Global Market Overview | May 2024

Global markets staged a recovery in May (MSCI World Index: 3.8%, MSCI Emerging Markets Index: 1.4%) amid an improvement in the risk environment with developed markets outperforming once again. While interest rate expectations (particularly in the US) caused angst among investors in April, recent commentary from the US Federal Reserve (Fed) in conjunction with slowing economic growth and a softer jobs market, quelled fears for an unlikely situation that will require a rate hike while reinvigorating expectations for a “soft landing”.

Robust earnings out of the US also provided some uplift, however, ongoing geopolitical tensions throughout several regions continued to weigh on sentiment. The European Central Bank (ECB) is widely expected to begin lowering interest rates in June.

The US market locked in solid gains for the month, with the S&P 500 Index adding 4.1% amid a solid earnings season. On an aggregate basis, revenue growth was slightly better than what was expected at the start of the reporting period, while earnings growth also beat expectations. Major technology counters and leisure stocks were the star performers. In terms of the Fed’s commentary, Chairperson Jerome Powell, stated that he does not foresee a hike as likely and that the current policy is sufficiently restrictive to achieve their 2% inflation target, sparking a solid rally in the market. The Fed also declared its intention to reduce the speed of quantitative tightening starting from 1 June, which should somewhat support financial conditions. It is possible that interest rates could remain at current levels for some time, with Powell also noting that he does not “know how long it will take” for cuts to be on the table and that the Federal Open Market Committee (FOMC) will need to be confident when that decision is made. He also removed reference to the timing of rate cuts as being “at some point this year” from his formal address.

The Eurozone also saw meaningful upward momentum during May with the Euro Stoxx 600 Index logging a gain of 3.2%. In terms of interest rate expectations, ECB President Christine Lagarde, indicated that an interest-rate cut is highly probable in the upcoming month as Eurozone inflation appears to be under control given that the impact of an earlier energy crisis and supply-chain bottlenecks have been largely abated. Given that rate cuts in the US are expected to be delayed, the market is now also focused on the likely rate differential between the US and Europe, which could potentially cause funds to flow to the US and weaken the euro.

Chinese equities gained solid traction as well with the MSCI China Index increasing by 3.8% as investors continued to cheer generally positive economic data, with additional support measures from government providing further confidence in the market. The property market, which has been a huge detractor for the region, continued to garner attention with Chinese officials announcing a rescue package which aims to reduce unsold home inventory and support market demand. Bloomberg GDP forecasts have also been upwardly revised to 4.9% for 2024, primarily driven by stronger-than expected first-quarter numbers and a recovery in exports.

There has been much speculation over the outcome of this election. However, for the first time in our democracy’s history the ANC looks set to not receive the majority of the country’s votes. Historically, local asset prices have performed better after elections than before – but of course the main outcome had always been easier to predict. Meanwhile, the South African Reserve Bank (SARB) kept interest rates on hold at 8.25% at its third meeting of the year – a widely anticipated outcome. The decision was unanimous and comes after the annual Consumer Price Index (CPI) cooled for a second consecutive month to 5.2% in April from 5.3% in March. Forecasts now indicate that inflation is expected to reach the midpoint of the SARB’s target range in the second quarter of 2025, sooner than previously predicted. Initially this was only expected to occur by the end of next year.


Economic Data Review

Timing of Fed rate cuts remains uncertain

Flash estimates showed that the S&P Global Composite PMI for the US surged to 54.4 in May, up from April’s 51.3, marking the highest level since April 2022 and beating market expectations of 51.1. The service sector drove the upturn, showcasing the biggest output growth in a year, while manufacturing also saw strong growth. Retail sales increased 3% in April, following a downwardly revised 3.8% gain in March - this was below expectations. The trade deficit remained almost unchanged at ten-month highs of $69.4 billion in March, compared to an upwardly revised $69.5 billion in February and forecasts of a $69.1 billion deficit. The unemployment rate edged up to 3.9% in April from 3.8% in March – better than expectations of an unchanged reading. The annual inflation rate eased to 3.4% in April from 3.5% in March, which was the highest reading since September, in line with market forecasts. The Fed kept the fed funds rate steady for the sixth consecutive time, as expected, during its May meeting, as ongoing inflationary pressures and a tight labour market indicated a stall in progress toward bringing inflation back down to its 2% target this year. Officials suggested that the disinflation process would likely take longer than previously thought.

