Inflation remains at the centre stage of financial markets this year. U.S. inflation release this week, triggered the biggest daily decline in the S&P 500 in over two years and drove interest rate expectations higher. The road to the Fed’s 2 percent inflation target appears increasingly long and could include some economic pain along the way.
Although headline inflation continues to decline from its June peak of 9.1%, coming in at 8.5% in July and 8.3% now in August, the reading was ahead of the market’s expectation of 8.1%. More importantly, U.S. core consumer inflation which excludes food and energy, accelerated from 5.9% in July to 6.3% in August and was ahead of market expectations, highlighting broader price pressures and challenging the Fed to keep hiking interest rates. U.S. Federal Reserve Chair, Jerome Powell will now feel justified in taking even bigger steps with interest rate hikes to tamp down prices.
The World Bank released a statement this week that it estimates global GDP growth will slow to 0.5%, and contract 0.4% in per capita terms, meeting the technical definition of a downturn. The global economy may face a recession next year due to policy tightening that could yet prove inadequate to curb inflation, the World Bank said.
The British Pound closed at 0.88 to the U.S. Dollar this week, its lowest level since 1985 as fears of a looming U.K. recession and concerns that the Bank of England might deliver an interest rate hike of 50 basis points at its next meeting, smaller than what the Fed is expected to deliver.
U.K. inflation came in at 9.9% (year-on-year) in August, down from 10.1% in July, whilst core inflation (excluding fuel and energy) advanced from 6.2% to 6.3% in August. The U.K. economy also marginally expanded by 0.2% (as measured by GDP) in July, after contracting by 0.6% in June. Meanwhile, the unemployment rate unexpectedly fell to 3.6% in July from 3.8% in the prior month.
Economic sentiment in Europe declined to -60.7 in September, worse than expectations for a decline to -52.0 and the previous month’s reading of -54.9. Germany’s economic sentiment reading was the lowest since October 2008.
China reported better-than-expected industrial production numbers and retail sales for August. Industrial production rose by 4.2%, ahead of market expectations for a 3.8% increase; and retail sales climbed by 5.4%, also more than the market forecast for an increase of 3.5%. However, the property sector extended its slump. New home prices in 70 cities fell in August for the 12th straight month. New housing starts slumped 46% in August from a year ago compared with July’s 45% drop, reflecting a collapse in land sales and poor sentiment among property developers.
Chinese President, Xi Jinping held a bilateral meeting with Russian President Vladimir Putin this week. Putin began by blasting those who had attempted to “create a unipolar world” and expressed appreciation to Xi for “the balanced position of our Chinese friends in connection with the Ukrainian crisis”. President, Xi Jinping surprising response focused on bringing stability and positivity to a world in disarray. “China is willing to work with Russia to play a leading role in demonstrating the responsibility of major powers, and to instil stability and positive energy into a world in turmoil,” Xi told Putin. Putin has increasingly been seen as a junior partner to China.
In commodity news, a potentially catastrophic strike of railroad workers across the U.S. was averted this week after U.S. railroads and unions reached a tentative deal early Thursday morning, a breakthrough that risked adding supply-chain strains to the world’s largest economy. Prior to the deal, natural gas futures surged 10% on Wednesday, driven by fears that an extended strike will curb deliveries of coal, which generates about 22% of U.S. electricity.
Global equities remained under pressure this week. In the U.S., the Dow Jones (-4.13%), S&P 500 (-4.77%) and Nasdaq (-5.48%) suffered large drawdowns. Similarly, the Euro Stoxx 50 (-1.95%), FTSE 100 (-1.56%), Nikkei 225 (-2.29%), Hang Seng (-2.93%) and Shanghai Composite Index (-4.16%) were all weaker.
Market Moves of the Week:
Eskom chief executive, Andre de Ruyter said on Friday that a final decision on the power utility’s new $476 million World Bank loan to repurpose its Komati coal-fired power plant into a renewable station will be concluded before November’s COP27 climate summit. The World Bank loan is separate from the $8.5 billion financial package to help South Africa move away from its reliance on coal-fired power plants.
At the same time, U.S. President Joe Biden on Friday discussed relations with Russia in a White House meeting with South Africa’s Cyril Ramaphosa, who has resisted joining Washington’s campaign against Moscow for the war in Ukraine. The two leaders spoke privately in the Oval Office for more than an hour on topics that included trade, climate and energy, the White House said. South Africa was one of 17 African countries to abstain from the U.N. vote condemning Russia’s assault.
National Treasury pushed back against the extension of the R350 per month grant this week, into the Medium-Term Budget Policy Statement (MTBPS) later this year, saying that the only way to raise the R50bn needed would be to increase taxes.
The JSE All-Share Index ended the week down -3.09%, with all three of the major indices including Industrial (-3.66%), resource (-2.96%) and financial (-3.64%) shares weaker. By Friday close, the rand was trading at R17.60 to the U.S. Dollar, weakening by 1.64% over the week, as markets priced in a higher probability of the U.S. Federal Reserve hiking rates by 75 basis points or more next week.
Chart of the Week:
U.S. mortgage rates have topped 6% for the first time in almost 14 years. The average for a 30-year loan jumped to 6.02% from 5.89% last week, Freddie Mac said. The last time rates were above 6% was in November 2008. 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.