U.S. manufacturing activity declined for the second consecutive month in May, driven by the sharpest drop in new goods orders in nearly two years and an unexpected decrease in construction spending the previous month. On Monday, the Institute for Supply Management (ISM) reported that its manufacturing Purchasing Managers’ Index (PMI) fell to 48.7 in May from 49.2 in April. A PMI below 50.0 indicates a contraction in the sector.

In contrast, the stronger-than-expected services reading countered Monday’s ISM report on the manufacturing sector. According to a survey published on Wednesday, the U.S. services sector rebounded into growth mode in May after a brief contraction in the prior month, with business activity registering the most significant improvement in three years. The ISM reported that its non-manufacturing Purchasing Managers’ Index (PMI) surged to 53.8 in May from 49.4 in April, marking the highest reading since last August

In May, the U.S. economy added a significantly greater number of jobs than anticipated, mitigating concerns about a slowdown in the labour market and potentially reducing the Federal Reserve’s inclination to lower interest rates. According to the Labor Department’s Bureau of Labor Statistics report released on Friday, nonfarm payrolls expanded by 272,000, compared to 165,000 in April. Job gains were concentrated in the healthcare, government, and leisure and hospitality sectors, which added 68,000, 43,000, and 42,000 positions respectively, accounting for over half of the total gains. Additionally, average hourly earnings surpassed expectations, increasing by 0.4% for the month and 4.1% from a year ago. However, simultaneously, the unemployment rate rose to 4%, marking the first time it has surpassed that level since January 2022.

The European Central Bank (ECB) cut interest rates for the first time in five years on Thursday but kept its plans undisclosed due to rising uncertainty over inflation after a significant slowdown in the past year. The ECB reduced its record-high deposit rate by 25 basis points to 3.75%, aligning with other central banks such as those of Canada, Sweden, and Switzerland. Notably, this is the first time the ECB has cut rates without a prior move by the Federal Reserve since its establishment in 1999. Despite the rate cut, the ECB revised its end-2024 inflation forecast upward to 2.5% from 2.3%, while increasing the eurozone growth outlook to 0.9% from 0.6%.

In May, Eurozone business activity experienced its fastest expansion in a year, driven by the growth in the services industry, which outpaced the contraction in manufacturing. According to a private survey, the Hamburg Commercial Bank (HCOB’s) composite Purchasing Managers’ Index (PMI) for the currency union, compiled by S&P Global and considered a reliable indicator of overall economic health, rose to 52.2 in May from April’s 51.7, marking its highest level since May 2023.

Meanwhile, a survey released on Wednesday indicated that growth among Britain’s services businesses in May eased from April’s 11-month high, while inflation pressures dropped to their lowest in three years. This development potentially paves the way for a Bank of England rate cut later this year. The S&P Global UK Services Purchasing Managers’ Index fell to a six-month low of 52.9, down from April’s 55.0. Additionally, the composite PMI, which includes the manufacturing PMI released on Monday, decreased to 53.0 from April’s one-year high of 54.1. S&P stated that the data was consistent with a gross domestic product (GDP) growth rate of 0.3% in the second quarter of 2024, half the pace of the first quarter, although it marks an improvement from the shallow recession in the second half of 2023.

China’s exports exceeded expectations in May, rising by 7.6% from the previous year, compared to a growth of 1.5% in April. However, imports grew by a weaker-than-expected 1.8% in May, slowing down from the 8.4% rise in April. Consequently, the overall trade surplus increased to USD 82.62 billion, up from USD 72.35 billion in April. Despite robust overseas demand driving China’s exports amid tariff threats, analysts highlighted that the disappointing growth in imports indicated sluggish consumer spending domestically.

Simultaneously, the private Caixin/S&P Global survey of manufacturing activity in China inched up to 51.7 in May from April’s 51.4, marking the seventh consecutive month of expansion. Additionally, the Caixin Services Purchasing Managers’ Index (PMI) exceeded expectations, reaching 54 in May, up from 52.5 in April. This private Caixin survey, focusing on smaller and export-oriented firms, contrasted with official data from the previous week, which unexpectedly showed a contraction in manufacturing activity in May.

The major indexes concluded the week with a mixed performance, as investors grappled with conflicting data from the week’s busy economic calendar. In the US, the S&P 500 Index and the technology-heavy Nasdaq Composite registered gains of 1.32% and 2.38%, respectively. The Dow Jones also saw a modest increase of 0.29%. In local currency terms, the pan-European STOXX Europe 50 Index closed 1.36% higher following the ECB’s decision to cut interest rates for the first time in five years on Thursday. Conversely, the UK’s FTSE 100 Index slipped 0.36%.

In Asia, the Japanese Nikkei 225 Index saw a rise of 0.51%. Conversely, the Shanghai Composite Index experienced a decline of 1.15%, while in Hong Kong, the benchmark Hang Seng Index surged by 1.44%.

Market Moves of the Week:

South Africa’s economy experienced a slight contraction in the first quarter of 2024, according to data released by the statistics agency on Tuesday, primarily due to a downturn in the mining and construction sectors. Gross domestic product (GDP) shrank by 0.1% in quarter-on-quarter seasonally-adjusted terms. On a year-on-year basis, the economy grew by 0.5%. Six out of ten industries tracked by Statistics South Africa contracted in the first three months of the year, with construction and mining experiencing declines of 3.1% and 2.3%, respectively.
 
The Absa Purchasing Managers’ Index (PMI), a key indicator of confidence in South Africa’s manufacturing sector, revealed a significant decline in manufacturing activity for May. According to the survey released on Monday, the seasonally-adjusted PMI fell to 43.8 points in May from 54.0 points in April, dropping below the 50-point threshold that distinguishes expansion from contraction. Respondents attributed this decline to uncertainties related to last week’s election and weak demand. The PMI has remained in contractionary territory for three out of the first five months of this year, indicating volatility in the manufacturing sector during the election period.
 
South Africa’s African National Congress (ANC), under the leadership of President Cyril Ramaphosa, has announced plans to invite other political parties to participate in forming a government of national unity. This decision follows last week’s election, in which the ANC lost its majority for the first time in South Africa’s democratic era. President Ramaphosa unveiled the plan on Thursday after extensive negotiations within the ANC and between major parties. There had been speculation about whether the ANC would attempt to establish a grand coalition government with its closest political rival, the Democratic Alliance, to control parliament, or if it would seek to collaborate with uMKhonto we Sizwe, led by former President Jacob Zuma, whose electoral gains came at the expense of the ANC.
 
Throughout the week, the JSE All-Share Index experienced a modest increase of +0.19%, primarily driven by significant gains in the property sector (+3.11%), the industrial sector (+2.02%), and the financial sector (+0.52%). Conversely, the resource sector ended the week with losses, declining by -3.06%. At the close of trading on Friday, the rand strengthened against the U.S. Dollar, trading at R18.86, marking a weekly depreciation of -0.62%.

