Global Market Overview | March 2024

Investors also continued to monitor monetary policy activity across the globe, with recent updates to market forecasts (pertaining to interest rate cuts) now resulting in a more aligned view between investors and key central bank officials. Despite the generally positive mood across equity markets, geopolitical tensions in major regions continued to create some hesitation.

The US market continued to dominate global equities with the S&P 500 adding 3.5% at the time of writing. While we did see an improvement in the broader market with the Russel 2000 Index up 3%, the stellar performance was once again driven by technology mega caps amid a standout performance from Nvidia (14.7%) and Alphabet (8.6%). In terms of central bank activity, the Federal Reserve held steady on interest rates at the conclusion of its March meeting and stuck with its forecast for three interest rate cuts this year (officials believe the federal funds rate would end 2024 at 4.5% to 4.75%, equivalent to three quarter-point cuts) despite sticky inflation. Fed Chair, Jerome Powell, also noted that continued strength in the labour market wouldn’t be a reason to hold off on lowering interest rates. However, an unexpected weakening in the labour market may warrant additional policy intervention. Officials also upwardly revised their economic growth forecast for 2024 to 2.1%, well above the prior estimate of 1.4%, with growth in 2025 expected to come in at 2% (prior 1.8%).

Moving over to the Eurozone (Euro Stoxx 600 Index: 3.6%), the European Central Bank (ECB) maintained its interest rates at historically high levels during its March meeting – the main refinancing operations rate remained at a 22-year high of 4.5%, with the deposit facility rate unchanged at 4%. ECB President, Christine Lagarde, indicated that officials may begin to loosen policy in June but are unable to commit to a particular path of interest rate cuts, despite signs that wage growth has peaked in the Eurozone. Future decisions will remain data dependent as officials assess the latest economic readings in each meeting. The ECB also lowered its inflation forecast for the next few years, and downwardly revised growth expectations for 2024, off the back of anticipated continued economic pressure during the rest of the year.

China’s authorities have set their annual growth target at 5%, acknowledging the current challenges being faced in the region and citing that policy support and effort will be required “from all fronts” to boost its flagging economy. This target matches that of 2023 and was expected by the market, but still presents a challenge as consensus for actual economic growth this year is still stuck at the 4.6% mark. This would require major additional intervention as the country continues to battle a pronounced slump in the property market, geopolitical instability, and deflationary pressures. The equity market continues to digest these proposals with a level of scepticism, reflected in the MSCI China Index (-1.6%) returning a relatively soft performance in March.

Looking at the local market, the All Share Index was able to gain some momentum (1.8%, USD: 2.9%), however, sentiment remains fragile due to ongoing concerns about energy insecurity and general infrastructure challenges, with the upcoming general election being flagged as a high-risk event (particularly among offshore investors). As expected, the South African Reserve Bank (SARB) unanimously decided to keep its key repo rate at 8.25% at its March meeting – marking the fifth consecutive meeting at 2009-highs. The bank highlighted that risks to the inflation outlook were skewed to the upside. Forecasts now indicate that inflation is expected to reach the midpoint of its target range only by the end of 2025, later than previously predicted. The SARB also maintained its growth projections at 1.2% for 2024 but upwardly revised expectations to 1.4% for 2025 (prior 1.3%).


Economic Data Review

US interest rates expected to decrease by the end of 2024

Flash estimates showed that the S&P Global Composite PMI for the US edged down to 52.2 in March, compared with February’s eight-month high of 52.5 – this was better than expectations. The latest reading still indicated a solid monthly improvement in business activity. Retail sales increased 1.5% y-o-y in February (ahead of expectations), following a flat reading in January. The US recorded a $67.4 billion trade gap in January (against expectations of $63.5 billion), the biggest in nine months, compared to an upwardly revised $63.5 billion gap in December. The unemployment rate rose 0.2% to 3.9% in February, touching the highest level since January 2022 and surpassing market expectations of 3.7%. The annual inflation rate unexpectedly edged up to 3.2% in February, compared to 3.1% in January and above forecasts of 3.1%. The Federal Reserve kept the fed funds rate steady, as expected, for a fifth consecutive meeting in March. Policymakers still plan to cut interest rates three times this year, similar to the quarterly forecasts in December. The plot also indicated three cuts in 2025, one fewer than in December, and three more reductions in 2026.

