The domestic data releases were mixed this week. The Absa PMI was a bright spot and points to a rebound in manufacturing activity during September. On the other hand, naamsa new vehicle sales for the same month underperformed and dipped on a monthly and annual basis, while the trade surplus for August narrowed by more than expected. On the international front, the most keenly awaited data release for the week is only coming out later today (the September jobs report in the US), with most of the focus on the situation in the Middle East.
Tensions in the Middle East escalated further this week. Following Israel’s ground invasion of Lebanon and the assassination of Hezbollah’s leader, Iran fired about 200 ballistic missiles at Israel – most were destroyed by its Iron Dome. Still, Israeli Prime Minister Benjamin Netanyahu vowed to retaliate. The question remains how, with some arguing that Israel could target Iran’s nuclear or oil sites. The missile attack was relatively unexpected. Some experts initially thought that Iran would likely continue to work through its proxies (such as Hezbollah and Hamas) and not (yet) get involved directly so soon. The US has said it supports Israel’s right to respond militarily to the attack, but the upcoming US election is complicating their efforts to push for a resolution. As a side note on the election, vice-president hopefuls J.D. Vance and Tim Walz had a debate during the week. The debate was heavier on policy matters (and some say more respectful) compared to the earlier debate between the presidential nominees. The suspension of the dockworker strike was good news for the US economy, and global supply chains.
In commodity markets, the Brent crude price initially rose following the strike on Israel as markets priced in a renewed risk premium but it fell back towards the middle of the week. Then, yesterday, the oil price surged by about 5% to the highest level in a month after US President Joe Biden said there were discussions around Israel targeting Iran’s oil facilities.The US has said that it would not support a strike on nuclear facilities. Iran is a significant player in the global oil market and exports about 1.6-1.8 million barrels per day (with the vast majority going to China). It is uncertain if the oil price will stay this high or once again drop back, as OPEC+ does have significant spare capacity and could easily ramp up production in the case of supply not meeting demand. On supply, Libya also announced this week that it would resume full oil production (returning about 700 000 barrels per day) following the resolution of a dispute between rival political factions.
Despite the situation in the Middle East, there was little change in (non-China) stock markets, Chinese equities, however, largely continued their rally following last week’s stimulus blitz. After a strong start to the week, the rand exchange rate came under some pressure yesterday and weakened past R17.50/$ against a generally stronger dollar. Local bond yields rose, while the JSE ALSI slipped by 1% from last Thursday.
Even closer to home (quite literally…), the BER announced the launch of the Impumelelo Economic Growth Lab this week. One of the first projects the unit worked on was a scenario for SA economic growth should a set of structural reforms be implemented swiftly. Fast-tracking reforms in the electricity, ports and rail, and water space, as well as addressing issues around crime, corruption, and governance, could jump-start economic growth to over 3% by 2025. This adds to last week’s relatively encouraging news about SA’s economic growth prospects and potential for attracting (foreign) capital. The news from Home Affairs that it would reform the current strict visa system is also welcome in that regard. However, it is worth highlighting that the forecast is not the BER’s baseline view and, while attainable, would require laser focus on the identified priorities. Without swift action, any delays will diminish the odds of attaining 3% growth.
On Thursday, Stats SA will publish mining and manufacturing production data for August. The July manufacturing print was strong, as foreshadowed by a solid Absa PMI reading for the month, but the PMI points to some potential pullback in August. However, a slight monthly decline could still keep the sector on track to register a quarterly increase. This is because the Absa PMI for September (see domestic section below) came in quite strong. Mining production was under pressure in July, declining for a third consecutive month (on a monthly basis), and likely remained under pressure in August.
On the international front, it is a relatively quiet week for data releases. The main focus will be on price data from the US, with consumer inflation due on Thursday and producer inflation on Friday. On Friday, the University of Michigan will also release its preliminary consumer sentiment data for October, which includes inflation expectations data. The minutes of the meeting, during which the Fed decided to cut its rate by 50bps instead of the widely expected 25bps, are out mid-week. It will be interesting to see if the minutes provide further clarity on why the Fed decided to cut by 50bps, and if it sheds any further light on what can be expected in the remaining meetings of the year.