Chart of the Week:

On Thursday, the European Central Bank made a significant departure from its usual practice by independently cutting rates for the first time in its 25-year history. This decision marks a notable shift away from its previous reliance on the Federal Reserve’s actions.

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The Electoral Commission of South Africa (IEC) announced that the majority of the 27.7 million registered South Africans showed up in their numbers to mark their ballots on Wednesday. It was South Africa’s 7^th democratic election, with a voter turnout of close to 59%.

With counting almost complete of all voting districts (99.89%), the ruling African National Congress (ANC), is on course to lose its majority in parliament for the first time since it came to power 30 years ago. The ANC leads with 40.2% (a significant drop from the 57.5% of votes it secured in the last national election in 2019), followed by the Democratic Alliance (DA) with 21.8%. The uMkhonto weSizwe Party (MK Party) of former President Jacob Zuma has received 14.6% of the vote (with a particularly strong showing in KwaZulu-Natal of 46% of the vote, Zuma’s home province) while the Economic Freedom Fighters party captured 9.5% of the national vote.

By law the election commission has seven days to release full provisional results, but election officials have said they are planning for a Sunday announcement. According to the Constitution, Parliament must hold its first session within 14 days after election results are released. Thereafter, members of Parliament (MPs) are sworn in, and they elect a president among their 400 members.

South African political parties are now gearing up for complex coalition talks. Former President Zuma’s new MK party has said it won’t partner with the ANC for as long as President Ramaphosa remains its leader, while an ANC coalition with the pro-business Democratic Alliance (the second largest party) being the more favoured investor outcome, also presents challenges for the ruling party, with resistance within the ANC to its reputation as a party for the white minority. Investors will hope the uncertain political picture becomes clearer over the next two weeks.

On Thursday, Governor Lesetja Kganyago delivered the May Monetary Policy Committee statement. The MPC decided to keep the repurchase rate at its current level of 8.25% per year, as expected. The decision was unanimous with the following key observations:

• Consumer inflation forecasts have been revised modestly lower, mostly due to easing food and core inflation. Kganyago said the bank sees inflation stabilising at the 4.5% objective in the second quarter of 2025, which is earlier than its previous forecast of stabilisation only at the end of next year; and
• SA GDP is still forecasted to grow at 1.2% this year, with the governor welcoming the reduced load shedding during the past few months.

For the week, election uncertainty impacted the currency, equity and bond markets. The local currency lost 1.66%, ending the week at R18.75 to the dollar, its biggest weekly loss since the week ended February 18. The JSE all share fell by just over 3% for the week, still managing to end the month of May marginally firmer. All the major sectors were weaker on the week as coalition dynamics around local politics weighed on investor sentiment.

Market Moves of the Week:

Former President Donald Trump has been found guilty on all 34 charges of falsifying business records in a hush-money trial with a sentencing hearing scheduled for July 11, only days before the Republican National Convention. He is the first former US President to be criminally convicted. Serving time is unlikely, at 77 years old, Trump is a first-time offender and has been convicted of a non-violent crime, while the appeals process will take many months or even years to play out and won’t be resolved before the upcoming November election.

This case is the beginning of several cases that Trump is facing, including separate lawsuits in Georgia and Washington relating to conspiracies to overturn the 2020 election, while another in Florida surrounds mishandling classified documents, but two out of the three are federal charges that could be shut down if he enters office in November’s election.

The core personal consumption expenditures (“PCE”) price index increased 0.2% in April, in line with the consensus forecasts. The preferred inflation measure that is closely followed by the Federal Reserve showed core PCE rose 2.8% on an annualised basis. Including the volatile food and energy category, PCE inflation was at 2.7% on an annual basis and 0.3% from a month ago. The numbers were largely around expectations.

Major US indices were down on the holiday-shortened week, with both the S&P 500 and Nasdaq declining 0.51% and 1.1%, respectively. The blue-chip Dow Jones slipped 0.98%, marking a second straight week of losses. Despite the tough week, it was a winning May, with each of the major benchmarks registering a sixth positive month in seven. The Dow added 2.3% for the month of May, while the S&P 500 rose 4.8%. The Nasdaq gained 6.88%, notching its best month going back to November.

In Europe, inflation rose to 2.6% in May, statistics agency Eurostat said Friday, rising for the first time in five months. The higher-than-expected print did not sway market bets of a widely expected cut to interest rates at the ECB’s June 6 meeting, the first reduction since 2019. Core inflation, excluding the volatile effects of energy, food, alcohol, and tobacco, increased to 2.9% from 2.7% in April. The central bank for the 20-nation euro area began its latest hiking cycle in July 2022, increasing rates out of negative territory to 4% at present.

In local currency terms, the pan-European STOXX Europe 50 Index ended 1.03% lower, while the UK’s FTSE 100 Index lost 0.51% for the week.

In Asia, data from Japan’s Ministry of Finance on Friday confirmed that authorities stepped into the foreign exchange markets on two separate occasions to prop up the Japanese currency. The finance ministry stated that Japan spent 9.7885 trillion yen (approx. $62.25 billion) on currency intervention between April 26 and May 29. The yen has been hovering around 34-year lows, with recent strength heightening speculation of possible intervention by Japanese authorities.

Chinese equities were broadly flat over the week with the benchmark Shanghai Composite Index down 0.07% after an unexpectedly weak PMI manufacturing reading. The official manufacturing purchasing managers’ index (PMI) fell to a below-consensus 49.5 in May from 50.4 in April, marking the first monthly contraction since February. The gauge lagged the 50-mark level, separating growth from contraction.

Oil prices were weaker for the week, the Brent benchmark trading at $81.28, as ongoing demand concerns offset ongoing expectations that OPEC+ is set to maintain its oil production curbs. Spot gold ended the week at $2,326/oz, 0.29% weaker.

Chart of the Week:

On Thursday, a New York jury found Trump guilty of all 34 felony charges of falsifying business records to hide a hush money payment to an adult film star to illegally influence the 2016 election. But if the political betting markets are to be believed, the presidential election campaign has shifted sharply in his favour during the trial. This is how RealClear Politics’ average of the probabilities of Joe Biden or Trump winning the November election have moved since the beginning of last year.

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U.S. stock markets ended the week mixed, with the Dow Jones Industrial Average recording its biggest weekly loss since early April, down 2,33%, while the NASDAQ Composite continued to march higher into record territory. The yield on the benchmark US 10-year Treasury Note rose 5 basis point to 4,47%.

The latest minutes from the Federal Open Market Committee (FOMC) reveal that Federal Reserve officials are inclined to maintain higher interest rates for an extended period. During the two-day meeting that ended on May 1^st, many officials expressed doubts about whether current policies were sufficiently restrictive to reduce inflation to their target. While participants generally agreed that policy was “well positioned,” several officials indicated a readiness to tighten policy further if necessary.

Recent US data indicates that business activity is rising at the fastest pace in two years, fuelling expectations that the Federal Reserve will maintain higher interest rates for an extended period. Growth in the service sector reached its highest level in a year, while manufacturing unexpectedly expanded, according to S&P Global data. The composite PMI climbed to 54.4, significantly above the expected 51.2 for May. Combined with recent hawkish comments from the Federal Reserve, this data reinforces the likelihood of a sustained tight monetary policy.

