All eyes were on U.S. inflation data this week, with the release offering a mixed picture. On a year-over-year basis, inflation increased by 6.4%, higher than expected but at its slowest pace since October 2021. Annual core (less food and energy costs) inflation was 5.6%, also modestly above expectations but its slowest pace since December 2021. Housing accounted for nearly half of the increase.

At the same time, U.S. retail sales rose in January by the most in almost two years (see Chart of the Week below), and separate measures of manufacturing and building activity also came in better than expected. Combined with Tuesday’s inflation report, figures reveal an economy that is generally performing better than expected, increasing the odds that the Federal Reserve will keep raising rates for longer.

Geopolitical tensions between the U.S. and China continue to escalate, following the shooting down of an alleged Chinese spy balloon. China imposed fines and sanctions on two U.S. defence companies. Lockheed Martin and a subsidiary of Raytheon were added to a list of “unreliable entities” for selling weapons to Taiwan. The Biden administration said it suspects that three unidentified objects downed since last Friday served commercial purposes, not espionage, a judgment that may help ease anxiety over the alleged Chinese spy balloon that traversed the U.S. before being shot down.

European government bond yields headed toward recent multiyear highs due in part to hawkish comments from European Central Bank (ECB) policymakers. ECB President Christine Lagarde reiterated that interest rates would need to increase to control inflation.
In the UK, consumer price growth declined for a third consecutive month in January to 10.1%. Core inflation (excluding energy, food, alcohol, and tobacco) also eased to 5.8%. The slowdown in inflation increases the odds of the Bank of England downshifting to smaller interest-rate increases in March.

Meanwhile, the UK job market remained strong, with the unemployment rate remaining just off an all-time low at 3.7%, in line with expectations. Retail sales advanced in January by 0.5%, compared to expectations for a decline, as online sales, driven by holiday discounts, and falling average fuel prices boosted the monthly number.

China ramped up its support for its economic recovery, seeking to ease a squeeze in bank borrowing costs. The People’s Bank of China (PBOC) added a net 632 billion yuan into China’s fiscal system, its biggest ever cash injection, offering a short-term cash boost to lenders on Friday, after having just pumped one-year money into the system earlier this week.

Bloomberg reported that prices for new home sales in China remained roughly steady in January, breaking a 16-month slide, as demand received a boost from the government lifting of its zero-COVID regime. In recent months, Chinese authorities have rolled out a slew of support measures for the struggling sector as it focuses on restoring economic growth in China.

Japan’s economy rebounded less than expected in the final quarter of last year, expanding at an annualised rate of 0.6% in the fourth quarter of 2022, following a contraction in the third quarter.

Portugal announced that it will be ending its golden visa program for wealthy foreign property buyers as it tries to address a lack of affordable housing in the country. Chinese nationals accounted for almost half of the residency permits sold under the program.

It was a mixed week for global equity markets. U.S. and Asian markets were generally softer, whilst European markets posted positive gains. In the U.S., the Dow Jones (-0.13%) and S&P 500 (-0.28%) ended the week mildly negative, compared to the Nasdaq (+0.59%) which was positive. In Asia, the Nikkei 225 (-0.57%), Hang Seng (-2.05%) and Shanghai Composite Index (-1.12%) were all negative, compared to positive gains from the Euro Stoxx 50 (+1.83%) and FTSE 100 (+1.65%).

Market Moves of the Week:

South African headline inflation fell to 6.9% in January, in line with expectations. Core inflation (excluding energy & food) remained unchanged at 4.9% (year-on-year), below expectations. At the same time business confidence dropped to a level of 112.90 in January, compared to a level of 117.30 in December 2022.

The JSE All-Share Index (+0.32%) posted modest gains this week, driven higher by the industrial (+1.47%) and financial (+0.90%) sectors, whilst the resources sector (-2.07%) was weaker as commodity prices came under pressure. By Friday close, the rand was trading at R18.03 to the U.S. Dollar, depreciating by +0.64% for the week.

Chart of the Week:

U.S. retail sales rose in January by the most in almost two years, reinforcing the narrative that consumer demand remains strong. The 3.0% total retail sales growth for the month matched the highest estimate in a Bloomberg survey of economists, which had a median forecast of 2%. Consumers’ appetite to keep buying may bolster the Federal Reserve’s resolve to maintain its aggressive monetary tightening campaign. Source: Bloomberg; U.S. Department of Commerce.

Important Information

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any STRATEGIQ product. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. All charts and tables are shown for illustrative purposes only.

U.S. major indexes ended the week lower, giving back a part of the previous week’s gains. The week had relatively few important economic releases or other drivers of sentiment, however markets needed to digest the statements from FED officials regarding stronger jobs numbers and further possible rate hikes. Within the S&P500 Index, most sectors were relatively uniform, with the exception of energy shares being the notable upside outlier.

This week, US Federal Reserve officials addressed the economic outlook, and consensus appears to have developed that more work still needs to be done by the FED before it can declare victory in the battle with inflation. If tight labour markets persist, a higher peak in the FED’s policy rate may be needed. Markets appear to have digested this information, pricing in an additional rate hike, and priced out any rate cuts before the end of 2023.

The U.K. economy narrowly avoided a recession in 2022, as new data released this week shows zero growth between October and December, this despite a sharp 0.5% fall in economic output during December, largely a result of national strike action. Chancellor Jeremy Hunt said the figures showed “underlying resilience” but mentioned that “we are not out of the woods”. The BoE still expects the UK to enter recession this year but expects it will be shorter and less severe than previously forecast.

In Europe, concerns around an overly aggressive central bank policy and the possibility of a prolonged economic downturn saw European equities weaken over the week. ECB policymakers reasserted their hawkish stance and continued to warn against complacency in the fight against inflation. The German Finance Ministry expects the winter slowdown to be mild given stronger industrial order books and easing of supply bottlenecks. Industrial orders rose 3.2%, the biggest increase in more than a year, thanks to strong domestic and Eurozone demand.

