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The domestic data releases were mixed this week, with a downtick in manufacturing in August and mining output looking a little better. There were some positive steps on the reform front, but also disappointments, with a setback on port reform. The international economic newsflow focused on the US monetary policy outlook, with markets now scaling back expectations for the pace of easing, and disappointment around the extent of stimulus in China.
Most of the US-linked headlines, however, followed developments around Hurricane Milton, which made landfall in Florida as a (downgraded) Category 3 storm. This was just two weeks after Hurricane Helene became the deadliest US storm since Katrina in 2005. Millions of people were told to evacuate, and there was concern about extensive damage to infrastructure. However, while the damage was severe, it seems to be not as bad as feared with the worst-case scenario avoided.
Important for the longer-term global growth dynamics, the tit-for-tat trade tariffs continued this week. China imposed retaliatory tariffs on EU brandy imports after the European Commission announced it had received enough support to impose tariffs of up to 45% on imports of Chinese-made electric vehicles (EVs). While China’s “brandy tariff” (ranging from 30.6% to 39%) will have little impact on the EU, Beijing is considering a tariff hike on imports of large-engine (2.5l or more) vehicles, which would hit the already-struggling Germany the hardest since they exported $1.2bn worth of such vehicles to China last year.
Staying in China, earlier this week, the National Development and Reform Commission (NDRC) held a briefing to provide an update and outline for the country’s economic plan. Of note was the government’s plans to frontload 100bn yuan ($14 bn) worth of ultra-long sovereign bonds initially budgeted for 2025 and another 100bn yuan for construction projects. Markets were somewhat disappointed with the scale of the measures when compared to measures previously announced by the People’s Bank of China (PBoC). However, the NDRC is not mandated to announce new spending plans. Nevertheless, this disappointment meant the Shanghai stock exchange lost 1% w-o-w up to Thursday. More news on fiscal stimulus is expected over the weekend.
In contrast to the prior week, most non-China financial markets performed better this week. The US S&P 500 gained 1.5%, Germany’s DAX rose 1.3%, and Japan’s Nikkei 225 climbed 2.1%. However, the UK’s FTSE 100 fell 0.5%. Disappointingly, the local JSE Alsi declined this past week. This was in line with the move towards less “risky” assets as the conflict in the Middle East escalated and concerns about the health of the global economy intensified. This, coupled with revised expectations for US monetary policy, resulted in a stronger US dollar last week. The stronger greenback followed higher-than-expected nonfarm payrolls (NFP) data on Friday.
The US NFP increased by a solid 245 000 jobs in September, while the unemployment rate also unexpectedly dropped to 4.1% from 4.2% in August. In addition, the NFP for August and July were also revised upward. The dollar kept that momentum and, on Thursday, closed at its highest since early August. Despite this, the R/$ exchange rate was little changed w-o-w. Indeed, the rand appreciated against both the euro and the British pound. In the same vein, the SA 10-year bond yield ticked down.
In commodity markets, prices were volatile as the impact of the war in the Middle East, weaker global demand, easing interest rates, and inadequate Chinese stimulus measures all worked against each other. Brent crude briefly rose above $80/bbl due to Middle East tensions but retreated to $76/bbl due to demand concerns. The other energy commodity, coal, rose despite the market’s dissatisfaction with the Chinese stimulus. Finally, a stronger dollar meant that the gold price declined.
On electricity reforms, the National Transmission Company of SA (NTCSA) was finally created this week. However, the market remains sceptical that the NTCSA will be allowed to operate truly independently. This is a critical part of the reform process – the intention of a separate NTCSA is to operate as an independent system market operator so that it manages the liberalisation of the electricity market. Even the branding remains clearly “Eskom – NTCSA” with NTCSA in a substantially smaller font. Optics aside, the corporate structure of Eskom remains unbundled – the NTSCA is a wholly-owned subsidiary and does not (yet) issue debt in its own name. The focus will be on how quickly substantive independence comes about.
In a presentation to Parliament this week, the NTCSA provided substantial information on the state of renewable capacity, including:
Ports reform was dealt a blow with the granting of an interdict. The Durban High Court granted an application by APM Terminals, a subsidiary of Danish logistics major AP Moller-Maersk, to halt the awarding of ICTSI, a ports operator from the Philippines, as the preferred bidder to concession Pier 2 of the Durban Container Terminal (DCT2). Pier 2 and its sibling, Pier 1, handle 65% of South Africa’s container volumes. Pier 2 is the larger of the two, with a capacity of 2.9 m Twenty-foot equivalent units (TEUs). The court’s decision was not a surprise: against the advice of its own lawyers, Transnet used ICTSI’s market capitalisation as a measure of solvency when assessing ICTSI’s bid.