Nvidia reported another impressive quarterly earnings, reinforcing its central role in the artificial intelligence (AI) boom. The chipmaker’s strong sales forecast indicates robust ongoing spending in AI computing. Nvidia expects second-quarter revenue to reach approximately $28 billion, surpassing analysts’ predictions of $26.8 billion. The earnings report, which did not disappoint, highlighted CEO Jensen Huang’s remarks about the dawn of a “new industrial revolution.” Following the results, Nvidia’s share rose 9.3% on Thursday, adding roughly $220bn to its market capitalisation, reflecting the market’s positive reception to the company’s performance and outlook. Company management also announced a 10-for-1 stock split and increased its dividend by 150%.

The S&P 500 ended the week flat, up 0,03%., while the tech heavy NASDAQ composite continued it’s positive YTD performance, closing the week up 1,41% (12,72% YTD).

In the UK, unexpectedly strong inflation data has led traders to significantly reduce their expectations for interest rate cuts, undermining a potential economic triumph for Prime Minister Rishi Sunak. The Office for National Statistics reported on Wednesday that the Consumer Prices Index (CPI) rose by 2.3% year-on-year in April, surpassing the 2.1% forecast by economists. While this brings the Bank of England’s (BoE) 2% inflation target within reach and represents the lowest inflation level since the onset of the cost-of-living crisis nearly three years ago, it remains at the higher end of economists’ expectations. On Wednesday, Rishi Sunak unexpectedly requested King Charles III to dissolve parliament and call a general election in the UK on 4 July. Sunak isn’t required to hold an election until January, his Conservative Party is lagging in opinion polls, while Labour Party leader Keir Starmer gathers momentum.  The FTSE 100 closed the week in negative territory, down 1.22%.

European Central Bank (ECB) President Christine Lagarde reiterated this week that an interest-rate cut is likely next month, as consumer-price growth appears to be under control. In a television interview with Ireland’s RTE One on Tuesday, Lagarde stated, “If the data that we receive reinforces the confidence level that we have — that we will deliver 2% inflation in the medium term, which is our objective, our mission, our duty — then there is a strong likelihood” of a rate cut on June 6. She expressed confidence in the ECB’s ability to manage inflation. First estimates of Eurozone composite purchasing managers’ index (PMI) for May came in at a 12-month high of 52.3, up from 51.7 in April. The Euro Stoxx 50 also closed lower, down 0.57%.

Japan’s stock markets finished the week lower, with the Nikkei 225 Index falling 0.36% and the broader TOPIX experiencing a marginal decline. Japan’s national new core CPI, which excludes fresh food and energy, slowed to +2.4% year-on-year in April, down from +2.9% in March, aligning with market expectations. This decrease mainly reflects the diminishing impact of the sharp rise in food prices (excluding fresh food) and a slowdown in the increase of hotel and lodging charges observed in April 2023. Japan’s 10-year government bond yield hit 1% for the first time in 11 years on Wednesday, off the back of moderating inflation.

China is considering imposing tariffs as high as 25% on imported cars with large engines, according to the China Chamber of Commerce to the EU. This potential move comes as trade tensions escalate between China, the US, and the European Union. The People’s Bank of China (PBOC) announced a historic rescue package for the ailing property sector, amid growing concerns of a severe housing crisis in China.  From a monetary policy perspective, the Chinese central bank kept their one- and five-year prime rates unchanged at 3.45% and 3.95%, respectively. Notwithstanding these positive local developments, Chinese stocks retreated this week as fears of elevated U.S. interest rates offset optimism about Beijing’s latest measures. Both the Shanghai Composite and Hong Kong’s Hang Seng Composite closed the week lower, down -2.07% and -5.11% respectively.

Market Moves of the Week:

With national elections imminent, political news has dominated headlines in South Africa this week. On Monday, the Constitutional Court ruled that former President Jacob Zuma is disqualified from standing in the elections due to his 15-month jail sentence for contempt of court in 2021. According to the Constitution, individuals sentenced to prison for 12 months or more cannot hold a parliamentary seat. While Zuma’s name will be removed from MK’s list of parliamentary candidates, his face will remain on the election ballot papers as he is the registered leader of the party.

Additionally, the African National Congress (ANC) has announced plans to finalise a comprehensive policy on universal basic income within two years if they return to power after the election. The ANC intends to use the Social Relief of Distress Grant as the basis for transitioning to a permanent basic income payment.

On the local equity front, the JSE ALSI ended the week in negative territory, down -0.48%, lead lower by the Resource sector down -1,54%. Industrials also ended lower, -0,67%, while Financials were marginally higher, up 0.31% for the week. The SA Listed Property sector also ended the week in positive territory, up 0.89%.

Chart of the Week:

Nvidia is now the third-largest company in the S&P 500 by market capitalisation, trailing only Apple & Microsoft. On a year-to-date basis, Nvidia has significantly outperformed the S&P 500 index, as displayed in the chart above. Bank of America noted that Nvidia had accounted for 37% of the S&P 500’s earnings-per-share gains over the previous 12 months, while Bloomberg reported that the stock had been responsible for 25% of the S&P’s 11.3% gain on a YTD basis. Source: Bank of America & Bloomberg.

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This week, investors remained closely attuned to Wednesday’s U.S. inflation report for April, which revealed figures largely in line with or slightly below expectations. This tempered concerns regarding a resurgence in inflationary pressures, following three consecutive months of higher-than-anticipated readings. Notably, the U.S. consumer price index (CPI) rose by 0.3% month-on-month, slightly below the projected 0.4%, with year-on-year CPI inflation easing to 3.4%, marking the lowest level since April 2021. Despite this, Federal Reserve Governor Jerome Powell reiterated the importance of patience in assessing signs of inflation cooling, while maintaining the stance that borrowing costs should remain elevated for an extended period.

Reports this week, including weaker-than-expected U.S. new home construction, manufacturing, and a sharp decline in retail sales, suggest a sluggish start for the U.S. economy in the 2^nd quarter. This provides hopeful signs for the Federal Reserve that it might consider cutting interest rates without risking a soft landing. While robust consumer spending and near-record employment continue to keep recession fears at bay, cooling inflation remains a challenge. However, investors responded positively to these developments, propelling stocks to record highs.

In other news, President Joe Biden announced new tariffs on Chinese imports, including semiconductors, batteries, solar cells, and critical minerals, aiming to safeguard American workers and businesses. Accusing China of unfair subsidies and dumping practices, Biden emphasised the importance of fair competition without seeking confrontation. These tariffs, added to existing levies on steel, aluminium, and electric vehicles, will impact about $18 billion in annual imports, further heightening trade tensions between the two economic giants.

