General
Publications & Data
Join the conversation
Social Links
Social Links
The last two weeks have been fairly volatile for financial markets. Just after the release of our last Weekly (2 August), contrasting sets of US employment data triggered a market meltdown. Investors were piling back into bonds amid concerns about the US falling into a recession, while stock prices slumped – although they have now more than recovered their losses. Following this week’s US CPI print (see international section below), markets are fairly sure that the US Federal Reserve (Fed) is set to cut its policy rate by 25bps in September. Some are even calling for 50bps, but we do not see that as likely. Indeed, following the fairly solid US retail sales data released yesterday, recession fears abated which implies fewer rate cuts. Stocks surged, while bond prices dipped after the release.
This week saw more monetary policy easing across the globe. New Zealand cut its policy rate sooner than expected, with the surprise announcement weighing on the local currency. The Philippines cut its rate for the first time in four years. However, it must be noted that amid all the easing, Norway announced what was dubbed a hawkish hold. The announcement to keep the interest rate at a 16-year high was expected, with the central bank worried about the weakening currency and inflation remaining above target. Closer to home, the Namibian central bank cut its policy rate by 25bps. Because of the currency peg to the rand exchange rate, Namibia often tracks SA’s monetary policy, but when economic conditions and/or the inflation trajectory differs, policies have diverged somewhat in the past. To be fair, and the Namibian central bank governor said as much when announcing the change, the SA Reserve Bank (SARB) is expected to cut its rate by a similar margin at its next meeting – although we think there is a possibility of a steeper cut from the SARB (see the week ahead section below).
On the global data front, a data dump from China presented a fairly bleak economic picture for July. Low confidence continues to weigh on consumption and investment. The weak Chinese data and consequent concerns about steel demand contributed to the iron ore price slumping (even) lower.
Locally, the data was mixed. The unemployment rate ticked back up above 33% in 2024Q2. Meanwhile, after manufacturing output eeked out slight quarterly growth on the back of a very strong performance in April, this week’s data confirmed that mining production is set to contract q-o-q. Sales by retailers and wholesalers, fortunately, did better on a quarterly basis, although the consumer remains under pressure. In all, the latest high-frequency data confirms that the economy is unlikely to have slipped into a technical recession in Q2 after the unexpected Q1 contraction, but quarterly GDP growth is set to remain subdued despite the absence of load-shedding. Our survey suggests that some ‘wait-and-see’ behaviour before and after the national election held back production and demand in Q2, so growth could turn decidedly more positive in Q3. The upturn in the July Absa PMI was an encouraging start in that regard.
An interesting development on the local political front was yesterday’s announcement that EFF deputy-president Floyd Shivambu (and some others) will move to the MK party. Internationally, the political conversation is largely dominated by the upcoming presidential election in the US. Kamala Harris has now picked her running mate, Tim Walz. This Democratic ticket seems to be receiving more voter support than Joe Biden’s attempt for reelection did, but it remains a tight race between Harris and Donald Trump. Harris is set to announce some of her plans for the economy later today. There was some focus on Japan too, where unpopular prime minister Fumio Kishida said he would step down in September after three years at the helm. At this stage, it is not clear who will take over from Kishida, but the new PM will have to navigate a largely disgruntled electorate and will, unlike most of the rest of the world, not have monetary easing to help soothe sentiment but instead faces the prospect of even higher interest rates.
Meanwhile, the final round of wage talks at the SA Local Government Bargaining Council (Salgbc) is taking place this week. Further from home, but with potential ripple implications through the global economy should a strike occur, negotiations between US dockworkers, and terminal operators and ocean carriers continue. Recent statements suggest that parties remain far apart. A strike could disrupt deliveries to US businesses (with demand picking up ahead of the Christmas season) and cause sluggishness through global trade routes.