More than 22,000 people are now known to have died in Monday’s catastrophic earthquakes in Turkey and Syria. The full extent of the disaster is still unclear at this point as rescuers search through rubble for survivors. The tremor ranks among the deadliest natural disasters of the century and has been further exacerbated by freezing weather conditions. Thousands of buildings were levelled by the two quakes, measuring magnitudes 7.8 and 7.5. A major international relief effort is in motion, the World Bank has pledged $1,78bn in aid to Turkey including financing to rebuild basic infrastructure.

Tensions between China and the US flared up again this week over the controversial spy balloon incident. Chinese stocks recorded a slight decline for the second straight week as investors were reminded of the geopolitical risks of investing in the country. The incident raised the prospect of further sanctions on China from the Biden administration. In economic news, China reported a pick-up in its consumer price index (CPI) up 2.1% in January from a year ago, this was in line with estimates. This latest data shows that China is unlikely to experience runaway inflation similar to the US or Europe, expectation is for supportive policy from the central bank to bolster the economy.

The Dow Jones (-0.17%), S&P500 (-1.11%) and Nasdaq (-2.41%) all ended the week lower. The Euro Stoxx 50 (-1.41%) and FTSE 100 (-0.24%) also closed the week in the red. In Asia, the Hang Seng posted a second consecutive negative return this week down (-2.10%), the Shanghai Composite Index (-0.08%) was marginally negative. Japan’s Nikkei 225 Index (+0.59%) was the sole major global index in the green, posting a modest gain.

Global energy shares rebounded strongly as international oil prices bounced over the week. Brent crude oil was up 8.40% this week and was trading at $86.43/bbl by Friday’s close.

Market Moves of the Week:

On Thursday evening, President Ramaphosa delivered his seventh annual State of the Nation Address (SONA). The proceedings were marred with disruptions by the EFF, who were subsequently removed from the sitting. There were a few key takeaways from the President’s speech:

• The declaration of a national state of disaster: Nkosazana Dlamini Zuma has already gazetted the declaration of the state of disaster, which will take immediate effect. The declaration comes as a result of the crippling energy crisis, and the existential threat to the economy as well as the social construct of the country. The Auditor General has been tasked to monitor funding and spending, to mitigate a repeat of the looting that took place during Covid.
• Cost of living crisis: National Treasury will consider the feasibility of urgent measures to limit the impact of load shedding on food prices. Social grants will also be increased to cushion the poor against the impacts of rising inflation.
• Unemployment crisis: Several programmes have been highlighted which will look to introduce young people to the world of work. An Employment Tax Incentive will be implemented, to encourage more businesses to hire young people.
• Crime prevention: A significant increase in funding will be made available for the police, the NPA, and the SIU.

A state of disaster effectively means that the government is given additional powers to resolve the crisis with less bureaucracy, regulation and can access extra funding.

The JSE ALSI came under some pressure this week, both from global risk off factors, and SA specific power issues. The index closed the week down (-1.56%). The rand sold off aggressively this week, trading at R17.92/$ by Friday close, depreciating 2.58% against the dollar. All but one of the three major sectors ended the week negative, resources (-3.51%) and financials (-2.75%), whilst industrials showed some resilience given the weaker rand, ending the week marginally higher (0.14%). The SA listed property sector also posted negative returns for the week (-1.89%), given the weaker economic backdrop.  

Chart of the Week:

From being termed “un-investable” in 2022, Chinese equities have received the lion’s share of Asia net equity flows in 2023. The lifting of the zero-Covid policy has encouraged international money managers to take a punt on Chinese stocks. $14bn in net equity flows over a 6-week period.  Source: Macrobond & EPFR Global.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends

The trio of big central banks, namely the U.S. Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) all raised rates at their early February meetings this week.

On Wednesday the Fed announced that it was raising its target rate by 25 basis points, as was widely expected. The hike was the eighth in succession. The Fed’s latest hike brings the Federal funds rate to a range of 4.50% to 4.75%. At the press conference following the interest rate announcement, Fed Chair Jerome Powell said that the economy’s disinflationary process had started but that it may be premature to declare victory against inflation. Investors seemed to interpret the overall tone of his remarks to be more dovish as major U.S. indices responded positively.

On Thursday the ECB followed by lifting interest rates by 50 basis points (bps) and pledged another hike by the same amount next month. The decision, which was also widely expected by markets, brings the lending benchmark deposit rate to 2.50%. The Eurozone unexpectedly grew in the fourth quarter, defying expectations that the ECB’s aggressive rate hikes in 2022 would spark a deep recession in the near term. The latest data showed the headline rate of inflation in the eurozone cooled more than expected in January to an annual rate of 8.5%, from 9.2% the previous month.

The Bank of England also hiked its interest rate for a tenth time in a row on Thursday. It also announced a 50 basis-point hike, as most had expected, to 4.0 percent, the highest level since late 2008. It warned that its battle against inflation was not over, but also said a UK recession was likely to be “much shallower” than forecast in November, largely due to a drop in energy prices.

U.S. job growth accelerated more than expected in January, boosted by a jump in leisure and hospitality employment. The January Labor Report released on Friday saw 517,000 jobs added in January, almost three times the Dow Jones estimate of 187,000. The unemployment rate fell to 3.4%, the lowest since May 1969. More importantly to the Fed, wage growth continued to soften, despite the strong job gains. Average hourly earnings grew 4.4% in January from a year earlier, down from a revised 4.8% in December. The buoyant labor market in January contrasts against spending and growth figures that suggested a more mixed picture of U.S. economic health at the end of last year.