Across the Atlantic, the eurozone’s first-quarter GDP met market expectations, mirroring the previous quarter’s growth with a 0.3% increase quarter-on-quarter. European Central Bank (ECB) policymakers hinted at a potential rate cut in June, though uncertainty looms over the extent of future policy measures. The UK’s unemployment rate rose to 4.3% in March, compared to the prior month’s 4.2% reading.

Meanwhile, Japanese companies are increasingly announcing dividends and share buybacks at a record pace, bolstering support for their market. Yet, Japan’s annualised GDP contracted by 2.0% in the first quarter of 2024, partly attributed to the negative impact of the January earthquake on the Noto peninsula and the suspension of some auto production activities.

Amidst an ongoing property market downturn, China’s government convened key officials to discuss support measures. The People’s Bank of China (PBOC) introduced measures to stimulate demand, including reducing the minimum down payment ratio by 5% for first-time buyers and abolishing the nationwide floor level of mortgage rates, allowing cities to set their own rates. These efforts aim to address China’s persistent housing crisis.

Finally, China’s substantial divestment of $53.3 billion worth of U.S. Treasury and agency bonds in the first quarter raises concerns about a potential shift away from American assets amidst escalating tensions. President Biden’s recent tariff hikes on Chinese imports and former President Trump’s threats of severe tariffs add to the geopolitical complexities shaping global markets.

Global stocks generally performed well this week. In the U.S., the Nasdaq (+2.11%) and S&P 500 (+1.54%) posted significant gains, while the Dow Jones (+1.24%) surpassed the 40,000 mark for the first time. European shares, however, were the exception, with the Euro Stoxx 50 (-0.41%) and FTSE 100 (-0.16%) ending the week slightly lower. Asian markets also showed strength, as Japan’s Nikkei 225 rose by +1.46% and China’s Hang Seng Index surged by +3.25%. Brent oil prices increased by +1.49%, and gold prices climbed by +2.30%

Market Moves of the Week:

President Cyril Ramaphosa signed South Africa’s largest health policy reform, the National Health Insurance (NHI) Bill, into law just fourteen days before the elections. Aiming for universal health coverage, the Bill restricts medical schemes to covering only minor private elective procedures. Numerous industry bodies have already threatened litigation against the NHI, likely resulting in a lengthy multi-year legal battle.

Additionally, South Africa’s unemployment rate increased to 32.9% in the first quarter of 2024, up from 32.1% in the previous quarter. On a positive note, retail sales saw a 2.3% year-over-year increase in March, rebounding from a revised 0.7% decline in the previous month.

The JSE (+1.36%) mirrored the global uptrend this week, with all three major sectors posting gains: Resources (+0.17%), Industrials (+1.84%), and Financials (+1.36%). The rand also showed significant strength, closing at R18.15/$.

Chart of the Week:

This Bloomberg Economic Analysis chart divides US inflation (CPI) into four key components: food, fuel, other goods, and other services. While significant price shocks in food, fuel, and goods from two years ago have now dissipated, resulting in lower overall inflation, the cost of services remains persistently high and currently drives most of the headline inflation. Since services are labour-intensive and wages are a critical factor in their pricing, monetary policy can effectively counteract wage inflation. This provides the Federal Reserve with a reason to maintain current interest rates. Source: Bloomberg.

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In the US, initial filings for unemployment benefits have surged to their highest level since late August 2023, suggesting a potential shift in what has otherwise been a robust labour market. According to the Labor Department’s report on Thursday, jobless claims totalled a seasonally adjusted 231,000 for the week ending on May 4, marking a significant increase of 22,000 from the previous period. This figure represents the highest number of claims since August 26, 2023. The surprising rise in jobless claims appeared to dominate the week’s sparse economic calendar.

The S&P 500 Index edged closer to its all-time high, marking its third consecutive week of gains as it closed the week with a notable increase of 1.85%. Other major indexes also saw advancements, with the Dow Jones surging by 2.16% and the Nasdaq rising by 1.14%.

Britain’s economy saw its most robust growth in nearly three years during the first quarter of 2024, marking the end of the shallow recession that commenced in the latter half of last year. According to data released by the Office for National Statistics (ONS) on Friday, Gross Domestic Product (GDP) expanded by 0.6% in the first three months of the year. This growth represents the strongest performance since the fourth quarter of 2021 when GDP increased by 1.5%. Notably, this growth comes after contractions of 0.3% in the fourth quarter and 0.1% in the third quarter of the prior year. Typically, a recession is defined as two consecutive quarters of economic contraction.

The Bank of England maintained its key interest rate at a 16-year peak but hinted at potential rate cuts in line with European peers. In its Thursday meeting, the central bank upheld the key rate at 5.25%, as expected, marking the sixth consecutive meeting without change. The Monetary Policy Committee (MPC) voted 7-2 in favour of holding rates steady, with the minority advocating for a cut. Despite this stance, the MPC remains cautious, citing elevated indicators of inflation persistence, particularly with services inflation reaching 6% in March, and acknowledging “upside risks” from geopolitical tensions. The central bank committed to monitoring forthcoming economic data releases to gauge the diminishing risks from inflation persistence before its next meeting on June 20.

Eurozone retail sales experienced a notable surge in March, marking their most substantial monthly uptick since September 2022. Data released by Eurostat on Tuesday revealed a month-on-month uptick of 0.8% in retail sales across the euro area. This rebound follows an upwardly revised decline of 0.3% in February. On an annual basis, sales expanded by 0.7%, reversing the 0.5% contraction experienced in February, and registering the first positive annual rate since September 2022. This growth also represents the highest increase since May 2022.

The pan-European STOXX Europe 50 Index closed 3.32% higher, driven by better-than-expected corporate earnings and growing optimism regarding imminent interest rate cuts by major central banks. Similarly, the UK’s FTSE 100 Index surged sharply, climbing by 2.68% to reach a new record high.

The Caixin/S&P Global services purchasing managers’ index (PMI) saw a modest dip from 52.7 in March to 52.5 in April, yet it remained in expansion territory for the 16th consecutive month, in line with market expectations. The 50-point mark separates expansion from contraction. The recent private sector survey indicated a modest slowdown in China’s services sector expansion, primarily attributed to rising costs. However, amidst this, there was a notable acceleration in the growth of new orders, complemented by a solid uptick in business sentiment. 

In April, China’s exports registered a notable rebound, increasing by 1.5% year-on-year, a significant improvement from the 7.5% decline witnessed in March. Notably, exports to Southeast Asian nations strengthened, while shipments to Europe saw a decrease. Sales to the U.S. remained relatively unchanged. Meanwhile, imports exceeded expectations, rising by 8.4% in April, reversing the 1.9% decline seen in March. Some analysts attribute this increase to heightened shipments of raw materials rather than a surge in consumer demand. Consequently, China’s overall trade surplus expanded to USD 72.35 billion in April, up from USD 58.55 billion in March.

As optimism surrounding economic recovery increased, Chinese stocks gained momentum, driven by robust holiday spending during the previous week’s Labor Day holiday. The Shanghai Composite Index surged by 1.6%, while in Hong Kong, the benchmark Hang Seng Index climbed by 2.77%.

