US markets staged a strong front for the month with the S&P 500 Index adding 4% as the tech space continued to fuel upside momentum while the broader market, as represented by the Russel 2000 Index (1.4%), remained under pressure. Nvidia (13.1%) and Meta (11.4%) were among the standout performers. In terms of central bank activity, the Federal Reserve (Fed) left its target range steady at 5.25% to 5.50% for a seventh consecutive meeting in June 2024, in line with forecasts. The decision was accompanied by the Federal Open Market Committee’s (FOMC) quarterly economic projections, which includes the fabled dot plot that shows its interest rate outlook. This dot plot shifted to less dovish, as expected, and it now suggests 25bps in cuts in 2024 (down from 75bps in March). Fed Chairperson, Jerome Powell, struck a similar tone to what he has in recent press conferences, stressing that the committee was prepared to act if there was a sharp deterioration in the labour market. He also indicated that "some" participants revised their forecasts post the CPI readings but that "most" did not. The CPI print came in lower than expected and prompted a strong positive market response. The options and futures markets are now both pricing in two cuts this year (in September and December), suggesting that the market may have run slightly ahead of itself.
The Eurozone delivered a lacklustre performance with the Euro Stoxx 600 Index falling by 0.9% as political uncertainty in France herded investors away from riskier assets. In addition, the European Central Bank (ECB) has moved ahead of the US, joining the likes of Canada, Sweden, and Switzerland in lowering rates. The ECB cut interest rates by 25bps, in line with expectations, marking a shift from nine months of stable rates after inflation declined by more than 2.5ppts since September 2023. However, domestic price pressures remain elevated, and the council said it aims to keep policy rates sufficiently restrictive and has not pre-committed to a particular rate path, noting that “interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission".
China was also under pressure in June, with the MSCI China Index down almost 2% as investors have been discouraged by intensifying geopolitical tensions with the Western bloc, sparking debate over “a rise in anti-China sentiment in America”. The US hiked tariffs on $18 billion worth of imports from China in May, targeting strategic sectors such as electric vehicles, batteries, steel and critical minerals, a move Beijing warned would "severely affect" relations between the two superpowers. Market participants have also been monitoring recent economic data and ongoing stimulus talks, with the focus shifting towards the highly anticipated Third Plenum meeting that will take place in July 2024. The Third Plenum carries historical significance and has previously spurred transformative periods of China’s economic policy.
Locally (JSE All Share: 3.1%; USD: 5.1%), equites, bonds and the rand saw a sizable rebound as heighted uncertainty surrounding the 2024 general election subsided with ANC President Cyril Ramaphosa announcing that the party had decided to invite other political parties to form a Government of National Unity (GNU). This followed days of speculation around a possible way forward after the party fell below 50% support in the 29 May national elections. Ramaphosa noted that the GNU will be committed to tackling the pressing issues that South Africans want addressed, including job creation, inclusive economic growth, the high cost of living, service delivery, crime, and corruption. While the long-awaited positive shift in sentiment initially drove the local bourse higher, skittishness returned to the market as the choosing of cabinet saw internal political dynamics return to the limelight. We caution that the external environment and political developments remain fluid, demanding a certain level of caution and a careful approach.
Economic Data Review
US policymakers await further certainty before cutting rates
Flash estimates showed that the S&P Global Composite PMI for the US rose to 54.6 in June, its highest level since April 2022, up from 54.5 in May, as per preliminary data. The service sector showed the most significant improvement, while manufacturing also contributed to economic expansion, although its growth slowed slightly. Retail sales edged up 0.1% in May (consensus: 0.2%), following a downwardly revised 0.2% fall in April, another sign that consumer sentiment is cooling. The trade deficit expanded to $74.6 billion in April, the largest since October 2022, moving from a downwardly revised $68.6 billion in March and below forecasts of a $76.1 billion gap. The unemployment rate rose to 4% in May from 3.9% in April, the highest since January 2022 and above expectations of the rate remaining unchanged. The annual inflation rate decreased to 3.3% in May from 3.4% in April, the lowest in three months, and below the 3.4% forecasted. The Fed kept the fed funds target range steady, as expected, for a seventh consecutive meeting. Policymakers do not believe it will be appropriate to reduce rates until they have gained greater confidence that inflation is moving sustainably toward the 2% target. Meanwhile, the dot plot showed that policymakers see only one rate cut this year and four reductions in 2025. In March, the FOMC was seeing three cuts in 2024 and three in 2025. The committee made no revisions to its GDP growth projections.
The ECB cuts rates ahead of the US
On a preliminary basis, HCOB Eurozone Composite PMI fell to 50.8 in June from 52.2 in May, considerably below market expectations of 52.5, but still signalled a fourth consecutive expansion in private economic activity. The expansion was solely carried by the services sector. Retail sales remained stagnant in April, following a 0.7% increase in March, and compared to forecasts of a 0.1% rise. The Eurozone posted a trade surplus of €15 billion in April, wider than €11.1 billion in the same month of the previous year and below market forecasts of €20 billion. Annual inflation in the Euro area was 2.6% in May (as expected), an increase from 2.4% in each of the two previous months. The ECB lowered rates by 25bps in June, in line with expectations, marking a shift from nine months of stable rates after inflation declined by more than 2.5pps since September 2023. However, domestic price pressures remain elevated, highlighting continued inflationary challenges. To address this, the Council aims to keep policy rates sufficiently restrictive, maintaining a data-dependent approach. The latest Eurosystem staff projections for both headline and core inflation were revised up for 2024 and 2025.