Investors are also watching the fallout from this week’s plunge in shares of India’s Adani group after market losses amounted to more than $108 billion in the wake of a U.S. short-sellers report. The report accused Adani of accounting fraud and artificially boosting its share prices, calling it a “brazen stock manipulation and accounting fraud scheme” and “the largest con in corporate history”. Adani on Friday called the allegations “baseless”.

In corporate earnings news, Meta raised investor hopes on Wednesday by beating revenue expectations for the fourth quarter, but Thursday saw major tech companies Apple, Alphabet and Amazon all reporting earnings that disappointed in some way. Google parent Alphabet suffered from a decline in ad spending at YouTube, Amazon offered soft guidance while Apple’s sales fell more than analysts predicted during the holiday quarter, with lower-than-expected purchases of iPhones and Macs.

U.S. stocks fell Friday as a strong jobs report worried some investors that the Fed would need to keep hiking rates. Still, the S&P 500 notched its fourth weekly gain ending the week higher by 1.62%, the Nasdaq Composite gained 3.31%, posting its fifth-straight winning week, while the Dow was the outlier, ending the week down 0.15%.

Shares in Europe also rose for the week on hopes that central banks may be nearing the end of the most restrictive phase of this monetary tightening cycle. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 1.91% higher, while the UK’s FTSE 100 Index climbed 1.76%.

In Asia, Japan’s benchmark Nikkei 225 Index ended 0.46% stronger, while Chinese equities (Shanghai Composite) were marginally down (-0.04%) in the first full week of trading after the Lunar New Year holiday.

Market Moves of the Week:

The International Monetary Fund (IMF) this week raised its growth forecasts for the global economy slightly for 2023 to 2.9% from 2.7% in its October World Economic Outlook report. It also raised its forecast for South African growth by 0.1 percentage point to 1.2%. The driving forces behind the upward revision were China’s reopening and the ebbing of worldwide inflation pressures. The IMF noted that growth in South Africa is expected to halve in 2023, “reflecting weaker external demand, power shortages, and structural constraints”. The growth forecast stands in stark contrast to the 0.3% forecast made recently by the South African Reserve Bank.

South Africa’s energy crisis is expected to be top of the agenda for President Ramaphosa’s State of The Nation Address (SONA) on 9 February. The SONA aims to inform the public about the government’s planned priorities for the year ahead.

The JSE’s All-Share Index ended the week -0.68% lower, dragged lower by the resource sector (-3.45%). The rand weakened on Friday, along with other emerging market currencies, on the back of the stronger than expected U.S. jobs report. By Friday close the rand ended the week at R17.47/$.

Chart of the Week:

This is how the projected course of the fed funds rate over the next 12 months changed from Tuesday to Wednesday, according to Bloomberg’s analysis of fed funds futures. Fed Chair Powell reiterated that he thought it was easier to correct course after an over-tightening than to deal with the consequences of easing too soon. But in responses during his press conference he appeared to confirm to the market that if inflation does come down reasonably quickly, rates would follow.

Investor anxiety has been heightened recently by the war in Ukraine and rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

The fourth quarter U.S. gross domestic product (GDP) advance estimate released during the week reveals a strong and resilient economy, growing at a 2.9% annualised pace in the fourth quarter of 2022. This growth rate was slightly slower than the 3.2% recorded in the third quarter, but it exceeded market expectations of 2.6%. It’s the second consecutive quarter of growth, following the start of 2022 which saw the economy contracting for two consecutive quarters. The increase in GDP was driven by growth in private inventory investment, consumer spending, government spending, and non-residential fixed investment. Decreases in residential fixed investment and exports offset some of the growth.

The U.S. composite purchasing managers index (PMI), a measure that tracks both manufacturing and services activity, increased in January to 46.6 from 45 in December, indicating a slowing economy. Typically, a PMI reading of below 50 signals a contraction in business activity, while a reading above 50 signals expansion. The United Kingdom, Germany and Australia also showed signs of slowing business activity, with composite PMI readings of 47.8, 49.7 and 48.3 respectively. In contrast, the Eurozone’s composite PMI climbed to 50.2 in January from 49.3 in December, the first time it has been above the 50 mark since June 2022. This increase was primarily driven by an increase in activity in the services sector.

In company news, Microsoft announced a new multiyear, multibillion-dollar investment with the artificial intelligence lab OpenAI, the company behind the ChatGPT tool. The tech giant declined to provide a specific dollar amount, however, it is speculated that they were looking to invest an additional USD 10 billion into the start-up, following their previous investments made in 2019 and 2021. Public interest in OpenAI surged following its November release of ChatGPT, a text-based chatbot that can draft prose, poetry or even computer code on command. Microsoft said the goal of the renewed partnership is to accelerate the developments in artificial intelligence and aid both companies to commercialise advanced technologies. 

Stocks rose on Friday and completed a winning week fuelled by the better-than-expected economic growth.  All major U.S indices posted positive gains for the week. The tech-heavy Nasdaq index, rose 4.32% and closed out its fourth week of gains. It’s on pace for its best monthly performance since July 2022. The S&P and Dow rose by 2.47% and 1.81%, respectively, this week. The Euro Stoxx 50 and FTSE 100 indices ended with weekly moves of 1.41% and -0.07% respectively. In Asia, both the Nikkei 225 index and Hang Seng index secured strong positive weekly gains of 3.12% and 2.84% respectively. Financial markets in mainland China were closed for the Lunar New Year holiday, which started on January 21 and will reopen on Monday, January 30.