Last week, Bank of Japan Governor Kazuo Ueda’s commentary triggered a surge in yen-selling, as he suggested that yen weakness might not exert a significant influence on inflation or monetary policy. However, he reversed course this week, indicating that if upside price risks escalate, it would be prudent to expedite rate hikes. Furthermore, he underscored the adverse impact of the yen’s persistent weakness on Japan’s economic landscape. Ueda emphasized the BOJ’s vigilant monitoring of the currency’s depreciation while assessing the necessity for monetary policy adjustments. Consequently, in contrast to global peers, Japan’s Nikkei 225 Index registered marginal weekly losses of 0.02%.

Market Moves of the Week:

Manufacturing output in South Africa has significantly underperformed market expectations, posing potential challenges for the forthcoming GDP figures for Q1 2024. In March, manufacturing production contracted notably by 6.4% year-on-year, following a revised 4.0% increase in February. Key sectors contributing to this downturn include motor vehicles, parts, accessories, and other transport equipment, as well as basic iron and steel. Despite this setback, South Africa’s economy is not at immediate risk of entering a technical recession (two consecutive quarters of contractions in GDP), as GDP saw a marginal quarter-on-quarter growth of 0.1% in Q4 2023.

On Friday, the JSE All-Share recorded its most significant gain in 10 days, rallying alongside global peers as a softer US jobs report reignited investor expectations of potential interest rate cuts by the Federal Reserve. Throughout the week, the JSE All-Share Index witnessed a notable increase of 2.66%, with significant gains observed across three major sectors, including the resource sector (5.32%), the financial sector (2.42%), and the industrial sector (1.29%). The property sector also saw weekly gains, albeit not as substantial, with an increase of 0.69%. By the end of trading on Friday, the rand strengthened against the U.S. Dollar, trading at R18.44, representing a weekly appreciation of +0.29%.

Chart of the Week:

The UK sees the strongest growth in nearly three years, exiting recession. GDP expands by 0.6% in Q1 2024, its fastest rate since Q4 2022, after a shallow recession in H2 2023. The Bank of England, which held interest rates at a 16-year high on Thursday, anticipates modest growth of 0.4% in Q1 and 0.2% in Q2, with a projected 0.5% expansion for the entirety of 2024. Source: LSEG Datastream.

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U.S. equities saw their third consecutive week of losses, influenced by concerns over Middle East tensions and enduring high U.S. interest rates. Mega-cap technology shares were hit by rising rates, leading to a higher theoretical discount on future earnings. Additionally, the technology sector was impacted by a first-quarter revenue miss from ASML Holdings, reducing optimism regarding AI-related earnings. Despite this, the pullback so far has been contained, with the S&P 500 down about 5.5% from its recent high, following a 25% rally over the past 6 months. The U.S. economy, however, remains robust, supported by strong consumer demand and a healthy labour market, while global economic growth is stabilising.

Robust economic data seemed to increase concerns that the Federal Reserve would delay any interest rate cuts until September, if not until 2025. The Commerce Department reported that retail sales rose 0.7% in March, well above consensus expectations of around 0.3%, while February’s gain was revised upward to 0.9%. Fed Chair Jerome Powell stated at an economic conference that “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” The retail sales data helped push the yield on the benchmark 10-year U.S. Treasury note to its highest intraday level since early November.

In Europe, Central Bank President Christine Lagarde expressed optimism about the region’s economy, suggesting that it is nearing the end of a period of stagnation that lasted over a year. Lagarde highlighted signs of recovery in the output of the 20-nation eurozone, noting particularly strong performance in the employment and job market. Numerous ECB policymakers at the IMF meeting reiterated that June was the likely target date for lowering borrowing costs, barring unexpected economic shocks.

The UK’s unemployment rate unexpectedly rose to 4.2%, compared to the revised 4.0% from the previous month. Meanwhile, UK inflation remained higher than anticipated at 3.2%, showing a slight decrease from the previous reading of 3.4%. Bank of England Governor Andrew Bailey suggested that the UK might consider lowering interest rates before the US, highlighting differing inflation dynamics between the two economies. Bailey noted more “demand-led inflation pressure” in the US compared to the UK, following concerns over strong price data in America the previous week.

Chinese economic indicators presented a mixed picture in March and the first quarter of 2024. While industrial production grew by 4.5% year-on-year, below market expectations, the house price index dropped by 2.2%, and retail sales saw a modest increase of 3.1%, falling short of projections. However, gross domestic product (GDP) expanded by 5.3% year-on-year in the first quarter, surpassing market expectations slightly, despite a slight slowdown from the previous quarter’s growth rate.

The International Monetary Fund (IMF) has made a cautious adjustment to its projections for this year, revising upwards to 3.2% citing the resilience of the US economy and positive developments in emerging markets. Despite this optimistic outlook, lingering worries persist regarding persistent inflationary pressures and geopolitical tensions, serving as a reminder of the delicate balance in the current economic landscape.

Global stocks closed lower after a volatile week as investors turned risk-averse. U.S. stocks faced challenges, with the Nasdaq (-5.52%) and S&P 500 (-3.05%) seeing significant declines, while the Dow Jones (+0.01%) managed to stay flat. European shares (Euro Stoxx 50) fell by -0.75%, and the FTSE 100 dropped by -1.25%. China’s Shanghai Composite experienced a -2.94% drop, and the Nikkei 225 fell by -6.21%. The standout performer was the China Shanghai Composite Index, which ended the week up +1.52%. Brent oil prices declined by -3.36%, while the gold price, known for its safe-haven status, increased by +2.07%.

Market Moves of the Week:

Following a two-month upswing, South African headline inflation softened to 5.3% in March from 5.6% in February. The rate has held its ground between 5% and 6% since September 2023. At the same time, retail sales fell by 3.2% (month-on-month) in February, compared to an increase of 1.2% recorded in the prior month.

Finance Minister Enoch Godongwana revealed plans to manage the country’s debt burden by utilising future drawdowns from the Gold and Foreign Exchange Contingency Reserve Account. However, he ruled out using these funds for Eskom or Transnet, emphasising the need for fiscal consolidation through potential tax adjustments and expenditure cuts in the upcoming budget.

Meanwhile, Governor Lesethsha Kganyago of the South African Reserve Bank indicated that a new inflation target framework might not be finalised before the 29^th of May election. On the energy front, Eskom announced a temporary halt to rotational power cuts, marking the longest respite since June 2022, and planned to restore a significant portion of generation capacity by the end of the week.

The JSE (-2.59%) tracked global peers lower this week after a significant selloff across all sectors, including the Resources (-4.21%), Industrials (-2.10%), and Financials (-2.13%) indices, all under pressure. The rand weakened throughout the week, closing at R19.10/$.

