By Hashmeel Suka, Jalpa Bhoolia, Nico Els, Pritu Makan, and Jarred Sullivan
Global markets continued to exhibit heightened levels of volatility during May, and investors closely monitored key
events, including hawkish policy implementation as well as continued geopolitical tensions in Eastern Europe, which
fuelled fears over the risk of a global recession. Headlines out of the world’s second largest economy, China,
exacerbated concerns as stringent Covid-control measures weighed heavily on key economic readings, including retail
sales, industrial production and unemployment. However, a change of stance from some US Federal Reserve members
provided some reprieve for global markets towards the second half of May.
Wall Street was in a downtrend for most of the month, as risk-off sentiment continued to prevail throughout the
market amid fears that recent interest rate hikes to fight rapid inflation would tip the economy into a recession.
While the rate hike trajectory remains assertive with two additional 50bp hikes expected going forward, recent
commentary from Fed officials in line with the FOMC’s most recent meeting minutes offset some concerns, with
members noting that the US economy remains in a sturdy position to tackle inflation without triggering a recession.
The current cycle of hawkish moves is also expected to provide further flexibility at a later stage, with certain
Fed members even suggesting a pause after the next two hikes.
• We remain cautious on the returns for global equity markets, as the supportive monetary and fiscal policy
that helped propel equities last year continues to fade.
• Hawkish rhetoric from the US Federal Reserve compared to other major central banks has helped increase the
relative attractiveness of the dollar.
• Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding
government transfer payments, and as real disposable income is eroded by inflationary pressures.
• China’s economy continues to show signs of weakness with PMI’s falling below their neutral 50
mark. Further Covid outbreaks across the region added to declining investor sentiment as the government stands by
its economically detracting zero-Covid policy. Low relative valuations compared to other equity regions mean that we
keep a close eye on the region, however, for now, we remain neutral until we see signs of an improving economic
• Commodity prices remain elevated amid supply-side constraints and as conflict between Ukraine and Russia
continues. However, the slowdown of the world’s second-largest economy, China, has become a headwind for most
industrial commodity prices such as copper, reaffirming our view of a slowdown in global economic growth.
• While price pressures remain sticky, particularly against the backdrop of elevated tensions between Russia
and Ukraine, we continue to believe that the inflation profile will subside in the second half of the
• We believe inflationary pressures will dissipate in 2H22 as we assume supply chain bottlenecks will likely
unwind as trading conditions normalise. In addition, shelter price base effects from 2021 will likely lead to a
disinflationary backdrop – likely more towards the end of the year. Increasing headwinds for consumer demand
will also likely add to disinflationary pressures as regions such as Europe continue to struggle with high staple
prices such as food and energy.
US inflation slowed and communication from the Fed appears less hawkish
On a preliminary basis, the S&P Global Composite PMI for the US declined to 53.8
in May 2022, down from a final reading of 56 a month before. This was below expectations, as inflation continued
to weigh on consumer spending. Retail sales increased 8.2% y/y in April, well above the market consensus of
4.2%. The trade deficit increased to $109.8 billion in March, higher than the estimated gap of $107 billion, as
imports continued to rise amid robust demand and rising oil prices. The unemployment rate was unchanged at 3.6%
for April, marginally higher than market expectations of 3.5%. Annual inflation slowed to 8.3%, however, was
still impacted by elevated energy prices due to the Russia-Ukraine war. Policymakers raised the target for the
Federal Funds rate by half a point to 0.75%-1% during their May 2022 meeting, in an effort to contain surging
Eurozone inflation soars – ECB plans to hike rates for the first time in more than a
Initial estimates showed the S&P Global Eurozone Composite PMI decreased to 54.9 this month given the headwinds
associated with the Ukraine war, persistent supply chain constraints and rising inflation. This was below forecasts
of 55.3. The Eurozone posted a trade deficit of €16.4 billion in March 2022, compared to a surplus of
€22.5 billion in the same period a year ago, as imports increased 35.4% y/y, driven mainly by elevated energy
purchases, while exports rose at a slower 14% y/y. The seasonally adjusted unemployment rate in the euro area fell
to a record low of 6.8% in March, but was still above estimates. Annual inflation climbed to its highest level on
record to a revised 7.4% in April 2022. This is now more than three times above the European Central Bank’s
(ECB) target of 2%, as sanctions on Russia pushed natural gas and fuel prices to record highs. During its April
meeting, ECB policy makers agreed that a gradual normalisation of monetary policy should continue. The ECB also said
that it expects to conclude net asset purchases by the third quarter, leaving interest rates at record low levels.