BoE keeps rates steady in a ‘finely balanced’ decision
Initial reports showed that the S&P Global UK Composite PMI fell to 51.7 in June, down from 53 in May, below market expectations of 53.1 and marking the weakest growth since November 2023. The slowdown was primarily driven by a deceleration in the service sector, despite a stronger performance in manufacturing. Retail sales increased 1.3% y-o-y in May, rebounding from an upwardly revised 2.3% drop in April and beating forecasts of a 0.9% decline. The UK’s trade deficit widened to a near two-year high of £6.75 billion in April, up from £1.10 billion in March, as imports rose 7.2% and exports fell 0.7%. The unemployment rate rose to 4.4% from February to April, compared to market forecasts and the previous three-month period’s 4.3%. The BoE decided to maintain the repo rate at 5.25% during its June meeting, as expected. Some policymakers noted that the decision not to cut rates was “finely balanced”. Recent economic indicators show inflation has returned to the target of 2%, driven by moderating inflation expectations and declining energy prices. GDP growth has exceeded expectations, but underlying economic surveys suggest that the pace of expansion slowed. The MPC acknowledged a looser labour market despite tight historical standards and is committed to maintaining a restrictive monetary policy until inflation risks diminish sustainably. They remain vigilant about persistent inflationary pressures and will adjust policy as necessary based on upcoming economic data and forecasts.
China’s concerns reignite over “effectiveness” of stimulus measures and deepening geopolitical tensions
The Caixin China General Composite PMI rose to 54.1 in May, up from 52.8 in April, reflecting the highest reading since May 2023. It was the seventh straight month of growth in private sector activity, with output growth accelerating in manufacturing and services. Retail sales rose by 3.7% y-o-y in May, exceeding market forecasts of 3% and accelerating from a 15-month low of 2.3% in April. China’s trade surplus widened to $82.6 billion in May from $65.6 billion in the same period a year earlier, exceeding market forecasts of $73 billion, due to exports growing much more than imports. The surveyed unemployment remained at 5% in May, unchanged from April’s five-month low and matching market forecasts. China’s annual inflation rate held steady at 0.3% in May for the second month in a row, missing market forecasts of 0.4%. It was the fourth straight month of consumer inflation, pointing to an ongoing recovery in domestic demand. The People’s Bank of China (PBoC) kept key lending rates unchanged at the June fixing, matching market expectations. The one-year Loan Prime Rate (LPR), the benchmark for most corporate and household loans, was maintained at 3.45%. While the five-year rate, a reference for property mortgages, was retained at 3.95% following a record cut of 25bps in February. Both rates are at record lows amid a fragile economic recovery that has reinforced calls for more support measures from Beijing. Central Bank Governor, Pan Gongsheng, mentioned that they will flexibly use various policy tools and that Beijing will prevent the yuan from overshooting.
Bank of Japan to ‘significantly’ scale back bond buying in shift on ultra-loose policy
Early estimates showed that the Jibun Bank Composite PMI fell to 50 in June 2024 from a final reading of 52.6 in May. It was the lowest figure since December 2023, as services activity contracted for the first time since August 2022, while the manufacturing sector expanded at a softer pace. Retail sales increased 1.2% in April, rebounding from a 1.2% drop in March. On an annual basis, retail sales grew 2.4% in April, accelerating from a downwardly revised 1.1% rise in March and surpassing market forecasts of 1.9% growth. Japan’s trade deficit decreased to ¥1.22 trillion in May 2024 from ¥1.38 trillion in the same month in 2023 and compared with market estimates of a ¥1.3 trillion shortfall. The unemployment rate stood at 2.6% in April, holding steady for the third straight month and aligning with market forecasts. The annual inflation rate accelerated to 2.8% in May from 2.5% in April – the highest reading since February. The BOJ unanimously maintained its key short-term interest rate at 0% to 0.1% at its June meeting, as was widely expected, after delivering the first rate hike since 2007 and ending eight years of negative rates in March. At the same time, the board indicated that it may consider how to start reducing bond purchases at its July meeting. Additionally, the board mentioned that Japan's economy had recovered moderately despite fragility in some areas.
Local sentiment recovered somewhat as elections angst dissipates
In April 2024, the composite leading business cycle indicator improved 2.4% m-o-m (following a decline of 1.1% in the prior month), marking a strong rebound in business activity. The SACCI Business Confidence Index dropped to 107.8 in May, and this was the second-consecutive monthly decline, with sentiment impacted by preceding fears over the national elections. Retail sales edged 0.6% higher y-o-y in April, slowing notably from an increase of 2.3% in March, but encouragingly above forecasts of a 1.8% decline. The trade balance in April amounted to a surplus of approximately R10.5 billion (below expectations of around R15 billion) as exports advanced 4.4%, while imports grew at a slower 3.8%.