Chart of the Week:

In the 1990s, the “Fed Model” gained popularity, correlating bond yields with stock earnings yields. However, its use has declined over the past two decades, coinciding with a period where this correlation broke down due to record low interest rates and central banks’ implementation of quantitative easing measures post the Global Financial Crisis. Recent trends indicate a return to the historical norm, with long Treasuries yielding more than stocks. This was once considered necessary to compensate for bonds’ limited growth potential. While not inherently alarming, this shift complicates asset allocation for a generation accustomed to stocks outperforming bonds.

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U.S. stock markets saw a decline for the week due to increased concerns about conflict in the Middle East and ongoing inflation worries, leading to higher long-term Treasury yields. Growth stocks performed better than value shares, with interest rate-sensitive sectors like real estate investment trusts (REITs), regional banks, housing, and utilities weighing down on value stocks.

Investors reacted to three consecutive hotter-than-expected CPI readings by revising their expectations for rate cuts by the US Federal Reserve downward. Initially, they anticipated two to three rate cuts before year-end, with the first expected in July. However, following the 0.4% month-on-month increase in both headline and core March CPI, the market is now pricing in only one to two cuts, with the first not fully priced in until September.

Following the CPI data, US 10-year Treasury note yields spiked over 20 basis points and remain elevated at 4.53%. Despite this, Fed officials emphasised that the central bank is not rushing to adjust policy and prefers to wait for more data. The next crucial inflation data point is core PCE on 26 April.

Geopolitical tensions are on the rise as the USA warns of an imminent attack on Israel by Iran or its proxies. In response, the US Embassy in Jerusalem has issued a security alert and imposed travel restrictions on US government employees and their families within Israel, restricting travel beyond their respective cities. The USA vows unwavering support for Tel Aviv’s defence in the face of these threats.

All major U.S. equity markets ended the week lower. The Dow Jones Industrial Average down 2.37%, followed by the S&P 500 down 1.56%. The tech heavy NASDAQ composite faired best, still in negative territory, down 0.45%.

In February, UK GDP growth increased by 0.1% month-on-month, aligning with consensus expectations. January’s growth rate was also revised upward to 0.3%. Goldman Sachs forecasts Q1 GDP growth at 0.4%, with an annual growth projection for 2024 at 0.6%, surpassing consensus estimates of 0.3% and the Bank of England’s forecast of 0.2%. In other news, former Federal Reserve Chair Ben Bernanke conducted a review of the Bank of England’s economic model, identifying significant shortcomings such as outdated software and makeshift solutions that hindered the bank’s ability to generate alternative scenarios quickly. The BOE’s failure, along with other central banks, to predict inflationary pressures from pandemic-era economic disruptions and the Ukraine conflict prompted the review.

At its meeting on Thursday, the European Central Bank (ECB) maintained its interest rates unchanged. However, ECB President Christine Lagarde acknowledged that some members of the Governing Council were ready to reduce interest rates at this week’s meeting, although a majority preferred to wait until June for more data. Lagarde emphasised that the decision to lower rates is not contingent on actions taken by the Federal Reserve. European natural gas futures surged on Thursday to their highest level in over two weeks following renewed attacks by Russia on Ukrainian energy facilities. Benchmark futures spiked by as much as 7.1%, reversing the losses from the previous two days.

The FTSE 100 closed the week in positive territory, up 1.07% while the Euro Stoxx 50 closed the week lower, down 1.19%.

Japan’s stock markets saw gains throughout the week, with the Nikkei 225 Index rising by 1.36% and the broader TOPIX climbing 2.1%. Investors closely monitored the Japanese yen, which remained near a 34-year low, anticipating potential interventions by the country’s authorities to bolster the currency. In March, Japan’s domestic Corporate Goods Price Index (CGPI) saw a slight increase of +0.2% month-on-month. Year-on-year, the index also rose gradually by +0.8%.

China’s headline Consumer Price Index (CPI) inflation decreased, while Producer Price Index (PPI) deflation widened slightly in year-over-year terms. The decline in headline CPI inflation was driven by moderation in food prices and tourism-related services prices, likely due to reduced demand after the Lunar New Year. The widening of PPI deflation was primarily attributed to weak upstream sector prices. With soft Q2 inflation data, full-year 2024 forecasts for headline PPI inflation have been revised down to -1.1% year-on-year (previously -0.3% year-on-year), while the headline CPI inflation forecast remains at 0.4%, below consensus. China’s March trade growth surprised to the downside, the trade surplus in March was $58.6bn below consensus. Chinese stocks experienced a retreat, as weak inflation data highlighted the subdued demand prevailing in China’s economy. The Shanghai Composite closed the week lower down -1.62%, while Hong Kong’s Hang Seng Composite ended marginally higher, up 0.11%.

Market Moves of the Week:

In local political news, the Social Research Foundation’s latest poll indicates a significant shift in support, with Jacob Zuma’s MK party gaining up to 13% of the vote while the ANC’s support slips to just 37%. Analysts suggest that such an outcome could compel the ANC to form a coalition with a larger party to maintain control of the country’s economy, potentially leading to policy concessions and changes in appointments. There’s also speculation that a poor election performance could prompt the ruling party to remove President Cyril Ramaphosa from office before the end of his term, causing concern among investors. The Independent Electoral Commission (IEC) has taken steps to challenge Jacob Zuma’s candidacy in the elections, potentially sparking public unrest if a negative ruling ensues.

These political developments have led to volatility in the currency and bond market, with the South African Rand depreciating by 1.02% against the US Dollar, closing the week at R18.86/$. The SA 10-year bond yields spiked 0.49% this week, a major move, pushing yields up to 11.02%. Investors are grappling with the implications of these events for local assets prices and forward-looking economic policy.

In share specific news, Transaction Capital (TCP) recently unbundled and listed their used-car business, We Buy Cars Holdings Ltd (WBC), on the JSE on 11 April 2024. WBC, the first new listing on the JSE for the year, debuted at R20 per share, surpassing its initial public offering price of R18.75 per share. This resulted in a total market capitalisation of R8.34 billion ($444 million) at the opening. The JSE anticipates approximately ten listings in 2024, including companies like cannabis firm Cilo Cybin Holdings and the highly anticipated Coca-Cola Beverages Africa. These listings could provide a much-needed boost to the JSE, which has faced challenges in attracting listings in recent years.

On the local equity front, the Resource sector caught a major bid pushing the JSE ALSI into positive territory for the week, up 0.72%. Resources ended the week up 9.75%. Both Industrials and Financials were lower, down 2.04% and 3.21% respectively. The SA Listed Property sector also ended the week down 1.70%.

Chart of the Week:

The International Monetary Fund notes a steady increase in China’s public debt-to-GDP ratio over the last decade. Projections anticipate a further rise as China aims to stimulate the economy amid a slowdown driven by the real estate sector. This growing debt has sparked concerns among rating agencies, with Fitch Ratings revising China’s outlook from stable to negative. Source: International Monetary Fund & Bloomberg.