UK data mixed with inflationary concerns at the
Britain's gross domestic product grew 6.4% y/y in March 2022, slightly below expectations. According to
preliminary reports, the S&P Global/CIPS UK Composite PMI fell to 51.8 in May, below the forecasted 56.5,
signaling the slowest rise in business activity since the recent phase of recovery began in March 2021. Retail
sales volumes declined to 4.9% y/y, better than expectations of a decrease of 7.2%. The trade deficit increased
to £11.55 billion in March, from £9.2 billion in the previous month, as exports to European Union
nations slowed to 1.3%. The unemployment rate was better than expected as it edged lower to 3.7%, and Annual
inflation also increased in line with expectations to 9% in April. As per its May 2022 meeting, the Bank of
England raised the key Bank Rate by 25bps to 1%, as widely expected. Recent events, such as the invasion
of Ukraine by Russia, are likely to heighten both the peak in inflation and the adverse impact on economic
activity by further pressuring household income.
Data out of China weighed on by stringent Covid-control
China’s composite PMI plunged further to 37.2 in April from 43.9 a month before. This was well below
expectations of 43.8. Retail sales declined 11.1% y/y, substantially lower than estimates of a 6.1% decrease.
China’s trade surplus jumped to $51.12 billion from $40.89 billion in the same period a year before,
beating forecasts of $50.65 billion. Exports decreased 3.9% y/y, and imports fell 0.01% y/y. The surveyed urban
unemployment rate was up to 6.1% in March – marking the highest jobless rate in over two years.
China’s annual inflation accelerated to 2.1% amid logistic disruptions caused by stringent Covid-19
measures. This was slightly ahead of the expected increase of 1.8%.
Mostly positive data out of Japan with the central bank maintaining a
flexible policy stance
Flash estimates showed that the Jibun Bank Composite PMI reading for Japan rose to a five-month high of 51.4 in
May 2022, from a final 51.1 in the previous month. This was ahead of expectations. Retail sales increased to
0.9% y/y in March, ahead of the estimated 0.4%, underpinned by recovering consumption from improved Covid-19
circumstances as well as rebounding general merchandise. Japan posted a trade deficit of ¥839 billion
compared to consensus estimates of ¥1.1 trillion, as imports jumped 28.2% y/y. The unemployment rate fell to
2.6% - the lowest in over a year. This slightly exceeded expectations of 2.7%. As widely expected, 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%. The central bank also said that it expects the economy to grow more
slowly, amid headwinds from a resurgence in Covid-19 cases and a rise in commodity prices due to the war in
Ukraine, however, it was reiterated that extra easing measures could be implemented if needed.
South African data mainly better than expected
The composite leading business cycle indicator rose by 0.6% in March, following a 0.1% decline in February. The
seasonally adjusted Absa PMI decreased to 50.7 in April from 60 in the previous month. The latest reading
pointed to the ninth straight month of expansion in manufacturing activity, albeit the weakest since July 2021
when unrest and looting unfolded. Private sector credit grew by 5.89% y/y in March, after a 3.62% gain a month
earlier. This marked the ninth straight month of increase, and the strongest rise since May 2020.The value of
recorded building plans passed rose by 15.9% from a year earlier in March, after a downwardly revised 19.3% fall
in the prior month. Retail trade rose by 1.3% in March, compared with a 0.9% fall in the prior month, beating
market estimates. The trade surplus rose to R45.86 billion in March from an upwardly revised R11.5 billion
in February, well above market expectations. Exports surged 30.9% while imports increased at a slower
Mining production plunged by 9.3% y/y in March, after a downwardly revised 5.8% fall in the previous month. It
was the steepest decline in mining activity since June of 2020. Manufacturing production fell by 0.8% y/y in
March, reversing from an upwardly revised 0.7% growth in the prior month and beating market expectations of a
Consumer price inflation stood at a three-month high of 5.9% in April, matching market expectations. This marks
the 12th consecutive month in which inflation has been higher than the midpoint of the SARB’s target
range. Main upward pressure came from fuel, food and housing. Core inflation, which excludes prices of food and
energy, printed at 3.9%, the highest since October 2019, from 3.8% in the prior month. The South African Reserve
Bank raised its benchmark repo rate by 50bps to 4.75% at its May meeting, as widely expected. Policymakers added
that risks to growth were assessed to be balanced, while the risks to the inflation outlook were to the upside.
Headline CPI forecast has been revised higher to 5.9% in 2022 (vs 5.8% in March), 5% in 2023 (vs 4.6%) and 4.7%
in 2024 (vs 4.6%). Growth projections were cut to 1.7% in 2022 from 2%. More hikes are expected.
Standard & Poor Global Ratings revised South Africa’s sovereign credit rating outlook to positive from
stable, citing the favourable terms of trade, contained fiscal expenditure and improved fiscal metrics as key
reasons for the outlook upgrade.