In financial markets, the rand briefly dipped below R18/$ yesterday. The better performance of the rand in recent days has largely been driven by US interest rate expectations and a renewed appetite for somewhat riskier assets. Also positive for the global inflation outlook was that the Brent crude oil price edged below $80/barrel in recent days. Locally, product price dynamics are even more favourable, with the petrol and diesel prices set for a further decline next month. Expectations of somewhat higher demand should the Fed indeed start cutting interest rates, saw the crude price rise again yesterday. However, the price remains well below July’s average. Hope for a ceasefire agreement in the Middle East has contributed to the relatively steady oil price of late. A ceasefire is not just important to stabilise the situation in Gaza, but would also alleviate fears of the conflict spilling over to the wider region.
Also worth mentioning is Ukraine’s continued incursion into Russian territory with the Ukraine this week launching what it describes as the war’s largest drone attack on Russian airfields.
Note: the market indicator table will added later this morning.
The biggest domestic data release is the consumer inflation (CPI) print for July, which is due on Wednesday. We expect headline CPI to dip below 5% for the first time since August 2023. We see CPI slowing to 4.9% y-o-y, from 5.1% in June, with core CPI steady at 4.5%. Headline CPI should moderate through the remainder of the year and reach the 4.5% midpoint target in September. The lower inflation profile will give the SARB scope to cut its policy rate next month. For now, our forecast is for a 25bps cut, but we can see a possibility of the SARB frontloading by 50bps in September. For this to materialise, the rand exchange rate would need to ‘behave’ (with higher probabilities of faster Fed easing possibly helping in this regard), and the oil price should not spike up on a sustained basis. Market developments, global monetary policy dynamics, particularly decisions by the Fed which meets the day before the SARB, and the actual inflation prints for July (next week) and August (the day before the September SARB meeting) will help shape this view. Services inflation trends will be particularly important. The BER's inflation expectations survey out on 12 September is also key. If expectations are sticky, a bigger cut is unlikely, but we do know the SARB targets 4.5%, and inflation is heading there (and, for now, likely to stay there) so some easing from the current restrictive stance is warranted.
On the international calendar, the US Fed will release minutes from its previous meeting midweek. Historic nonfarm payroll data will see benchmark revisions next week. This usually does not result in huge changes, but amid large recent revisions to historic data undermining the ‘strong labour market’ narrative in the US, the exercise will receive more scrutiny than usual. ECB-watchers, in turn, will keep an eye on Thursday’s negotiated wage growth data for the second quarter. Thursday also sees the first batch of preliminary PMI data for August for the Eurozone, UK and US.
Mining production slumped by 3.5% y-o-y in June, following an upwardly revised 1.3% y-o-y expansion in May. The headline reading came in below the consensus expectation of a slight 0.1% contraction. The decline was primarily driven by gold (down 12.6% y-o-y, shaving off 1.8% pts) and PGMs (down 5.8% y-o-y, - 1.7% pts). Seasonally adjusted (sa) output fell by 1.6% m-o-m in June, after an upwardly revised 0.1% increase in May, and a 0.8% uptick in April. Unfortunately, the mining sector contracted by 0.9% q-o-q (sa), placing a damper on Q2 GDP.
Mining and manufacturing are arguably of the most electricity-intensive sectors of the economy. Despite the stable electricity supply through Q2 and bouncing back in April, these two sectors struggled in May and June. Although the poor mining outcome will weigh on real GDP growth, April’s solid bounce in factory output outweighed the declines in May and June. Indeed, last week’s manufacturing production release revealed that despite contracting 5.2% y-o-y and 3.2% m-o-m (sa) in June, the sector will contribute positively to Q2 GDP (+0.9% q-o-q).
According to Stats SA’s QLFS, the official unemployment rate rose to 33.5% in 2024Q2, up from 32.9% in 2024Q1. Following an increase of 22 000 jobs in the prior quarter, total employment declined by 92 000 to 16.7 million in Q2. Meanwhile, the number of unemployed persons increased by 158 000 to 8.7 million. Modest employment gains were recorded in some sectors, led by manufacturing and community services (see chart). However, these were not enough to offset job losses most notably in the trade sector, followed by agriculture. The expanded unemployment rate (which includes discouraged work-seekers) increased by 0.7% pts to 42.6%. The number of discouraged jobseekers had followed a downward trajectory since reaching a record high in 2021Q3. Worryingly, 2024H1 labour surveys indicate a reversal of this trend, as an increasing number of jobseekers have become discouraged throughout the first half of the year.