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In March, U.S. employers surpassed expectations by hiring a significantly larger number of workers and increased wages. This suggests that the economy concluded the first quarter on a robust note and could potentially postpone anticipated interest rate cuts from the Federal Reserve this year. According to the Labor Department’s Bureau of Labor Statistics, nonfarm payrolls surged by 303,000 for the month, exceeding the downwardly revised 270,000 gain observed in February. Average hourly earnings rose 0.3% in March after gaining 0.2% in the prior month.

U.S. manufacturing exhibited growth for the first time in 18 months in March, with a notable resurgence in production and an uptick in new orders. According to the Institute for Supply Management (ISM), the manufacturing index rose to 50.3 in March from 48.3 in February. Conversely, growth in the U.S. services industry continued to decelerate. The ISM reported on Wednesday, that its non-manufacturing Purchasing Managers’ Index (PMI) fell to 51.4 last month from 52.6 in February. This marks the second consecutive monthly decline in the index following a rebound in January.

Annual headline inflation in the eurozone decelerated beyond initial forecasts, reaching 2.4% in March compared to 2.6% in February. Similarly, core inflation, excluding volatile food and energy components, eased to 2.9% from 3.1%. However, service prices saw a sustained year-over-year increase of 4.0% for the fifth consecutive month.

Concurrently, the eurozone witnessed a notable shift as the composite Purchasing Managers’ Index (PMI) returned to positive territory in March for the first time since May. S&P Global revised its estimate for the eurozone’s composite PMI, incorporating both services and manufacturing, to 50.3, marking an increase from the initial 49.9. A reading above 50 indicates an expansion in private-sector business activity.

Minutes from the European Central Bank’s (ECB’s) March meeting revealed policymakers’ growing confidence in the timely deceleration of inflation towards target levels. While a majority acknowledged the strengthening case for rate reductions, they also emphasized the importance of awaiting key economic data scheduled to be released after the ECB’s April meeting before making any decisions.

China’s manufacturing sector experienced its most rapid expansion in 13 months, as indicated by a private survey. This growth was accompanied by a notable surge in business confidence, reaching an 11-month peak, propelled by an uptick in new orders from both domestic and international customers. The Caixin/S&P Global Manufacturing Purchasing Managers’ Index (PMI) increased to 51.1 in March from 50.9 the previous month, reflecting this positive trend.

This week, global equity markets experienced a pullback from their recent highs, amid hawkish comments from some U.S. Federal Reserve policymakers and elevated crude oil prices, which raised concerns about the timing of potential interest rate cuts. In the U.S., major indices such as the Dow Jones (-2.27%), S&P 500 (-0.95%), and Nasdaq (-0.80%) all ended the week lower. Similarly, the pan-European STOXX 50 Index saw a decline of -1.35% during the shortened trading week, breaking a 10-week streak of gains. The UK’s FTSE 100 Index also saw a modest decline of -0.52%.

Japan’s stock markets also faced downward pressure, with the Nikkei 225 Index declining by -3.41% over the week.

In contrast, Chinese equities showed resilience, supported by positive economic indicators suggesting a potential acceleration in economic growth. The Shanghai Composite Index rose by +0.92%, while in Hong Kong, the benchmark Hang Seng Index increased by +0.98%.

Market Moves of the Week:

South African manufacturing activity declined in March, as indicated by Absa’s latest Purchasing Managers’ Index (PMI) survey released on Tuesday. The seasonally-adjusted PMI decreased to 49.2 points in March from 51.7 in February, falling below the critical 50-point threshold that distinguishes expansion from contraction. According to Absa’s statement on Tuesday, despite significant improvements in February, both the business activity and new sales orders indices decreased in March, though they remained above the recent lows observed in January.

On Tuesday, the South African Revenue Service (SARS) announced its preliminary estimates, revealing that it had collected over R1.74 trillion during the 2023/24 fiscal year. This represents a 3.2% increase compared to the previous year’s collection. Moreover, the figure exceeds the forecast outlined in Finance Minister Enoch Godongwana’s February budget presentation to Parliament by R10 billion. Consequently, this surplus indicates a potential for a slight reduction in the Treasury’s projected budget deficit of 4.9% of gross domestic product (GDP).

During the week, the JSE All-Share Index saw a modest increase of +0.32%, largely driven by a notable surge of +5.15% in the resources sector. In contrast, the property sector (-1.66%), industrial sector (-0.98%), and the financial sector (-0.85%) ended the week with losses. By the close of trading on Friday, the rand strengthened against the U.S. Dollar, trading at R18.67, marking a weekly appreciation of +1.11%.

Chart of the Week:

After extensive debate, the anticipated scenario of “higher for longer” has materialized. The fed funds rate reached 5% in March last year, with market expectations pricing it to remain at this level until November. While previously perceived as a concerning scenario, such elevated rates typically indicate a robust economic environment. Source: Bloomberg. As always, we appreciate your support and value your trust in LNKD Investment Managers.

The U.S. economy exceeded expectations in the final quarter of 2023, with a revised annual growth rate of 3.4%, up from the previous estimate of 3.2%. Strong personal consumption and robust corporate profits were key drivers. Overall, U.S. real GDP for 2023 increased by 2.5%. Nowcast models from the Federal Reserve (the Fed) Banks of New York and Atlanta predict a growth rate of around 2% in the first quarter of 2024.

The Fed’s preferred inflation measure, the core personal consumption expenditures price index (PCE), which excludes food and energy, increased 2.8% y/y in February, matching estimates. The Fed targets 2% annual inflation; core PCE inflation hasn’t been below that level in three years. Jerome Powell remarked that the PCE report released on Friday, along with other recent data, indicated that progress towards the 2 percent target was occasionally bumpy. The latest projections from the Fed indicated that officials still anticipated reducing rates by 0.75 percentage points this year, down from their 23-year high of 5.25-5.5%. In other U.S. news, on Tuesday, ratings agency S&P Global downgraded five regional U.S. banks due to their commercial real estate exposures. This action is expected to revive investor concerns regarding the sector’s health.

European Central Bank (ECB) board member Piero Cipollone stated on Wednesday that the ECB is growing more confident of inflation returning to its 2% target by mid-2025 as wage growth eases, bolstering the argument for reduced interest rates. He indicated that the ECB has hinted at a potential rate cut in June, contingent on positive wage developments. Investors are anticipating an ECB rate cut in June, although opinions are divided on whether two or three additional moves will follow before the year concludes.

This week, China’s President, Xi Jinping, held discussions with U.S. business leaders during the China Development Forum, an annual conference in Beijing. In recent months, China has aimed to create a more hospitable environment for international businesses, particularly after foreign direct investment reached its lowest levels in decades last year. Official statistics released Wednesday indicate that China’s economy is displaying signs of stabilization, with industrial profits increasing by 10.2% for the January to February period compared to the previous year. However, this growth was partly attributed to a low base in 2023.

Despite the Bank of Japan’s (BoJ)  recent decision to discontinue negative interest rates, the yen depreciated to a 34-year low of 151.97 against the U.S. dollar on Wednesday. Japanese authorities voiced their objection to these developments, describing them as disorderly. The historic weakness in the yen has benefited many of Japan’s large-cap exporters, as they derive a significant share of their earnings from overseas. Market expectations are converging on the likelihood of two more BoJ interest rate hikes within a year.

