Global equity markets sold off sharply towards the end of the month following news of a new Coronavirus (COVID-19) variant, named Omicron by the World Health Organisation (WHO), identified by South African scientists.

*27 October to 27 November 2021
Source: Bloomberg

This followed on from a relatively volatile month as investors continued to weigh solid economic data and good earnings numbers from companies globally against the threat of higher inflation and the possible knock-on impact on monetary policy. The Johannesburg Stock Exchange (JSE) followed global markets, but a much weaker rand because of the above-mentioned factors saw it underperforming in United States (US) dollar terms. As expected, the financials index was hardest hit, followed by the listed property index.

Bond yields globally pushed upward for most of the month. Emerging market yields spiked in response to Omicron, while safe havens came down in response to the discovery of the new variant.

Economic Overview

In the US, data was mixed and inflation remained a persistent theme

On a preliminary basis, the IHS Markit Composite Purchasing Managers’ Index (PMI) for the US declined to 56.5 in November from 57.6 in October. This was below expectations and signaled a slowdown in output growth. The trade deficit widened to a new record high of $80.9 billion in September, slightly ahead of the estimated $80.5 billion, as exports fell 3% month-on-month while imports edged up a further 0.6% month-on-month. On the flipside, retail sales increased 16.3% year-on-year in October, well above forecasts. The unemployment rate fell to 4.6% last month – the lowest since pre-pandemic levels in March 2020. This was below market expectations of 4.8% as labour continued to recover amid an increase in demand. United States annual inflation surged to its highest levels in over 30 years at 6.2% in October 2021. This was above the forecast 5.8%. United States Federal Reserve officials stated the central bank would be prepared to adjust the pace of asset purchases and raise interest rates sooner than anticipated if inflation continued to run high. They also indicated an increase in uncertainty around the inflation outlook and suggested that significant price pressures could last longer than anticipated due to persistent supply bottlenecks.

Eurozone data was neutral to positive

Initial estimates showed the IHS Markit Eurozone Composite PMI rose to 55.8 in November, well above market expectations of 53.2, signaling a recovery in business activity. Consumer confidence deteriorated by more than expected. The trade surplus narrowed to €7.3 billion in September 2021, from €24.1 billion in the same month last year. This was below the market consensus of €10.7 billion as exports rose 10% year-on-year while imports climbed at a faster 21.6% year-on-year. The seasonally adjusted unemployment rate in the Euro area edged down to 7.4% in September, slightly below expectations. The number of unemployed persons decreased ~255 000. Annual inflation remained in line with estimates at 4.1% year-on-year in September – the highest since the global financial crisis in 2008. Policy makers indicated the European Central Bank’s (ECB) generous monetary policy support to the economy would need to be reassessed at some point in the future considering the improved inflation outlook. Officials also concurred that recent price pressure was expected to be more persistent than previously anticipated.

The United Kingdom (UK) recovery remained on track but unemployment and inflation continued to bite

Britain's gross domestic product grew 5.3% year-on-year in September, below a downwardly revised 6.6% rise in the month before. This was just below market expectations of 5.4%. According to preliminary reports, the IHS Markit/CIPS UK Composite PMI edged down to 57.7 in November, from 57.8 in the previous month. This was above the forecast 57.5 as new order intakes increased and business spending improved robustly. The GfK Consumer Confidence index rose to -14 last month, compared to expectations of -16. Retail sales volumes decreased 1.3% year-on-year yet again in October, above the market consensus of a 1.6% decline. The UK’s trade deficit widened to £2.8 billion in September, from a downwardly revised £1.9 billion. This was above forecasts of ~£3.4 billion, as imports rose 2.9% while imports advanced at a slower 1.2%. The unemployment rate declined even further to 4.3% in the three months to September 2021 but was still below market expectations. Annual inflation jumped to 4.2% year-on-year in October – the highest since December 2011. This was above the forecast 3.9%, with upward pressure coming from the cost of housing and utilities. Yet again, the Bank of England held its benchmark interest rate at a record low of 0.1% and kept its bond-buying programme unchanged. The central bank also said it is likely to increase rates over the coming months to return to the 2% inflation target.

China’s economic statistics generally topped estimates

China’s composite PMI for October inched higher to 51.5, for the second consecutive month of private sector grow as sporadic COVID-19 outbreaks in various parts of the country were contained. This was above expectations of 51. Retail sales rose by 4.9% year-on-year, following a 4.4% gain in the month before, and beating forecasts of 3.5%, as consumption remained strong. China's trade surplus surged to a record high $84 billion in October, easily ahead of the market consensus $65 billion. This was yet again the largest trade surplus since December 2020 as exports saw double-digit growth for 13 months running. In line with expectations, China’s surveyed urban unemployment remained unchanged 4.9% last month. The annual inflation rate shot up to 1.5% in October, from 0.7% a month before and ahead of the forecast 1.2%. This is the highest since September last year, owing mainly to a sharper rise in the cost of non-food products.

