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It was a busy week on the data front which caused sharp movements in financial markets. As a small open economy, international developments affect South Africa; however, by addressing domestic challenges, SA will minimise these impacts. On Wednesday, the International Monetary Fund’s (IMF) report on South Africa following its July visit and discussions with National Treasury officials brought these challenges into focus. The July visit was part of a post-financing assessment of the $4.3 billion (bn) loan granted in 2020 to mitigate COVID-19's impact. The IMF recognised South Africa’s resilience but stressed the need for reforms to tackle rising debt, high unemployment, declining GDP per capita, inequality, and poverty. They recommended a 3% GDP expenditure-based consolidation over the next three years to stabilise debt, with the goal of reducing debt to 60-70% of GDP within 5-10 years, while protecting vulnerable groups. In the end, the IMF judged South Africa's ability to repay the loan as adequate.
Weak economic data from China and the US, especially in the US labour market, led to a stock market sell-off, with the US S&P 500 falling by 1.3% w-o-w. A drop in job openings fuelled further market speculation about a possible 50bps Fed rate cut later this month. While this would typically boost stocks, concerns that it signals economic weakness have driven investors toward safer assets, causing US 10-year bond yields to decline. Labour market data was not only to blame. In addition, Nvidia’s shares plummeted, erasing $279 bn from its market value—the largest single-day drop for a US company. Nvidia alone had comprised 23% of the S&P 500’s year-to-date total return of 19.5% as of the end of August. It may also be that investors are cashing in profits. The S&P 500 has already risen to record highs and September is historically a weak month for stocks. Investors are likely pre-empting this and cashing in at the first available opportunity – after the labour day weekend.
European markets were also hit, with the UK’s FTSE 100 and Germany’s DAX dropping 1.6% and 1.7%, respectively. Political uncertainty in Germany, where the far-right Alternative for Germany (AfD) won its first state election in Thuringia, likely contributed to market jitters. Although the AfD did not secure a majority, its rise poses risks for EU policy.
South Africa’s JSE Alsi fell 2.8% week-on-week, despite positive economic growth in Q2 and improved business sentiment in Q3. Among the top ten companies by market capitalisation, only Naspers posted gains. Conversely, the rand performed well, appreciating against the dollar, euro, and pound sterling, aided by broader dollar weakness.
Crude oil prices declined (Brent closed at around $73 per barrel) due to heighted demand concerns and mixed signals from producers about supply increases. Data from the US Energy Information Administration (EIA) released on Friday indicated that US oil consumption in June slowed to the lowest seasonal levels since the COVID-19 pandemic in 2020. Meanwhile, crude oil production in the US increased by 25 000 barrels per day (bpd) in June, reaching 13.2 million bpd. In addition, May's production figures were revised upward by 11,000 bpd from the previously reported numbers. OPEC+ has yet to announce any changes to their production schedule with the group set to increase production from October. This would put further pressure on crude prices.
Finally, gold was little changed and remained close to record highs. The market appears uncertain whether faster-than-expected US interest rate cuts would be positive or negative and gold remains a good hedge.
It’s a busy week for both domestic and international markets. The US Bureau of Labor Statistics will release the August Nonfarm payrolls and unemployment data today, the last major labour market report before the US Federal Reserve's meeting the week after next. This data is crucial as Fed officials increasingly emphasise labour market conditions now that inflation has softened. Indeed, Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly (both members of the FOMC) have cautioned against keeping rates high for too long, warning of potential harm to employment. A Fed rate cut in September is likely, with a 25bps cut being the most expected outcome. As such, markets are highly sensitive to labour data, as seen with the recent Job Openings and Labour Turnover (JOLTS) report, which showed that job openings per unemployed person fell below pre-COVID levels.
Next week also sees the release of August US inflation data. Both core and headline CPI have slowed in the four months to June, with headline inflation expected to slow further in August. On Friday, the University of Michigan Consumer Sentiment survey will be released. Recent surveys have shown one-year inflation expectations falling to 2.8% over the last three months, while five-year expectations remain steady at 3%.
The European Central Bank (ECB) meets on Thursday and is expected to cut rates for the second time, with all 77 economists in a Reuters poll predicting a 25bps cut and 63 anticipating another in December. ECB members, including Piero Cipollone and Joachim Nagel, have hinted that inflation is slowing and that policy may need (more) easing, though Nagel, a known hawk, has said that he will only make his decision next week once all the data is available.
In the UK, the Office of National Statistics (ONS) will release July GDP growth and unemployment figures, with the last data showing economic stagnation and falling unemployment. The Bank of England (BOE) meets on the 19th of September, the day after the US Fed (and the same day as the SARB).
China will release August trade data this weekend. The latest PMI data showed that foreign demand is weak, suggesting export growth likely declined in August after slowing in July. On Monday, China's inflation data is expected to show annual headline inflation at 0.5%.