On the market front, most of the major U.S. benchmarks ended the week higher, to end a quarter of strong gains. The S&P 500 index rose by +0.39%, recording new closing and intraday highs to end the week. The Dow Jones also ended the week higher, up +0.84%, while the Nasdaq Composite slipped -0.30%. The yield on the U.S. 10-year benchmark note remained largely unchanged at 4.22%.

In Europe, the Euro Stoxx 50 index gained +1.04%, despite confirmation of a significant slowdown in some major economies while the UK’s FTSE 100 climbed +0.27%. Chinese stocks declined slightly (Shanghai Composite Index down -0.23%), whereas Hong Kong shares (Hang Seng index) rose +0.31%. Japan’s stock market dipped, with the Nikkei 225 losing -1.27%. Oil prices (Brent) gained +2.10% while Gold rose by +3.18%. 

Market Moves of the Week:

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) kept its repo rate unchanged at 8.25% in a unanimous decision (as expected) on Wednesday. While its forecasts stayed largely consistent, the MPC’s commentary on inflation adopted a more hawkish tone. The Committee cited mounting upside risks to the inflation outlook, stemming mainly from the threat posed by adverse weather conditions to domestic food production and its likely impact on food prices. Meanwhile, the MPC pointed out that interest rate differentials, terms of trade, and election risk have exerted downward pressure on the Rand, which it perceives as being “undervalued”.

On Tuesday, Statistics South Africa (Stats SA) reported that formal employment in the country decreased by 194,000 jobs, or -1.8% q/q, for the fourth quarter of 2023. This brought the level of employment to 10.7 million. Several industries witnessed declines in full-time employment, with the construction sector, manufacturing industry and community services industry experiencing the most significant decline. Conversely, the trade industry reported an increase of 31,000 jobs.

Private sector credit extension (PSCE) growth drifted sideways in February, as consensus expected (3.3% y/y in February from 3.2% y/y in January). Credit trends generally remain quite weak in SA and well below inflation. Persistent weakness in this data has a dovish read-through for monetary policy, even though it hasn’t been a key determinant of the SARB’s interest rate decisions in recent months.

The JSE gained +1.75% over the shortened trading week, with Industrials (+3.14%) leading the advance. Resources (+2.39%) maintained their recent bullish momentum on the back of rising commodity prices. The local currency strengthened against the U.S. dollar over the week, falling to R18.88/$ from last week’s R18.99/$ level.

Chart of the Week:

The latest Asset Allocators survey by Absolute Strategy Research, which polls 225 managers overseeing $8 trillion, indicates a notable decrease in the likelihood of a recession within the next 12 months. This is the first time in two years that the probability of a recession, as assessed by these allocators, has dropped below 50%. Source: Bloomberg.

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All three major U.S. indices moved higher this week, with the S&P 500 gaining 2.3%. The Dow was also up 1.97% for its best week since December. The Nasdaq was the outperformer of the three, gaining 2.85%.

The main driver of positive investor sentiment for markets was the conclusion of the Federal Reserve’s (Fed) policy meeting on Wednesday. As expected, policymakers left the federal funds rate unchanged in the range of 5.25% to 5.50%. However, the updated dot plot signalled that policymakers still remain on track to cut rates three times this year (75 basis points). Fed officials also boosted their forecast for 2024’s underlying inflation to 2.6% from 2.4%, while raising the growth forecast to 2.1% from 1.4%. The news from the Fed helped drive a decline in longer-term Treasury yields over the week.

Earlier in the week the Bank of Japan (BoJ) made a much-anticipated policy shift, exiting its negative interest rate policy. The central bank delivered its first hike since 2007, scrapping the world’s last remaining negative interest rate.

On the economic front, Japanese inflation accelerated to 2.8% in February, data showed Friday, staying above the Bank of Japan’s 2% target. The year-on-year rise in prices excluding volatile fresh food was in line with market expectations and followed an increase of 2% in January.

The Euro Stoxx 50 Index gained 0.91% for the week. Dovish signals from central banks boosted risk-on sentiment, as well as a surprise reduction in Swiss interest rates.

The Bank of England (BoE) took another step toward cutting interest rates in the coming months after two of its most ardent hawks dropped their demands for hikes in borrowing costs. The BoE kept its key interest rate unchanged at 5.25% for a fifth consecutive time, striking a more dovish tone at its policy meeting. The UK’s FTSE 100 gained 2.70% for the week buoyed by the BoE’s greater optimism about the economy.

In other central bank news, the Swiss National Bank (SNB) unexpectedly reduced borrowing costs by a quarter of a percentage point to 1.5%—the first cut in nine years. Meanwhile, Norway’s central bank kept its policy rate unchanged at 4.5%.

Chinese equities were softer on the week, as concerns about the property sector continued to offset optimism about better-than-expected economic data. The Shanghai Composite Index ended the week 0.22% lower.

Central banks in emerging markets, Brazil and Mexico both cut rates this week. Brazil’s central bank reduced its benchmark interest rate by 50 basis points to 10.75% on Wednesday, in line with market expectations. While the Bank of Mexico trimmed its key interest rate by 25 basis points to 11%—the first reduction since it started tightening monetary policy in 2021.

Market Moves of the Week:

South Africa’s inflation rate climbed to 5.6% in February from a year earlier, compared with 5.3% the prior month, Pretoria-based Statistics South Africa said on Wednesday. The increase moved the inflation rate further away from the 4.5% midpoint of the South African Reserve Bank’s target range, likely supporting the central bank’s resolve to keep borrowing costs steady at a 15-year-high of 8.25% for a fifth straight meeting when they announce their policy decision next week on March 27.

February’s price-growth was largely driven by higher transport costs, housing & utilities and food and non-alcoholic beverages.

Stats SA also released retail sales data later in the week, showing that retail sales measured in real terms dropped by 2.1% year-on-year in January 2024. The largest contributors to the decrease were retailers in textiles, clothing, footwear and leather goods as well as retailers in pharmaceuticals and medical goods, cosmetics and toiletries.

For the week, the broader all-share index ended 0.36% higher, largely driven by gains in the resource sector (+3.76%). The rand weakened on Friday in line with other emerging market currencies as the U.S. dollar gained on global risk sentiment. The rand ended the week at 18.99 against the dollar, 1.4% weaker than the previous weeks close.

Chart of the Week:

The chart above illustrates current and expected interest rate paths for major developed markets. The Swiss National Bank (SNB) made history this week as the first developed market central bank to deliver a rate cut this cycle, while the Fed confirmed that it still plans to cut rates three times this year, even with stronger growth and stickier inflation in mind. The Bank of England laid the groundwork for a potential cut as soon as June while in contrast the Bank of Japan hiked rates for the first time in 17 years to officially put an end to its negative interest rate policy.

As always, we appreciate your support and value your trust in LNKD Investment Managers.