Market Moves of the Week:

The South African Reserve Bank’s Monetary Policy Committee (MPC) raised interest rates by 25 basis points this week, taking the country’s repurchase rate to 7.25% and the prime lending rate to 10.75%. It was highlighted that the vote was not unanimous. Three MPC members preferred the announced increase, while two voted for a 50 basis point increase. The raise is the eighth since the central bank began its hiking cycle at the end of 2021 when it adopted a combative stance to tame spiraling inflation.  The other key takeaways from the recent press conference were:

• The forecast for GDP growth for 2023 was set at only 0.3%. Given the scale of load shedding, the central bank estimates that it deducts as much as 2 percentage points from growth in 2023. A material reduction in load shedding could significantly raise growth.
• The forecast for headline inflation remained unchanged at 5.4% in 2023 and further decreased to 4.8% in 2024 and 4.5% in 2025. Headline inflation is only expected to sustainably revert to the mid-point of the target range by the fourth quarter of 2024.
• The forecast for core inflation is lower at 5.2% in 2023 (down from 5.5%) and 4.7% in 2024 (down from 4.8%).

 
The JSE all-share index rose by 1.92% this week, driven by gains in the industrial sector which gained 3.54%, followed by financials (1.70%). In contrast, the resource and property sectors ended the week with negative market moves of -0.48% and -1.56% respectively. Following a less hawkish South African Reserve Bank and stronger US GDP data, the rand ended the week at R17.19 to the U.S. dollar.

Chart of the Week:

The U.S Economy expanded at a faster than expected rate in the final months of 2022. The advance estimate released during the week showed the economy grew by a 2.9% annualised rate. It concludes a year of 1% annual growth even with the economy contracting for two consecutive quarters in the first half of 2022.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

U.S. indexes ended the week mixed, as fears of a recession weighed on investor sentiment. Investors interpreted weak U.S. economic data as bad news for equities, rather than a sign that the FED could turn more dovish. Treasuries posted positive returns as the yield on the 10-year benchmark note fell to its lowest intraday level in four months, before increasing slightly to end the week. The Dow Jones Industrial Average gave back a portion of its strong two-week performance, performing the worst of the major indexes. The tech-heavy Nasdaq Composite recorded modest gains, as softening inflation fears boosted growth stock outperformance. U.S. markets had a shortened trading week, as Martin Luther King Jr. holiday was observed on Monday.

On Thursday, the United States announced that it would send hundreds of armoured vehicles, missiles, and artillery shells to Ukraine, as part of a military assistance package worth $2.5 billion. The support comes as fears increase over the possibility that Russian forces could re-group and launch an aggressive attack over the winter. Since the beginning of the invasion in February 2022, the U.S. has committed $27.4 billion in security support and weaponry. 

The U.K released mixed data this week, monthly GDP expanded by 0.1% mom in November, above expectations of a 0.3% mom contraction. The December inflation print showed a moderation in headline inflation, CPI slipped to 10.5% from November’s 10.7%, while core inflation was unchanged at 6.3%. The key driver was lower gasoline prices. The November labour market report reflected that labour market tightness and wage pressure may have past their peaks, while wage growth continued to surprise to the upside. The unemployment rate still closed at record lows in the three months to November. Bank of England (BoE) Governor Andrew Bailey said that he still expects a “long, but shallow” recession in the UK this year.

In Europe, equity markets weakened after the European Central Bank (ECB) policymakers signalled their intention to continue an aggressive interest rate hiking cycle, reigniting fears of a prolonged economic slowdown. ECB President Christine Lagarde dismissed speculation that lower energy prices would moderate the pace of monetary policy tightening. Lagarde reiterated the ECB’s intentions of bringing inflation back to 2% in a timely manner in her speech at the World Economic Forum in Davos.

Nationwide protests commenced in France this week, as workers and unions took to the street to show their discontent with the proposed changes to the retirement age (increase from 62 to 64). Workers would now need to work 43 years to qualify for full pension pay-outs. The disruption was far reaching, many schools were closed and public transport came to a halt. Buoyed by the success of the strike action, unions have called for another day of protest on 31 January 2023.

China’s economic data held up better than expected in December, despite a major increase in the number of COVID infections. Q4 GDP came in at 2.9% yoy, above market consensus of 1.6%. This implies full-year 2022 GDP growth of 3.0%. Given these stronger numbers, and news that the reopening of the Chinese economy is proceeding faster than expected, expectation for 2023 GDP growth have been revised upward. The National Bureau of Statistics reported that China’s population did in-fact decline for the first time in 60 years, a drop of approximately 850,000 people.  

The Dow Jones (-2.70%), S&P500 (-0.66%) and Nasdaq (0.55%) ended the week mixed. The Euro Stoxx 50 (-0.74%) and FTSE 100 (-0.94%) ended lower. In Asia, the Hang Seng posted another positive return this week up (+1.31%), the Shanghai Composite Index (+2.18%) and Japan’s Nikkei 225 Index (+1.66%) also ended the week in the green.

Market Moves of the Week:

South African lawmakers are developing new emergency legislation to speed up energy projects to add generating capacity to the ailing electricity grid. These developments, announced on Tuesday by the National Energy Crisis Committee, will be tabled in Parliament to “allow projects to proceed more quickly and enable coordinated and decisive action.” This comes at a time when Eskom Holdings SOE Ltd is facing mounting pressure to deliver a sustainable end to loadshedding. The parastatal is also facing a barrage of legal action brought by opposition parties and civil society organisation alike.

South African headline and core inflation declined in December, surprising to the downside. Headline inflation fell from 7.4% yoy in November to 7.2% yoy in December. The core inflation print was marginally lower from 5.0% to 4.9%, contrary to expectation of a small increase. On the back of a more benign inflation outlook, expectations of the peak policy rate have been lowered, limiting the degree of further rate hikes.   

Intraday on Friday, the JSE ALSI briefly surpassed the 80,000-point mark, unfortunately these gains could not be sustained, and the index closed the week slightly negative (-0.08%). The rand came under some pressure this week, trading at R17.10/$ by Friday close, depreciating 1.49% against the greenback. Two of the three major sectors ended the week lower, resources (-0.47%) and financials (-0.80%), whilst industrials showed some resilience given the weaker rand, closing the week up (0.61%). The SA listed property sector also posted negative returns for the week (-0.36%).