On the domestic front, we will see the release of the BER Inflation Expectations Survey ahead of the SARB's meeting. Over the last two quarters, the one and two-year-ahead inflation expectations have declined. The SARB will be looking for a further slowdown to bring expectations closer to its target. Stats SA will also release July manufacturing and mining production data. The July Absa Manufacturing PMI suggested an improvement in the former.
Real GDP growth expanded by 0.4% quarter-on-quarter (q-o-q) in Q2 following an upwardly revised 0% in 2024Q1. This was in line with our expectations and a fraction below consensus. On the expenditure side, household consumption was the bright spot, growing at the fastest pace since 2021Q4. In contrast, fixed investment contracted (by 1.4% q-o-q) for the fourth consecutive quarter. Net exports also weighed on growth. From the production side, the largest positive contribution came from the finance industry (+1.3% q-o-q; contributing 0.3% percentage points, pts), the biggest sector in the economy. The manufacturing, electricity and trade industries also contributed 0.1%pt each to growth amid an absence of load-shedding. Clients can get more insight on the latest GDP figure here.
According to Stats SA, annual electricity production rose 8.5% in July compared to a 5.4% rise in the prior month. On a monthly basis, seasonally adjusted electricity generation was down from 2.4% in June to 1.3% in July.
According to the SARB, the current account deficit narrowed to 0.9% of GDP (or R64.6 billion) in Q2 from an upwardly revised 1.5% in 2024Q1. This was a fraction below the expected shortfall of 1% of GDP. Favourably, the trade surplus widened further in the second quarter from the first quarter. The value of exports increased in 2024Q2, attributed to higher prices. Meanwhile, imports climbed owing to a lift in the volumes and prices.
The RMB/BER Business Confidence Index (BCI) rose marginally to 38, the best level since 2022Q4. Concerningly, activity across the surveyed sectors remained subdued amid logistical bottlenecks and other underlying factors weighing on demand. Encouragingly, post the May 29 election, respondents have noted that the general political climate (asked in the manufacturing survey) has become much less of a constraint on business conditions and investment decisions. Subsequently, this may spark renewed appetite in investment outside of that designated for renewable energy capacity. Positively, selling prices continue to decline which bodes well with the deceleration in consumer inflation. See the BCI press release here for more detail.
The Absa PMI plunged by 8.8 points to 43.6 in August (after a strong start to Q3). The fall in business activity and new sales orders signalled weak demand and weighed on the health of the manufacturing sector relative to a strong July. Additionally, supplier delivery times shortened, as a result of weak(er) activity. On a positive note, the S&P Global SA PMI, increased from 49.3 in July to 50.5 in August, returning to expansionary terrain.
Following a 1.5% annual gain in July, domestic new vehicle sales fell by 4.9% in August, according to naamsa. Worrying vehicle export sales slumped 34.3% year-on-year (y-o-y) in August due to sluggish economic activity in the Eurozone (a key trading partner for us).
As anticipated, retail sales in the Eurozone grew by 0.1% month-on-month (m-o-m) in July, following a notable 0.4% contraction in June. This modest recovery was primarily driven by a 0.4% increase in food, drinks, and tobacco sales, which helped offset a 1% decline in automotive fuel sales.
The marginal growth in retail sales suggests that Eurozone consumers are still struggling to recover from the impacts of high inflation and elevated interest rates. This slow rebound diminishes expectations of a strong economic recovery, as hopes for improved GDP growth driven by household consumption are gradually fading.
The US ISM manufacturing PMI rose to 47.2 in August, up from 46.8 in July. This reading slightly missed market expectations of 47.5 and marks the fifth consecutive month of contraction (i.e. below 50-index points), albeit at a slower pace. The uptick in the index was primarily driven by improvement in the employment sub-index, which offset a further decline in new orders. Despite weak demand, input costs for manufacturers remain high, which may slow down the current pace of disinflation. However, this has not altered expectations of a 25bps rate cut by the Federal Reserve in their upcoming September meeting.
Meanwhile, business activity in the service sector remains strong. The ISM services PMI increased slightly to 51.5 in August, up from 51.4 in July, defying market expectations of a decline to 51.1. Notably, there was a broad-based improvement across the subindices of the PMI.
After slipping into contraction territory in July, the Caixin manufacturing PMI rebounded to 50.4 in August, surpassing consensus expectations. The return to expansion was mainly driven by renewed growth in new orders, which in turn led to faster production. The gauge for expected business conditions marginally rose, albeit remaining below its long-term average. This means that optimism about business conditions in the coming 12 months in China is still relatively subdued. Meanwhile, the Caixin services PMI declined to 51.6 in August from 52.1 in July, contrary to market expectations of a slight increase to 52.2. Encouragingly, this marks the 20th consecutive month of business activity growth in the service sector.
Editor: Craig Lemboe
Tel: +27 (0)21 808 9755
Email: cjl@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, 06 Sep 2024