Local mining production rose 0.7% y-o-y in April (compared to forecasts of a 0.9% increase), recovering from a drop of 4.8% in the previous month. This was driven by stronger output in chromium ore (20.8%), other non-metallic minerals (15.6%) and PGMs (16.9%). Manufacturing production grew 5.3% y-o-y (vs. forecasts of a 2% decline), marking the strongest increase in industrial activity in almost a year. The S&P Composite PMI edged higher to 50.4 in May (from 50.3 in April), signalling a further improvement in private sector activity. However, the Absa Manufacturing PMI dropped sharply to 43.8 in May (April: 54), implying a renewed contraction across the local manufacturing sector, due to slowing consumer demand.
As expected, annual CPI was unchanged at 5.2% in May, underpinned by steady pricing of food and non-alcoholic beverages, housing utilities, education, and household content and services. Nevertheless, this remains above the South Africa Reserve Bank (SARB’s) target of around 4.5%. Core inflation (which excludes the price of food, non-alcoholic beverages, fuel, and energy) was also unchanged at a three-month low of 4.6%. The SARB left its benchmark interest rate unchanged at 8.25% during its meeting in May, with policymakers emphasising the need to bring inflation firmly within the targeted range. CPI is now expected to reach the targeted level of around 4.5% by 2Q25, much sooner than initial forecasts which stated 4Q25. The inflation projection for this year was left unchanged at 5.1%.
Outlook
Local
- Global activity highlights diverging developments: US resilience fades, China’s recovery proves lethargic, while falling interest rates should support a modest recovery in much of the rest of the world. This comes ascentral banks have begun to cut interest rates earlier than the US, where the risk of sticky inflation has kept the Fed cautious. That said, global trade risk remains elevated and could result in adverse growth and inflation outcomes.
- South Africa’s outlook is viewed as more balanced, as ongoing structural reforms should incrementally reverse idiosyncratic inefficiencies. Nevertheless, the robustness of reform implementation hinges on the formulation of the seventh administration. The president’s cabinet appointments could provide a boost in confidence in the state, allowing for higher business confidence. Should this confidence usher in robust structural investment and spending on big-ticket items such as property, it would support higher-than-expected economic growth.
- We foresee real economic gains being gradual, with growth improving from 0.7% in 2023 to 1.6% by 2026. Therefore, current projections suggests that growth will not be at the required level to reverse fiscal slippage as unemployment remains elevated.
- However, sustained improvement in sentiment should reduce risk aversion, supporting lower borrowing costs and less depreciation of the rand. This would mean that inflation and economy-wide debt-servicing costs become less binding on activity, providing much-needed relief to an indebted state, households, and small businesses.
- We currently project inflation to average 5% this year, falling to 4.5% over the period to 2026. In line with this, we anticipate a 25bps cut to interest rates before year-end and for rates to fall to 7.5% over the medium term.
- Given prevailing political uncertainty, there is more fluidity in our projections than usual.
Global
- US growth has held up very well over the last few quarters despite a very aggressive interest rate hiking cycle. However, GDP for 1Q24 came out at a ‘disappointing’ 1.3%, versus consensus estimates of 2.5%. In the last Bank of America survey participants continued to favour a better outcome for the US economy, with 64% calling for a soft landing, 5% for a hard landing, and a slowing 26% calling for a no landing (economy to grow above potential).The long and variable lags of monetary policy are in progress, but thus far the impact has been relatively small (as most companies/individuals have locked-in low rates). We expect this soft vs hard landing rhetoric to continue throughout the year as new data becomes available. Our house view is for US growth to underperform consensus this year and next.
- Inflation has peaked but is proving to be sticky.
- The Fed’s interest rate hiking cycle is over. The question for 2024 becomes the pace and quantum of the cuts. Markets are now pricing in only two interest rate cuts by the Fed for 2024, versus the six cuts priced into the market just a few months ago. The ‘soft’ landing narrative is based on the Fed cutting rates fast enough so real rates don’t become too restrictive on the economy. Our house view has two cuts for this year, starting in 3Q24.
- In emerging markets, it is encouraging to see the PBoC maintaining loose monetary policy and further injecting liquidity into the banking system. However, the recovery will remain fragile in the absence of fiscal stimulus targeted at restoring confidence to the consumer and addressing property sector issues. With low levels of inflation and notable excess savings combined with attractive valuation multiplies, we are of the belief that selected opportunities remain in the Chinese economy and will be on the lookout for more palatable policy responses from fiscal authorities. Economic data has been encouraging lately, with GDP for Q1 surprising to the upside (5.3%) and PMI data also showing some improvements.
- With ‘rates higher for longer’, the US dollar has remained resilient. We expect the US dollar to remain well supported over the short term as interest rate differentials favour the greenback.
- Geopolitics are always important for asset markets, but the election calendar for 2024 is exceptionally busy. This year 76 countries will be voting, representing more than half of the world’s population and over 65% of global GDP. This, together with two major ongoing wars, could exacerbate uncertainty and volatility over the next few months. The impact from these developments, especially on oil, should be monitored very closely.
- Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.