Chart of the Week:

Despite attractive real yields, foreigners have been net sellers of South African government bonds. Over the past 3 years, non-residents have been offloading government bonds worth R60.6bn ($3.6bn). Foreign ownership now sits around 25%, the lowest it’s been in over a decade. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

2023 has started the year with equity markets rising, bond yields falling, and the U.S. dollar weakening, very different to the trends that prevailed in 2022. This week’s all important U.S. inflation release for December provided further evidence that the Federal Reserve’s efforts are working against inflation.

Consumer prices rose by 6.5% in December (year-on-year), marking the slowest inflation rate in more than a year, which is a small but necessary step towards easing some of the pressures. Core inflation, which excludes food and energy, was up 5.7% over the same period, also the smallest advance in a year. The figures, which matched forecasts, puts the Fed on track to downshift to smaller interest-rate increases, raising hopes for a soft landing for the U.S. economy.

Fed officials however continue to talk up interest rates. This week, two Fed officials made the case for pushing rates higher. Raphael Bostic said that he favours getting the benchmark to 5.00 – 5.25% before taking stock. Mary Daly gave a similar prediction, though she’s uncertain where exactly the peak will be. The central bank could hike by either 25 bps or 50 bps in February, she told the WSJ.

The World Bank cut its growth forecasts for most countries for 2023 and warned that any new adverse surprises could tip the global economy into a recession. The World Bank expects global growth to increase by 1.7% this year, about half the pace forecast in June.

U.S. 4^th quarter earnings season kicked off this week, with major banks including JPMorgan, BofA, Citi and Wells Fargo all reporting. Results were mostly positive, with JPMorgan, BofA and Citi beating earnings estimates. A common trend across all results saw banks bolstering net reserves, showing concerns around the 2023 macroeconomic outlook.

In China, the Covid surge hasn’t deterred Lunar New Year travel, which bounced 40% year-on-year in the first two days of the rush, according to government data. Data reported during the week saw Chinese exports decline by -9.9% (estimated -11.1%) and imports decline by -7.5% (estimated -10.0%) in December. Consumer prices rose by 1.8% on a year-on-year basis, in line with market expectations.

Interestingly, experts believe that China’s population probably shrank in 2022 for the first time in decades. A combination of record low births and increased deaths, partly due to Covid, suggest that the country could slip behind India as the most-populous nation in 2023, and its economy may struggle to overtake the U.S. in size. Official birth data is due next week.

UK GDP expanded by 0.1% in November, beating estimates for a 0.2% contraction. This upside surprise fuelled expectations that the economy might avoid a recession. The Office for National Statistics said that the economy would have to shrink by 0.5% in December to record a second quarter of economic contraction.

In the eurozone, the unemployment rate remained unchanged at 6.5% in November, in line with market expectations. Investor morale improved, with the economic sentiment index reaching its highest level since June last year but remains in negative territory.

Core inflation in Tokyo rose by 4.0% (year-on-year) in December, the fastest rate in 40 years, leading to speculation that the Bank of Japan (BoJ) could revise up its inflation forecasts and assess the viability of further monetary policy adjustments at its next meeting. The BoJ was again forced to conduct unscheduled bond-buying operations to keep the 10-year Japanese government bond yield around its new 0.50%.

It was a strong week for global equity markets. In the U.S., the Dow Jones (+2.00%), S&P 500 (+2.67%) and Nasdaq (+4.82%) all ended the week higher. Similarly, the Euro Stoxx 50 (+3.31%) and FTSE 100 (+1.88%) were positive. In Asia, the Nikkei 225 (+0.56%), Hang Seng (+3.48%) and Shanghai Composite Index (+1.19%) also ended the week higher.

Market Moves of the Week:

Eskom Holdings SOC Ltd. has won approval to increase tariffs by 18.65%, the most in more than a decade, despite the power utility saying it’s still below what is needed to help limit worsening power cuts. The utility had applied for a price increase of 32% to pay for more purchases from independent producers as it struggles to meet demand.

Following on from last week’s ANC meeting where policies were discussed, resolutions have alluded to a greater focus on job creation by the South African Reserve Bank (SARB) but stopped short of calling for its mandate to be changed. South Africa’s unemployment rate, which officially stands at 33%, is among the world’s highest.

The JSE All-Share Index (+3.22%) posted strong gains this week, reaching new all-time highs. Strong performances came from all three of the major sectors including resources (+3.64%), industrial (+3.21%) and financial (+3.17%) sectors. By Friday close, the rand was trading at R16.85 to the U.S. Dollar, appreciating by +1.08% for the week.

Chart of the Week:

The chart breaks down inflation into food, energy, and remaining goods and services. The inflation shock was initially driven by goods prices and energy but has now migrated to services (which includes the cost of shelter), along with erratic cost of food. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Friday’s employment report in the United States turned sentiment back in a positive direction as investors weighed a renewed possibility of the Federal Reserve (Fed) achieving a soft landing. The U.S. unemployment rate fell from 3.7% to 3.5%, while in December, the economy added a more-than-expected 223 000 jobs. Encouraging for investors, robust job growth appeared to be accompanied by slowing growth in average hourly earnings, which rose 0.3% in December – below expectations. There is however little in the report to change the Fed’s hawkish outlook in the near term.

Friday also brought news that the U.S. service sector slowed rapidly in December. The Institute for Supply Management’s index of services sector activity fell to 49.6 in December (November: 56.5), below estimates and into contraction territory (<50) for the first time since May 2020. 

