (ECB) hiked its key lending rate by 25bps. Despite this move, the central bank stated that inflation was still expected to remain at elevated levels for an extended period. CPI in the Euro Area achieved a hat-trick when CPI slowed for a third consecutive month to 5.3% in July, while core inflation remained at 5.5%.
Emerging Market equities outperformed their peers in US Dollar terms, with the MSCI World Index up 3.4% and the MSCI Emerging Market Index up 6.3%.
China continued its sluggish economic growth after very optimistic sentiment post the freedom of movement restrictions being lifted. China faces a deflationary risk we have to start taking seriously as they posted a flat (0%) year-on-year CPI number in June and a 0,3% year on year drop in July. This was the first time in two years that consumer prices fell in China. However, China still has a few levers they can pull, like the fact that their prime rate is at 3,55%, just below their long term average of 3,82%. Potentially, they could lower the cost of capital to boost spending. Officials in China have also pledged support to lift the country’s economy and support the struggling property sector.
We will take the win, even if it’s ugly and the upward revision of the SARB’s 2023 growth forecast to 0,4%, up from 0,3% is a win.
The JSE All Share Index had a strong month, up 4%. Commodities, resources and industrials where all in positive territory while financials where remarkable for a second consecutive month, up by 7,6%. The Rand appreciated against the major currencies. In relation to the US Dollar the Rand appreciated 6,2% and by 5% against the pound Sterling.
SA Inflation continued to show signs of moderating and came in below expectations prompting the SARB to maintain the repo rate. The central bank however warned that the decision did not necessarily mark the end of the hiking cycle, stating that the committee would continue to monitor inflationary pressures.
Our energy crisis is summarized well by Yobi – “For a moment, nothing happened. Then after a while, nothing continued to happen.” Loadshedding returned to stage 6 in July. The number of gigawatts shed so far this year is 50% higher than the entirety of 2022.