Encouragingly, visa reforms significantly moved ahead with the announcement of an overhauled visa system. This system has been in the works for a number of years, with draft regulations published on 20 May. Two reforms were included:
Both reforms will make it substantially easier for companies to hire foreign skills, which has been a significant constraint, particularly for domestic technology companies.
Next week's data release calendar is packed. Locally, Stats SA will publish August trade data. In July, retail and wholesale trade declined slightly, but strong August figures could still show that the trade sector contributed positively to 2024Q3 GDP.
Internationally, attention turns to the European Central Bank (ECB) on Thursday for its interest rate decision. Following a 25bps cut in September, markets expect another 25bps cut, as inflation fell below the ECB's 2% target in September. Despite easing inflation, major eurozone economies remain under strain. On Wednesday, Germany’s Economy Minister, Robert Habeck, confirmed the country is set for its second consecutive year of contraction. He pointed to deeper structural problems, including inadequate investment in infrastructure and skills. Volkswagen recently announced possible plant closures, and Intel may suspend a 30 billion euro factory project. The October ZEW economic sentiment index, released next week, will likely reflect continued pessimism, following an 11-month low in September.
In the UK, August unemployment data and September CPI are set to be released. Both of these indicators will be of key interest in the lead-up to the Bank of England’s interest rate decision in November. At the end of the week, the Office of National Statistics will release the September retail sales data. Meanwhile, in the US, it’s a relatively quiet week for data, with September retail sales the only notable release.
Finally, China will release its 2024Q3 GDP growth figures. There have been doubts about China’s ability to reach its growth target of “around 5%”. With Q2 growth falling short and ongoing struggles in the property market, the Q3 print is critical. As mentioned earlier, the stimulus announced thus far has been underwhelming. However, that could change on Saturday when the Ministry of Finance holds a press briefing on fiscal policy and economic growth.
DOMESTIC SECTIONOn a monthly basis, mining production ticked up by 2.9% in August after two consecutive months of decline. On an annual basis, mining production also increased, rising by 0.3% y-o-y. Positive contributions by manganese ore, PGMs and chromium ore were countered by a steep decline in iron ore and gold.
In contrast to mining, manufacturing production declined by 0.6% m-o-m and 1.2% y-o-y in August. The contraction in the annual headline figure was primarily driven by manufacturers of motor vehicles, parts and accessories, followed by manufacturers of basic iron and steel. In contrast, the food and beverages sector emerged as the largest positive contributor. The deterioration in August was foreshadowed by a decline in the Absa PMI in the same month. The PMI bounced back, which suggests official manufacturing production may also look better in September.
In all, the July and August data suggests that mining is set to contract for another quarter (barring a very strong September), while manufacturing should record quarterly growth and contribute positively to GDP in Q3.
SA’s gross foreign reserve holdings rose by $428 million in September, closing the month at $63.6 billion. Improvements in gold reserves and Special Drawing Rights (SDR) holdings contributed to the overall rise, while foreign exchange reserves declined. The 4.9% increase in gold prices from August to September partly explains the higher reserve levels.
The official Bureau of Labor Statistics data showed that annual consumer inflation (CPI) fell to 2.4% in September from 2.5% in August. This means inflation has continued its downward trend and is below 3% for a third consecutive month, but it came in slightly hotter than expected. Monthly inflation increased by 0.2% in September, the same as in August. Core CPI, which excludes the volatile food and energy prices, rose by a slightly faster-than-expected 3.3% y-o-y (0.3% m-o-m) in September, from 3.2% in August.
The minutes of the US Federal Reserve’s (Fed) mid-September meeting revealed that there was some pushback on the surprising 50bps rate cut. However, the majority of the Federal Open Market Committee (FOMC) found that amid significant progress with inflation and an uptick in the unemployment rate, it was appropriate to start the easing cycle with a large cut.
That said, following the minutes and the slight acceleration in core CPI, another 50bps cut by the Fed in November seems unlikely – with some now speculating the Fed may even pause its easing cycle.
As anticipated, retail sales in the Eurozone grew by 0.2% m-o-m in August compared to stagnation in July. The July reading was revised flat for the EZ, from 0.1% growth. On an annual basis, retail sales grew by 0.8%, falling a bit short of the expected 1% growth in sales.
Zooming in on the struggling largest economy, according to the Federal Statistical Office, German industrial production increased by 2.9% m-o-m in August. This was much stronger than expected and stemmed from a significant increase in the automotive industry's output. However, worryingly, industrial orders declined by 5.8%. Relatively high energy prices, difficulty scaling up electric vehicle production, and a slowdown in Chinese demand for Germany’s industrial goods will continue to weigh on the manufacturing sector’s recovery. Indeed, according to its economy ministry, Germany’s GDP is expected to contract by 0.2% in 2024. This would be the second consecutive year.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
Email: lisette@sun.ac.za
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Friday, 11 Oct 2024