The minutes of December’s Federal Reserve Open Market Committee (FOMC) were released this week. The committee’s tone was more hawkish than anticipated, with them emphasising that no FOMC members expect rate cuts in 2023, despite market pricing. Officials noted that a “misperception” of the Fed’s reaction function would complicate the bank’s goal of restoring price stability. The minutes also confirmed that the bank should slow the pace of rate hikes, but wants to remain ‘flexible’. “Participants reaffirmed their strong commitment to returning inflation to the Committee’s 2% objective,” the minutes said. “Many participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price stability goal.” On Thursday, the International Monetary Fund warned that the U.S. has not yet turned the corner on inflation and urged the central bank to stay the course on rate hikes.

The pace of inflation in Europe slowed in December, as energy prices fell. Eurozone inflation fell from 10.1% y/y in November to 9.2% y/y in December, however, core inflation, which strips out energy and food, rose a record 5.2% y/y. Investors nonetheless welcomed the news, sending European stocks higher. On the energy front, the cost of natural gas finally fell to levels last seen before Russia invaded Ukraine. In other European news, on 1 January  2023, Croatia formally adopted the euro as its currency, becoming the 20th member of the eurozone.

Most major indices ended the week in the green as global investor sentiment improved. In the U.S., the S&P 500 Index gained +1.45%, the Dow Jones rose +1.46% while the tech-heavy Nasdaq composite managed a +0.98% gain. Shares in Europe (Euro Stoxx 50) surged +5.91% on the back of positive inflation news, while the FTSE 100 jumped +3.32%. 

Japan’s stock market returns were negative for the week, with the Nikkei Index falling by -0.46%. Chinese equities soared (Hang Seng +6.08%) amid reports that Hong Kong would reopen its border to mainland China and that Beijing was thinking about relaxing curbs on borrowing for the struggling property sector. Gold rose +2.32% while Brent Oil sunk -8.70%.

Market Moves of the Week:

South Africa’s (SA) private sector activity managed to expand in December, despite intensified loadshedding, with S&P Global’s SA purchasing managers’ index coming in at 50.2 (November: 50.6). December’s print remains just above the 50-point mark that separates expansion from contraction. “The latest findings suggest that GDP figures are likely to disappoint in the fourth quarter following a more robust expansion in Q3,” David Owen, economist at S&P Global Market Intelligence, said.

The African National Congress (ANC) met on Thursday to fine-tune its policies and implement new ones, with electricity shortages, welfare grants, central bank independence, immigration rules and the management of state companies among the items on its agenda. A number of the policies discussed were reiterations of previous rulings the party took years ago but never executed. Some of the key proposals include: 

• Energy: The ANC recognised that SA’s energy crisis is the biggest obstacle to economic growth. They proposed a state-owned company continue to play a central role in sustaining the electricity supply and that the government consider natural gas and more nuclear power to ensure a transition to renewable energy doesn’t disadvantage the country.

• Welfare Grants: The National Treasury has warned that an indefinite extension of the current temporary monthly stipend could threaten the sustainability of public finances unless a permanent source of funding is found. The ANC suggested that measures be taken to contain state debt and said that the introduction of a wealth tax should be considered to reduce inequality.

• Central Bank: The documents state that the “historic anomaly of the private ownership of the South African Reserve Bank must be corrected, in a manner that does not enrich speculators  or overburden the fiscus.” While the ANC first decided in 2017 that the state should own the central bank, the process — which will require a change to the Reserve Bank Act and an agreement on the price of shares — has stalled.

The JSE rallied +5.22% over the week, following global markets higher. Resources (+7.14%) and Industrials (+6.98%) surged, while Listed Property (-0.67%) struggled to maintain its momentum. Over the week, the rand weakened against the U.S. dollar to end at R17.10/$. 

Chart of the Week:

2022 was the worst year for U.S. equities and bonds in the last 150 years, here are the total nominal returns in U.S. stocks and bonds, for each year from 1871 to 2022. Source: Financial Times. 

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Hawkish comments from the Federal Reserve and other global central banks over the previous week continued to be a key factor weighing on markets. The major U.S. indices ended the week mixed with the Dow Jones Industrial Average (+0.86%) recording a modest gain, while the S&P 500 (-0.2%) ended relatively flat. The tech-heavy Nasdaq Composite rose Friday, but still posted a weekly loss of -1.94%.

The personal consumption expenditure (PCE) price index rose 0.1% in November, bringing its year-over-year increase to 5.5%, the lowest since October 2021. The 12-month rise in the core (less food and energy) PCE index—which is the Fed’s preferred inflation metric—fell to a four-month low of 4.7%, providing some support for equity markets.

On Thursday, the Commerce Department upped its estimate of U.S. economic growth in the third quarter from 2.9% to 3.2%, driving the rise in gross domestic product were strong exports and healthy consumer spending.

Shares in Europe were stronger for the week amid signs of slowing inflation and an improvement in consumer confidence. In local currency terms, the pan-European STOXX Europe 50 Index ended 0.34% higher, while the UK’s FTSE 100 Index climbed 1.92%.

Sam Bankman-Fried was released on a $250 million bail package earlier in the week after making his first US court appearance to face fraud charges over the collapse of FTX, the cryptocurrency exchange he co-founded. Two of his top executives, Caroline Ellison and Gary Wang, pleaded guilty Wednesday to various criminal charges related to fraud at FTX, and are cooperating with the federal government. The implosion of FTX has shattered investors confidence as the ripple effects continue to be felt across the crypto industry. Overall, the crypto market has lost over $2 trillion in 2022 and popular digital coins such as bitcoin have fallen over 60% year to date.

China is likely experiencing 1 million Covid infections and 5,000 virus deaths every day, according to UK-based health data firm Airfinity, as it grapples with what is expected to be the biggest outbreak the world has ever seen. It’s been about two weeks since mainland China abruptly ended most Covid controls following nearly three years of strict containment measures. China has officially reported 14,285 cases and just seven deaths so far this week in stark contrast to Airfinity’s data modelling and numerous reports of overloaded hospitals and crematoriums. Chinese stocks were lower for the week as the spike in coronavirus cases weighed on the country’s growth outlook, with the benchmark Shanghai Composite Index ending -3.85% lower.