Finally, retail sector data for June presented some good news, with real sales unexpectedly increasing by 4.1% y-o-y, after an upwardly revised 1.1% y-o-y gain in May. General dealers experienced the most significant sales increase, making the largest contribution to the headline figure (up 7.3% y-o-y, adding 3.3% pts). In Q2, retail trade sales (sa) were 1.5% higher than in Q1.
In contrast, the wholesale industry painted a less rosy picture, as real trade sales decreased by 9% y-o-y in June, after a 6.5% contraction in May. On a monthly basis, trade sales grew by 0.6% (sa), up from a 3.6% decline in the prior month. April’s strong performance and a shallow monthly gain in June, resulted in a 0.9% q-o-q (sa) expansion for Q2. Like wholesale, annual motor trade sales were up m-o-m (by 4.9%) but still contracted on an annual basis (by -9.9%). New vehicle sales fell the most (down 17% y-o-y), shaving off 4.3% pts from the annual figure, contributing to a 1.5% q-o-q decrease in real motor trade sales (sa) for Q2.
Data by the official Bureau of Labor Statistics data showed that annual consumer inflation slowed to 2.9% in July, slightly below the consensus and the previous June reading of 3%. This was the first time since March 2021 that inflation has fallen below 3%, bolstering the case for the Fed to cut interest rates at its next meeting in mid-September. Looking at the core CPI, which excludes the volatile food and energy prices, inflation rose by 3.2% y-o-y in July compared to 3.3% in June, which was in line with expectations.
Retail sales unexpectedly surged in July, growing by 1% from a decline of 0.2% in June and well above expectations for a 0.3% gain. Strong car dealership sales growth of 3.6% drove this growth, but electronics and grocery sales also grew by 1.6% and 1%, respectively. Industrial production fell sharply by 0.6% in July, from 0.3% growth in June, and below market expectations of 0.1% growth. This decline was caused by the July shutdowns in the petrochemical and related industries due to Hurricane Beryl.
CHINA'S INDUSTRIAL OUTPUT GROWS AT THE SLOWEST PACE IN FOUR MONTHS
Official data by the National Bureau of Statistics showed that China’s industrial output growth slowed to 5.1% in July from 5.3% in June. This was the slowest growth in industrial production in four months, falling below expectations of 5.2% growth. With depressing building activity, steel production was down 4%, and cement production declined by 12.4%. New house prices dropped by 4.2% y-o-y. Positively, retail sales rose by 2.7% in July, beating the 2% rise in June.
Staying in Asia, India’s consumer inflation fell sharply to 3.5% y-o-y in July from 5.1% in June. This was the softest rise in consumer prices since August 2019 and the first time in five years that inflation fell below the 4% target. Industrial production increased by 4.2% in June, falling short of expectations of 5.5% growth and down from 5.9% in May.
UK GDP EXPANDS MARGINALLY, EXTENDING ITS RECOVERY FROM RECESSION
Office for National Statistics (ONS) data showed that the UK economy grew by 0.6% in the second quarter, slowing down from the 0.7% growth in Q1. The services sector's performance helped extend the UK’s recovery, with growth of 0.8%. Meanwhile, consumer inflation accelerated to 2.2% in July, climbing above the 2% target and accelerating for the first time in 2024. The higher gas and electricity prices are the main culprits, as food prices have moderated. The Russia-Ukraine war has cost the UK (consumer) dearly as the cost of groceries has increased by 32.6%, gas prices 68%, and electricity prices 45% since Russia invaded Ukraine. Services inflation remains sticky and fell to just 5.2% in July, although down from 5.7% in June.
Eurozone industrial production contracted by 3.9%, significantly worse than the expectation of a 3% contraction. The ZEW Economic Sentiment Index points to further weakness as it declined from 43.7 points in July to 17.9 in August, indicating deteriorating optimism in the Eurozone economy. This was the biggest drop since the pandemic, driven by the significant fall in Germany, the block’s biggest economy. Germany’s ZEW Index fell by 22.6 points to 19.2, the drop three times bigger than expected.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 16 Aug 2024
