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Following a string of busy weeks, it was relatively quiet on the local front. Datawise, the most notable release was the consumer price inflation (CPI) print for June. Inflation slowed to 5.1% y-o-y, in line with expectations, with food inflation ticking down to the lowest level in almost four years. We expected a further moderation in headline CPI during the second half of the year – see the domestic for more on the CPI and Thursday’s producer price index (PPI).
However, it was a(nother) wild week in US politics, with President Joe Biden announcing on social media platform X that he will not seek re-election in the upcoming US elections, although he intends to finish his current term. This was mere days after ‘confirming’ that he would not stand down. Importantly, Biden endorsed his Vice President Kamala Harris, who is likely (although not guaranteed) to become the Democratic Party nominee in the upcoming election. It will be interesting to see who she picks as her running mate after rumours that Donald Trump is already regretting his choice. Polls show a surge in support for Harris, although the race between Trump and Harris is set to remain tight and could be determined in a handful of so-called swing states.
The biggest global data release of the week also came from the US, with GDP coming out much stronger than expected in Q2. In addition, the first month of Q3 was off to a good start with the flash composite PMI ticking up to a more than two-year high in July. While the US Federal Reserve (Fed) will not be pleased with the uptick in input costs, most other data is pointing to a cooling labour market and easing price pressure. Meanwhile, the Eurozone preliminary PMI data was weaker than expected, while input costs accelerated – particularly on the services side. In contrast, the UK PMI was lifted by the manufacturing sector reaching a two-year high. Also good news was that inflationary pressure slowed.
Across the globe, China stepped up monetary easing. The People’s Bank of China (PBoC) cut a short-term interest rate early in the week and unexpectedly lowered its medium-term facility later in the week. This after leaving its rate unchanged during its scheduled meeting early in July. The easing is unlikely to do much to prop up its ailing property sector, which requires more targeted support.
Worries about weak demand from China contributed to a decline in the Brent crude oil price. In financial markets, lacklustre earnings data from Alphabet and Tesla prompted a rotation out of technology stocks, with sharp declines in their stock prices dragging equity markets lower mid-week. Despite a bit of a recovery on Thursday, US stock markets were still down w-o-w at yesterday’s close. For the JSE, Thursday’s gain was enough to push it in the black for the week. The rand was about 1% weaker against a generally stronger US dollar, with smaller losses against the euro and pound.
It will be a central-bank-heavy week on the global front. Following last week’s on-hold decision by the European Central Bank (ECB) and this week’s easing by the PBoC, the focus shifts to the Bank of England (BoE), US Federal Reserve (Fed), and Bank of Japan (BoJ) next week. The BoJ is expected to keep interest rates on hold in this meeting. However, there is a growing possibility that the BoJ would opt for another interest rate increase. Expectations for further hikes and intervention in the currency market by the BoJ have contributed to a steady recovery in the yen in recent weeks after the currency had slumped to its lowest level to the dollar since the 1980s. The BoE and Fed are generally expected to keep the interest rate steady, with a higher probability of cuts priced in at their next meetings. Indeed, markets have vitually fully priced in a Fed rate cut in September. Despite the better-than-expected GDP data, markets took note of former NY Fed President William Dudley arguing that it might already be too late to start cutting rates now. Today’s PCE price data and next week’s US jobs data (after the July Fed decision) will be important for the September Fed meeting. The labour market has shown signs of cooling with significant downward revisions to historic data and a tick-up in the unemployment rate to 4.1%. Across the Atlantic, European GDP estimates for Q2 will be released as well as the preliminary consumer inflation print for July. In China, the July PMI figures will be of interest following a weaker-than-expected Q2 GDP.
Locally, we see the Absa PMI for July on Thursday. The Absa PMI foreshadowed the surge in manufacturing activity in April and the subsequent drop in May. The PMI stayed weak in June, but we do not have official data for June yet to confirm how this played out. Respondents blamed part of the May and June weakness on a “wait and see” approach from their clients around the election. Certainty on that front should have helped with a pick-up in demand. It may have also been positive for new vehicle sales in July, released by naamsa on the same day. While vehicle sales are still declining on an annual basis, the seasonally adjusted series suggests sales have bottomed and are now picking up, albeit slightly. Often seen as a leading indicator, this bodes well for a recovery in consumer spending. Next week also sees credit extension, budget balance and trade data for the SA economy.