ABSA PMI RETURNS TO EXPANSIONARY TERRITORY, BUT VEHICLE SALES STAYED WEAK
Following a decline into contractionary terrain in August, the Absa PMI returned to expansionary territory, rising by a solid 9.2 points to 52.8 in September. Business activity improved on the back of a strong rebound in new sales orders, reflecting a positive recovery in both domestic and external (export) demand. Notably, input costs for producers fell to its lowest level since March 2018, which was attributed to a strong(er) currency coupled with lower oil prices. Manufacturers are optimistic and expect business conditions to improve further in six months’ time. Positively, the S&P Global SA PMI inched further into expansionary terrain, rising to 51 in September from 50.5 in the prior month.
Annual new vehicle sales fell 4.1% in September compared to a 0.4% decline in the previous month, according to naamsa. This was the 12th consecutive annual decline. Disappointingly, vehicles exported plunged 38.1% y-o-y in August owing to subdued external demand underpinned by a sluggish activity in our key trading partners’ economies. However, despite monthly declines in August and September, a big increase in July means that vehicle sales were up q-o-q in Q3. This bodes well for GDP.
The trade surplus narrowed to R5.6bn in August from a downwardly revised R17.1bn in July. Exports declined sharpy by 5% owing to lower outbound shipments in most product categories. Contrastingly, imports rose by 1.8% due to higher demand for machinery and electronics as well as chemical products.
Meanwhile, private sector credit extension accelerated from 3.5% in July to 5% in August, according to the SARB. Moreover, further easing in the interest rate environment may boost the appetite for credit in the coming months. On the other hand, annual money supply (M3) rose 6.1% in August from 5.9% in the previous month.
Finally, according to Stats SA, annual electricity generation grew by 6.3% in August, down from 8.5% in the prior month. On a monthly basis, seasonally adjusted electricity production declined by 0.7% in August relative to a 1.3% gain in July.
US SERVICES PMI CONTINUES TO OUTPERFORM THE MANUFACTURING PMI
The ISM manufacturing PMI came in at 47.2 in September, unchanged from the prior month. The reading points to more of the same for the US manufacturing sector, which has now been in contraction for six straight months. However, September’s flat reading also signals a wait-and-see approach amongst manufacturers. Survey respondents’ comments highlighted that with the US Federal Reserve starting its rate-cutting cycle with a bold 50bps cut and the presidential election fast approaching, uncertainty is in the air.
In contrast, the ISM services PMI surprised on the upside rising from 51.5 in August to 54.9 in September. This marked the third consecutive month of expanding service sector activity, with the improvement being driven by stronger growth in both the business activity and new orders indices. On a less positive note, the employment index contracted for the first time in three months (from 50.2 to 48.1 in September) and much like the manufacturing PMI, concerns over political uncertainty were more prevalent.
In China, the official NBS manufacturing PMI edged up to 49.8 in September from a six-month low of 49.1 in August. This marked the slowest pace of contraction in five months, driven by a faster pace of output growth and stable business sentiment. However, new orders, foreign sales and employment indices all remained in contractionary terrain. This points to weakness elsewhere in China’s economy. The NBS non-manufacturing PMI ticked down to its lowest level in almost two years (50 in September vs. 50.3 in August).
Slipping into contractionary terrain, the Caixin general manufacturing PMI told a similar story. Against expectations of a slight expansion, the headline reading fell to 49.3 in September from 50.4 in the prior month. This was largely driven by a renewed downturn in new orders and foreign sales, as demand conditions remain subdued. Meanwhile, the Caixin services PMI declined to its lowest level in a year (50.3 vs 51.6), as new orders grew at a softer pace.
Annual EZ consumer inflation moderated to 1.8% in September, down from 2.2% in August, undershooting expectations for a slowdown to 1.9%. This marked the first time in three years that headline inflation fell below the European Central Bank’s 2% target, increasing the likelihood of a further 25bps rate cut in October. The slowdown was primarily due to a significant decline in energy prices, which fell by 6% y-o-y in September compared to a 3% decline in the prior month. Meanwhile, services inflation, a key gauge of domestic price pressures, eased slightly to 4% y-o-y from 4.1%. This persistent services inflation is mainly driven by elevated wage growth. On a positive note, EZ wage growth is expected to have peaked and should gradually ease, which would improve the outlook for services inflation. Meanwhile, core inflation, which excludes food and energy costs, dipped only marginally to 2.7% from 2.8%.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
Email: lisette@sun.ac.za
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Please refer to the glossary on the BER website for explanations of technical terms.