On Tuesday the Bank of Japan (BoJ) surprisingly widened the trading band for 10-year government bonds to ±0.5%, from ±0.25% to promote market functioning. BoJ governor Haruhiko Kuroda denied the latest adjustment amounted to a tightening of monetary policy. The central bank said it would allow 10-year bond yields to fluctuate to half a percentage point on either side of its target of zero, instead of the previous band of plus or minus 0.25 percentage points. Since the BoJ’s steps, the yen has strengthened broadly against a basket of currencies while Japanese equities (Nikkei 225, -4.69%) fell sharply over the week.

Market Moves of the Week:

In South Africa, equity markets ended relatively stronger for the week following recent market volatility. The African National Congress (ANC) held its 55^th national party conference over the weekend, where President Cyril Ramaphosa won re-election for a second five-year term as the party’s leader. The president was re-elected overcoming a scandal over cash hidden on his private farm, securing 2 476 votes while his opponent former Health Minister Zweli Mkhize secured 1 897 votes. Deputy party leader went to Paul Mashatile. The ANC led government faces a myriad of challenges, ranging from high levels of unemployment, low growth but most urgently the worsening electricity crisis.

On Friday, state-owned power utility Eskom reported a loss of R12,3 billion for the year to end March, its fifth successive annual deficit. The continued strain of high debt servicing costs, diesel costs, maintenance costs and an escalation in arrear debt from non-paying municipalities all weighing heavily on the performance of the power utility.

The JSE All Share Index gained 0.69% over the week, buoyed by gains in the financial sector (+4.42%). The rand enjoyed a strong week, spurred by the re-election of Ramaphosa as ANC president, ending at R17.04 against the U.S. dollar ahead of the four-day long Christmas weekend.

Chart of the Week:

(Source: Bloomberg) Online shopping has gone from being non-existent to becoming a multibillion-dollar industry. Buying online has become a common practice among millions of people around the world and after nearly three years of the Covid pandemic, online shopping is here to stay with growth being driven by both convenience and the search for competitive prices.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

The US Federal Reserve (Fed) announced a 50 basis point rate hike on Wednesday, taking the benchmark policy rate to the targeted range between 4.25% and 4.5%.This broke the past cycle of four consecutive 75 basis point hikes in recent months. The Fed also highlighted that it would do more to restrain the economy than previously expected. The point where officials expect to end rate hikes has been projected to be 5.1%, an increase from 4.6% when they last issued forecasts in September. Following the actions of their American counterparts, both the Bank of England (BoE) and the European Central Bank (ECB) also increased interest rates by 50 basis points, taking them to 3.5% and 2.0% respectively.

The US Bureau of Labor Statistics reported that inflation, measured by the Consumer Price Index (CPI), declined to 7.1% on an annual basis in November from 7.7% in October. This CPI reading came in below the market forecast of 7.3% and it was the second consecutive month where the actual value was below market expectations. Although inflation has moderated from its recent peak of 9.1% in June, it’s still higher than at any point since the early 1980s.

Similar to the US, inflation in the UK also came in slightly below expectations at 10.7% in November. According to a group of economists polled by Reuters, they had forecasted an annual increase in CPI of 10.9% in November after October saw an unexpected climb to a 41-year high of 11.1%. The Office for National Statistics said the largest contributors came from housing and household services (principally from electricity, gas, and other fuels), and food and non-alcoholic beverages, while the leading detractors came from transport, particularly motor fuels. The Office for National Statistics also reported that the UK’s jobless rate rose for a second consecutive month to 3.7% in the three months to October from 3.6% in the three months to September. There were also signs in the data presented that indicated that some of the inflationary heat in the labour market is cooling as the economy stumbles.

China’s economic activity fared worse than expected in November. According to the National Bureau of Statistics (NBS), retail sales fell by 5.9% in November, a much greater drop than the 3.7% decline forecasted.  Industrial production grew by 2.2% in November, missing the forecast of 5.6%. Unemployment also worsened last month rising to 5.7%, the highest level in six months. China’s economic slump happened before the government abruptly dropped its COVID zero policy.

All the major US indices ended the week lower following the release of the Fed’s December policy meeting statement. The Dow Jones fell by -1.66% followed by the S&P 500 which fell by -2.08% and the tech-heavy Nasdaq which fell by -2.72%. Euro Stoxx 50 and FTSE 100 indices closed with negative weekly moves of -3.52% and -1.93% respectively. Chinese stocks also fell this week because of the weaker-than-expected economic data released. The Shanghai Composite Index was down -1.22% and the Hang Seng index was down -2.20%. Japan’s Nikkei 225 also ended the week lower with a weekly market move of -1.34%.

Market Moves of the Week:

South Africa’s headline consumer inflation slowed to 7.4% year-on-year in November from 7.6% in October. Core inflation, which excludes the price of food, non-alcoholic beverages, fuel, and energy, remained unchanged on an annual basis in November at 5%. The headline consumer inflation peaked in July, reaching a 13-year high of 7.8%, a reflection of global trends as food and fuel prices soared. Since then, inflation has been on a downward trajectory.  Rates are expected to continue to rise in 2023, but the pace and scale of the hikes should slow if inflation maintains this current trend.

Eskom has confirmed that André de Ruyter has resigned as CEO of the state power utility amid the current worsening power crisis. Following his resignation, the power utility has dismissed reports that the board chairperson, Mpho Makwana, will take over as the interim CEO. De Ruyter’s last day at Eskom will be the 31^st of March 2023. This extends beyond his 30-day notice period while they search for a suitable candidate to replace him.