The BER conference will take place on Wednesday next week at the Maslow in Sandton. We have an interesting lineup of speakers and registration is still open, click here:
Chair: Craig Lemboe, Deputy-Director, BER
Speakers and panel participants:
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As expected, annual headline CPI moderated from 5.2% in May to 5.1% in June, according to Stats SA, marking the lowest reading this year. The deceleration was primarily due to softer price increases in housing & utilities (up 5.5% in June vs 5.8% y-o-y in May), food & non-alcoholic beverages (4.6% vs 4.7%), and transport (5.5% vs 6.3%). On a monthly basis, the increase in headline CPI eased to 0.1% following a 0.2% rise in the previous month, mainly driven by declining fuel prices. Meanwhile, core inflation, which excludes volatile food and energy costs, ticked down to 4.5% y-o-y in June from 4.6% in May.
Factory gate prices, measured by the PPI, remained steady at 4.6% y-o-y in June, defying market expectations for a slowdown to 4.5%. On a positive note, monthly PPI inflation declined by 0.3%, which was more than expected and marked the first decrease in six months, following a 0.1% rise in May.
Looking ahead, we now expect headline CPI to moderate towards the SA Reserve Bank's (SARB) 4.5% midpoint target by the end of Q3, averaging 4.8% for the year. This is largely supported by a stronger rand and favourable fuel price dynamics. Similarly, PPI inflation is expected to ease through the second half of the year. The better inflation profile should give the SARB scope to cut the repo rate in September.
Lastly, the SARB's composite leading business cycle indicator declined by 1.0% m-o-m in May, reversing the notable 2.4% m-o-m rise observed in April. Seven out of ten available component time series showed decreases, with the deceleration in the six-month smoothed growth rate in job advertisements and a decline in approved residential building plans, being the main drags.
Official data from the Bureau of Economic Analysis showed that the US economy grew by 2.8% (annualised) in 2024Q2, exceeding market expectations for 2% growth. This follows 1.4% growth in Q1. Consumer spending growth accelerated from 1.5 to 2.3%. However, spending on healthcare services, inventories and government spending also made sizeable contributions to GDP growth in Q2. It is perhaps useful to note that this is a first estimate of GDP, revisions are likely and can be fairly significant.
Nonetheless, the start to Q3 was strong, with the S&P Global Flash US PMI Composite Output Index reaching 55 points in July, a 27-month high and up from 54.8 points in June. However, growth disparities widened; the manufacturing sector declined as output fell to a six-month low, while the services sector expanded to a 28-month high.
UK FLASH PMI IS ENCOURAGING, WHILE THE EUROZONE PMI POINTS TO STAGNATION
The S&P Global Flash UK PMI showed that business is gaining momentum with a rebound in business confidence. Order books, output, and employment are all growing faster. The manufacturing output index rose to a 29-month high, and the services index ticked up slightly to a two-month high. This took the composite PMI to a 2-month high at 52.7 points in July compared to 52.3 points in June. Input cost inflation eased further as wage pressures are softening, currently at a 41-month low, raising the prospect of a summer rate cut by the BoE.
In contrast to improvements in the US and UK, the HCOB flash composite Eurozone PMI output index fell to 50.1 points in July, a five-month low, from 50.9 points in June. The reading points to a near stagnation in private sector activity following five months of growth. The manufacturing sector was the source of this stagnation and fell to a seven-month low. The growth in services activity prevented the overall private sector activity from contracting. As new orders and business confidence fell, firms were discouraged from new hires, and employment remained unchanged. Input prices rose sharply in July, with inflation ticking to a three-month high. Selling prices increased in the services sector, but continued to decline in the manufacturing sector.
Better news was that the German Gfk Consumer Climate Indicator increased from -21.6 for July to -18.4 for August. Income expectations surged to 19.7 points from 8.2 points previously. The UEFA European Football Championship 2024 being in Germany likely played a role as economic sentiments improved by 7.3 points to 9.8 points, returning to the May 2024 levels. The willingness to save remained steady while the willingness to buy increased.
The PBoC lowered the reverse repo rate, the seven-day rate used to price short-term lending, by 10bps to 1.7% to “strengthen the countercyclical adjustments to better support the real economy.” This cut was then followed by a 10bps cut in the one-year prime rate to 3.35%, the first such cut since August last year. This rate is used as a benchmark for corporate lending. The five-year equivalent rate, which influences mortgage pricing, was also lowered by 10bps to 3.85%. Last week, official data showed that the economy grew by 4.7% in Q2, missing the forecasts. These actions are aimed at boosting the economy, especially the property sector, although they are unlikely to do much to lift activity. The 10-year sovereign bond yield dropped to 2.24% following the cut, while the renminbi weakened to a near two-week low of 7.28 to the US$. Later in the week, the lending rate for one-year medium-term policy loans was reduced by 0.2%pts to 2.3% - the biggest rate cut since the COVID-19 pandemic.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9777
Email: lisette@sun.ac.za
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Please refer to the glossary on the BER website for explanations of technical terms
Friday, 26 Jul 2024