ECB expected to start rate cuts by mid-year and maintain its data-dependant approach

On a preliminary basis, HCOB Eurozone Composite PMI rose to 49.9 in March, up from 49.2 in the previous month and slightly surpassing market expectations of 49.7. The latest reading was the highest for nine months and indicated a near-stabilisation of business activity, with service sector output rising for the second consecutive month in March after six months of decline. Retail sales dropped by 1% y-o-y in January, following a revised 0.5% contraction in December and compared with market expectations of a 1.3% fall. The region recorded a trade surplus of €11.4 billion in January, compared with a deficit of €32.6 billion in the same period last year. The unemployment rate edged lower to 6.4% in January, the lowest on record, from 6.5% in December, matching market forecasts. The Consumer Price Inflation (CPI) rate in the Euro area was confirmed at 2.6% y-o-y in February, the lowest rate in three months but still exceeding the ECB’s target of 2%. The ECB maintained its interest rates at historically high levels during its March meeting (as expected), as policymakers balanced concerns over a looming recession with persistently elevated underlying inflationary pressures. The ECB has also revised its growth projection for 2024 down to 0.6%, anticipating continued subdued economic activity soon. However, they foresee a subsequent uptick in growth, with the economy expected to expand by 1.5% in 2025 and 1.6% in 2026.

UK inflation data continues to support expectations for monetary policy contraction

Initial reports showed that the S&P Global UK Composite PMI edged down to 52.9 in March from 53 in February and just below expectations of 53.1. Still, it was the fifth month of expansion in the country’s private sector, thanks to a solid increase in output. Retail sales volumes in the UK declined by 0.4% y-o-y in February, following a downwardly revised 0.5% increase in January and compared with market expectations of a 0.7% decline. The UK’s trade deficit widened to £3.1 billion in January 2024 (softer than expectations of a deficit of £2.3 billion), up from a three-month low of £2.6 billion recorded in the prior month – this was propelled by a 1.4% surge in imports coupled with a 0.7% rise in exports. The unemployment rate edged up to 3.9% between November 2023 and January 2024, largely unchanged from the previous quarter but slightly above the market consensus of 3.8%. The Bank of England (BoE) maintained the bank rate at 5.25% (as expected) during its March meeting, its highest level since 2008, as policymakers awaited clearer signals indicating that the country’s persistent inflationary pressures had subsided. The announcement came a day after data revealed that the country’s CPI rate had dropped to 3.4%, its lowest level in almost two-and-a-half years. Governor Bailey expressed optimism about Britain’s economic trajectory, suggesting that conditions were favourable for the central bank to begin reducing interest rates, but stressed the necessity for greater certainty regarding the economy’s control over price pressures.

Chinese authorities say policy support and effort “from all fronts” is needed to boost its economy

The Caixin China General Composite PMI moderated for the second straight month to 52.5 in February 2024 from 52.7 in January. It was the 14th straight month of expansion in services activity but the softest pace since last November amid a subdued increase in overall new work. Retail sales increased by 5.5% y-o-y in January to February 2024 combined, topping the market consensus of 5.2% and following a 7.4% rise in December. China’s trade surplus increased to $125.16 billion in January to February 2024, surpassing market forecasts of $103.7 billion, as exports rose more than imports. The surveyed urban unemployment rate averaged 5.3% in January to February 2024. China’s consumer prices rose by 0.7% y-o-y in February, above market forecasts of 0.3% and a turnaround from the sharpest drop in over 14 years of 0.8% in January. The People’s Bank of China (PBoC) kept benchmark lending rates unchanged at the March fixing, as was widely expected. The one-year Loan Prime Rate (LPR), the benchmark for most corporate and household loans, was retained at 3.45%. Meanwhile, the five-year rate, a reference for property mortgages, was maintained at 3.95% following the biggest-ever reduction of 25bps in February. Both rates are at record lows, as the central bank seeks to spur an economic turnaround in the face of headwinds from the property sector and a near-record low in consumer confidence.

BoJ scrapped the world’s last negative interest rate and further unconventional stimulus tools

Early estimates showed that the Jibun Bank Composite PMI increased to 52.3 in March from a final reading of 50.6 in February. It was the highest reading since August 2023, pointing to the third consecutive month of growth in private sector activity, as service providers expanded the most in ten months, while the manufacturing sector contracted at the softest pace in four months. Retail sales rose 2.3% y-o-y in January, slowing from an upwardly revised 2.4% gain in December and matching the consensus forecast. Japan’s trade deficit decreased sharply to ¥379.4 billion in February (compared with market estimates of a gap of ¥810.2 billion) from ¥928.9 billion in the same period last year. The unemployment rate stood at 2.4% in January 2024, unchanged from the previous month which was also the consensus forecast. The annual inflation rate climbed to 2.8% in February 2024 from 2.2% in the prior month, accelerating for the first time in four months and reaching the highest since last November. The Bank of Japan (BoJ) raised its key short-term interest rate to around 0% to 0.1% from -0.1% in March 2024, matching market expectations and halting its eight years of negative interest rates. It is the first interest rate hike since 2007. Furthermore, the BoJ will slowly reduce the pace of corporate bond buying before fully stopping it in about a year. Still, the bank added that in case of a rapid rise in long-term rates, it would make nimble responses, such as increasing the amount of Japanese government bond purchases.