Japan’s data pointed to an improvement in underlying activity

As shown by flash estimates, the Jibun Bank Composite PMI reading for November was up to 52.5, from a final 50.7 in the previous month. This was ahead of expectations and signaled the second straight month of growth in private sector activity. Retail sales fell 0.6% year-on-year in September 2021, compared to a forecast drop of 2.3%. Japan posted an unexpected trade deficit of ¥67 billion last month – missing market estimates of a ¥310 billion surplus. This was the third straight deficit as exports rose 9.4% year-on-year while imports jumped 26.7% year-on-year. The unemployment rate was once again unchanged at 2.8%, as expected, with the number of unemployed persons falling ~20 000. The Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained the target for the 10-year Japanese government bond yield at ~0% during its October meeting, as widely expected. Policymakers maintained a bleak view on exports and factory output as supply-chain disruptions continued.

In South Africa, economic data was mixed

The RMB/BER business confidence index remained flat at 43 in quarter four of 2021 amid concerns over recurrent power cuts and rising inflationary pressures due to supply chain issues. The composite leading business cycle indicator dropped 2.3% in September, reversing from a 0.7% rise in August. The IHS Markit PMI fell to 48.6 in October, the lowest since July, from 50.7 in the previous month, pointing to a renewed contraction in the private sector. The trade surplus narrowed to R22.2 billion in September from a downwardly revised R42.3 billion in August. Retail sales rose by 2.1% year-on-year in September, following an upwardly revised 1.5% fall in August and against estimates of a 0.2% drop. The value of recorded building plans passed rose 28.6% year-on-year in September, the eighth straight month of increases. Mining production shrank 3.4% year-on-year in September, missing estimates of a 2% rise. It was the first decline in mining activity after six consecutive months of growth. Manufacturing production rose by 1.3% year-on-year in September, beating market expectations. Producer prices jumped by 7.8% in September, up from 7.2% in August and above market expectations of a 7.3% rise. This was the highest rate since February 2016. Consumer price inflation stood at 5% in October, unchanged from the previous month. The annual core inflation rate stood at 3.2% in October, also unchanged from September. The South African Reserve Bank raised its benchmark repo rate by 25 basis points to 3.75% at its November meeting. It was a close call, three members voted for a hike, versus two members for no change. This was the first hike in three years due to increased inflation risks, and despite a fragile recovery. The central bank’s quarterly projection model (QPM) model indicates further increases in each quarter of 2022, 2023 and 2024.

The medium-term budget review was also presented in November. Government cut its budget deficit outcome to 10% of gross domestic products (GDP) in 2021/21 fiscal year from 14% in February, mainly due to better tax collections from mines, as well as the higher rebased GDP number. The deficit is expected to fall to 7.8% the following year, from 9.3% in their previous forecast in February. Gross debt is projected to peak at 78.1% in 2025/26 versus 88.9% earlier. Implementation risk remains high.

Outlook

Global

• China continues to cloud the emerging market investment case given the uncertainty on future policy dynamics. However, selected countries within the emerging market bucket are forecasting accelerated growth in 2022, such as Indonesia, which is one of the few economies’ growth rates forecast to accelerate next year, as the region continues to catch up on the vaccination front and ease lockdown restrictions. 
• Precautionary savings will likely continue unwinding, although consumers’ spending power should be relatively lower compared to the first half of the year. 
• The dovishness of other central banks, such as the ECB compared to the US, has helped increase the relative attractiveness of the dollar. At this stage, we have a neutral view on a trade weighted basis, particularly due to the resurgence of COVID-19 cases in Europe. 
• Monetary policy is expected to remain accommodative until the end of the year, however, the reduction in asset purchases by the US Federal Reserve heading into next year will likely lead to less supportive liquidity dynamics.  
• Inflation is expected to continue rebounding and remain relatively sticky, particularly in the US.
• Commodities are set to remain elevated in the short-term amid relatively strong demand dynamics and supply-chain disruptions.   
• We believe that yield curve movements will likely have a mild upward bias, particularly as we expect economic growth to be relatively robust.

Local

• Economic growth is expected to have recovered in 2021 from a low base. The favourable global macroeconomic backdrop should benefit SA but the roll-out of vaccines and severity of restrictions in response to the “fourth wave” of COVID-19 infections remain key risk factors in the last month of the year.
• Policymakers and the private sector will continue to muddle through the complexity of implementing meaningful structural reform. Without these reforms, overall GDP will remain low by historical standards.
• The terms of trade boost seen in 2021 and a few other factors have improved the fiscal outlook over the short term, however, the longer-term outlook remains challenging. Fiscal pressures continue to be exacerbated by financial difficulties at state-owned enterprises, particularly Eskom.
• Domestic inflation is being affected by some of the global supply-side pressures with higher oil prices contributing to higher forecasts this year. Overall, inflation remains contained by relatively subdued domestic demand.
• Short-term interest rates are expected to lift but remain low by historical standards. Low inflation and accommodative global monetary policy should allow the Monetary Policy Committee to keep policy accommodative by historical standards. The baseline forecast now projects the repo rate at 5% in 2023.
• We expect the rand to continue enjoying some temporary relief before depreciating over the medium term, within a wide trading range.
• Despite an expected near-term improvement in the jobs market as the economy reopens, unemployment is expected to consistently trend higher and household income to remain weak.
• Successful implementation of growth-enhancing economic and fiscal reforms represents an upside risk to our baseline view.