The JSE all-share index fell by -2.09% this week, driven by losses in the resource sector which fell by -3.34%, followed by industrials (-1.64%), then the financials (-1.58%). The property sector was the only positive of the week, with a weekly market move of 0.85%. The rand weakened this week, ending at R17.55 to the dollar.

Chart of the Week:

The Federal Reserve has been raising rates fast in 2022, and the impact may finally be showing in the headline inflation numbers. That has opened the door for smaller rate increases.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

U.S. equity markets gave up some recent gains over the week, as strong economic data revised sentiment that the Federal Reserve (FED) might look to soften their interest rate hiking program. The news is good from an economic standpoint, but has reduced optimism for a dovish pivot by the FED.

Investors focused their attention on the release of U.S. producer price inflation (PPI) data on Friday morning. The PPI figures surprised moderately to the upside, up 7.4% yoy versus consensus expectations of 7.2%, which sent stocks lower on the day. All eyes turn to the week ahead where investors cautiously await two important U.S. macro data points: the US consumer price inflation (CPI) print for November (released on Tuesday) and the final FOMC meeting on Wednesday which will determine the final interest rate decision for 2022.

Over the pond, UK Prime Minister Rishi Sunak announced that the UK has agreed to double imports of US gas over the next year, in an attempt to stabilise soaring energy prices. The agreement would look to bring down gas prices for British consumers and help mitigate Europe’s reliance on Russian energy. Under the agreement, the UK aims to import 9-10 billion cubic meters of liquefied natural gas (LNG), which accounts for approximately an eighth of the gas the UK uses every year. High levels of inflation and an ailing economy have added pressure on the newly formed Sunak government to take decisive action to curb rampant inflation.

Staying in the UK, services-related business activity contracted again in November, as new orders fell. The S&P Global/CIPS UK Services PMI Business Activity Index came in at 48.8 in November, remaining in contraction territory. Housing prices continued to decline for the third consecutive month and at the fastest pace since the 2008 financial crisis. Average housing prices were down 2.3% in November as mortgage rates surge in the UK.

The reopening and lifting of covid restrictions in China, which have weighed heavily on economic growth, is a positive development out of the region. Despite a rapid rise in cases, the Chinese government has eased various quarantine and lockdown measures this past week, allowing for asymptomatic or mild covid symptom cases to now quarantine at home, as opposed to centralised quarantine facilities. The rising number of cases, brought about by increased mobility, has raised concerns that China may face a difficult winter ahead from a public health perspective. The surge in recent cases has caused a shortage of medical supplies in Beijing. 

Renewed fears of a recession also caused European shares to fall this week as inflation and central bank policy continue to increase uncertainty. Not dissimilar to the US, Eurozone economic growth came in slightly stronger and above market expectations. The Eurozone economy expanded 0.3% for the third quarter, above estimates of 0.2%. This was boosted by business investments and an increase in household spending.  

The Dow Jones (-2.77%), S&P500 (-3.37%) and Nasdaq (-3.99%) all ended the week in the negative. Similarly, the Euro Stoxx 50 (-0.89%) and FTSE 100 (-1.05%) ended lower, but to a lesser degree. In Asia, the Hang Seng had another strong week up (+6.45%), the Shanghai Composite Index (+1.61%) and Japan’s Nikkei 225 Index (+0.44%) also ended the week in the green.

Global energy shares tumbled over the week as international oil prices reached their lowest levels since January, erasing the gains made by the sector since the invasion of Ukraine by Russia earlier this year. Brent crude oil was down -10.79% for the week.  

Market Moves of the Week:

The South African political environment remains ugly. Following the speculation last week that President Ramaphosa would likely resign given the findings of the section 89 panel, he has now mounted his defence by filing papers on Monday afternoon with the Constitutional Court, seeking to have the recommendations of the report reviewed, and potentially declared unlawful and invalid. The president’s leading argument is one of inadmissibility of evidence, which his legal team believes should have been rejected. The evidence in question was made public by former spy boss Arthur Fraser. The panel did not apply any of the mandatory legal provisions about the admissibility of evidence that may have been unlawfully obtained. The affidavit argues that the panel failed to properly engage with the hearsay nature of Fraser’s allegations, and incorrectly allowed for hearsay evidence to be included in their findings.

It is yet to be determined whether these findings have weakened the President’s position in the ANC. Given the support of the NEC over the past week, it would seem that he is still in the running for re-election later this month. However, the risk of him not sitting through a full second term has now increased as we await the hearing and ruling from the Constitutional Court.

South African GDP surprised on the upside, rebounding sharply over the quarter. Output expanded by 1.6% qoq in the third quarter, after a 0.7% qoq contraction in Q2. The latest increase in economic activity was broad-based, and well above market expectations for growth of 0.4% qoq. The recent GDP print has pushed the South African economy above the pre-pandemic level, the largest it has ever been, albeit by a relatively small margin.

Once again, SA was plunged into darkness with the implementation of Stage 6 loadshedding on Wednesday afternoon. The power utility stated that this was due to high number of breakdowns at various plants, as well as the need to preserve the remaining emergency generation reserves.  

Despite the political and energy uncertainty, the rand strengthened against the US dollar (-1.19%), trading at R17.34/$ by Friday close. The JSE All-Share Index (+0.30) posted a modest gain for the week, largely driven by the rand-hedged industrial sector (+1.11%). The softness in commodity prices and rand appreciation saw the resource sector ending the week in the negative (-0.95%), while financial ended relatively flat (+0.02%). The SA listed property sector also posted muted gains for the week (+0.20%).

Chart of the Week:

South African bond yields have risen to their highest level since the infamous “Nenegate” saga of 2015. Markets dread political instability, and the potential of another negative political outcome was quickly priced in. The 10-year sovereign rand-bond yield rose 74 basis points to 11.54%. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond short term news and gain exposure to industries benefiting from longer-term growth trends.