Local interest rates remain on hold for a fifth time in a row

The composite leading business cycle indicator in South Africa went down 0.5% m-o-m in January 2024, the third consecutive month of decline, although slightly easing from a downwardly revised 0.7% fall in the previous month. In contrast, the SACCI Business Confidence Index rose to a one-year high of 112.3 in January, up from 112.1 in the prior month, underpinned by increased merchandise imports, higher sales of new vehicles, a rise in tourism, and an uptick in retail sales. Retail sales fell by 2.1% in January compared to the same month a year earlier, following an upwardly revised 3.2% increase in the prior month. The decline is mainly attributed to a fall in retail sales for textiles, clothing, footwear, and leather goods (-6.6%), pharmaceuticals (-4.4%), hardware, paint and glass (-4.3%) and food, beverages and tobacco (-1.1%). A trade gap of R9.4 billion was recorded in January, compared to an upwardly revised surplus of R15.6 billion a month before and worse than market forecasts of a R5.2 billion shortfall.

Local mining production dropped by 3.3% from a year ago in January, following a downwardly revised 0.2% increase in the prior month, against market forecasts of a 0.2% rise. It marks the first decline in mining activity and the steepest since July last year after three consecutive months of advances. Manufacturing production rose by 2.6% y-o-y in January, following an upwardly revised 1.3% increase in the prior month and surpassing market forecasts of a 0.7% growth. In February, composite PMI edged up to 50.8 (vs a reading of 49.2 a month before), indicating a slight improvement in the country’s private sector following a two-month period of negative readings, mainly due to stabilised new business volumes after experiencing significant declines over the past four months. Manufacturing PMI increased to 51.7 in February, from 43.6 in the previous month. The latest reading indicated a renewed expansion in factory activity in February, the strongest since early 2023, following a steep contraction the month before.

CPI rose to 5.6% in February, up from January’s 5.3%, slightly above market forecasts of 5.5%, and moving farther from the central bank’s preferred 4.5% midpoint of the 3% to 6% target range. Core inflation (which excludes the price of food, non-alcoholic beverages, fuel, and energy) rose to an eight-month high of 5% in February, up from 4.6% in the prior month, and ahead of market expectations of 4.8%. The SARB unanimously decided to leave its key repo rate unchanged for the fifth time in a row at 8.25% on 27 March 2024, as was widely anticipated. This decision keeps borrowing costs at their highest since 2009, amid uncertainty regarding the inflation outlook.


Outlook

Local

• The resilient US growth expectations, China’s ability to achieve its growth target of 5% and the EU’s recovery being ushered by interest rate cuts should all bode well for the external demand for SA’s exports.
• However, even as loadshedding becomes less of a binding constraint, logistical issues will continue to curtail SA’s ability to take full advantage of an improving trading partner environment. Therefore, we project local growth of 1.6% in 2025 and 1.8% in 2026, well-below what is required to reduce fiscal pressures through an alleviation of unemployment.
• Fortunately, inflation is expected to continue decelerating over the course of the year, which would support lower nominal interest rates and an improvement in household spending growth. Furthermore, while SA’s risk premium could move further away from the long-term average ahead of the elections, a reform-friendly outcome should support improved risk sentiment and a recovery in the rand, which would entrench disinflation in 2H24. That said, upside risk prevails, as hostile weather and cost passthrough pressures could result in shallower disinflation than currently predicted.
• We currently project headline inflation to average 5.2% this year, before falling towards target in 2026. Such a profile is necessary to support a moderation in the nominal repo rate to 7% in 2026, but real interest rates will remain higher than the pre-pandemic experience as the Fed has recently reduced its anticipation of rate cuts over the longer run and Japan has recently shifted to a positive interest rate regime.
• The higher-for-longer interest rate thesis has implications for fiscal policy, which should continue to struggle with meaningful consolidation as the tax base remains narrow and the difficulty in warding off spending pressures persists. Even though tapping into GFECRA has allowed for a lower debt to GDP level over the forecast, these pressures suggest that debt will likely not peak as Treasury projects.

Global

• US growth has held up very well over the last few quarters despite a very aggressive interest rate hiking cycle. In the last Bank of America survey, participants stopped predicting a global recession for the first time since April 2022, with 62% calling for a soft landing, 11% for a hard landing, and a growing 23% 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 in 2024.
• Inflation has peaked and is trending lower. We are now in the ‘last mile’ (to get inflation from 3% to 2%), and many economists expect this to take some time. This month confirmed the stickiness of getting inflation lower, with US CPI surprising to the upside. However, shelter inflation should continue to trend lower, causing inflation to continue its downward trend.
• The Fed’s interest rate hiking cycle is over. The question for 2024 becomes the pace and quantum of these cuts. Markets are now pricing in about three-and-a-half interest rate cuts by the Fed for 2024 and is much closer aligned to the Fed, versus the six cuts priced into the market just two 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.
• In emerging markets, it is certainly 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 the 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. Key outcomes from the National People’s Congress earlier this month were also encouraging with the GDP growth target for 2024 around 5% and issuing more ultra-long special sovereign bonds, all helping to improve sentiment.
• 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.