ECB on track to cut rates before the Fed

On a preliminary basis, HCOB Eurozone Composite PMI rose to 52.3 in May, the highest in a year, compared to 51.7 in April and beating forecasts of 52. The reading showed that economic recovery in the Eurozone gained momentum, amid faster increases in business activity, new orders, and employment, while business confidence hit a 27-month high. Retail sales rose by 0.7% y-o-y in March, rebounding from the revised 0.5% decline in the previous month, to mark the first growth in retail sales since September 2022 – this was better than expectations. The Eurozone posted a trade surplus of €24.1 billion in March, wider than €19.1 billion y-o-y in March 2023 and better than market forecasts of €19.9 billion. The unemployment rate hit a fresh record low of 6.4% in April, down from 6.5% in each of the prior five months and slightly below market forecasts of 6.5%. The annual inflation rate in the Euro Area was confirmed at 2.4% last month, the same as in March, and holding at levels not seen in nearly three years. The ECB maintained interest rates at record-high levels for a fifth consecutive time during its April meeting (as expected), but it does seem as if a cut could be on the cards in June.

UK inflation eased once again, still higher than expected

Initial reports showed that the S&P Global UK Composite PMI dropped to 52.8 in May, below the expected 54, indicating a slight decline from April’s 54.1. Despite the fall, this data points to a solid expansion in the private sector, as a resurgence in manufacturing production supplemented a further, although slower, upturn in services output. Retail sales decreased 2.7% y-o-y in April, compared to a 0.4% gain in March and much worse than forecasts of a 0.2% decline. The UK’s trade deficit narrowed to £1.098 billion in March, the smallest in three months, from a revised £1.478 billion in February - this was better than expectations of a deficit of £2.1 billion. The unemployment rate rose to 4.3% from January to March, slightly up from 4.2% in the three months to December 2023, aligning with market expectations. The Bank of England (BoE) maintained the key bank rate at 5.25% on 9 May, the highest level since 2008, and in line with expectations. However, two committee members preferred to reduce the rate by 0.25ppts, compared to only one member in the previous meeting and officials revised down inflation forecasts while boosting its growth outlook. CPI inflation is expected to return close to the 2% target in the near term, with potential risks from geopolitical factors. The Monetary Policy Committee (MPC) emphasised the need for restrictive monetary policy to return inflation sustainably to the 2% target, with a commitment to adjusting policy as warranted by economic data. A few days later, annual inflation data was released and showed that CPI eased to 2.3% in April 2024, the lowest since July 2021, compared to 3.2% in March and market forecasts
of 2.1%.

Chinese state promised more stimulus to assist lagging housing market

The Caixin China General Composite PMI was confirmed at 52.8 in April, up slightly from 52.7 in March. It was the highest reading since May 2023, pointing to the sixth straight month of growth in private sector activity, as the manufacturing sector grew the most in 14 months and the services economy expanded for the 16th month. Retail sales rose by 2.3% in April, missing market forecasts of 3.8% and moderating from 3.1% in March. China’s trade decreased to US$72.35 billion in April from $86.46 billion in the same month last year, below market forecasts of $76.7 billion, as exports grew much less than imports. The surveyed urban unemployment rate dropped to 5% in April, the lowest reading since November 2023, and compared to the previous month’s reading and market estimates of 5.2%. China’s annual inflation rate rose to 0.3% in April, compared with market estimates and March’s figure of a 0.1%. It was the third straight month of consumer inflation, amid ongoing recovery in domestic demand despite a fragile economic revival. The People’s Bank of China (PBoC) kept key lending rates unchanged at the May fixing, matching market expectations. Rates remain at record lows, amid Beijing’s attempts to spur an economic recovery. Last week, the PBoC held its medium-term lending rate, continuing its efforts to stabilise the yuan. It also moved to lower down payments for first- and second-time home buyers and scrap a floor on mortgage rates. Separately, Beijing pledged fresh stimulus for the property sector by easing purchase rules and urging local governments to buy unsold houses from builders for conversion into affordable housing.

Bank of Japan (BoJ) to proceed cautiously with inflation-targeting frameworks

The Jibun Bank Composite PMI ticked up to 52.4 in May 2024 from 52.3 in the prior month, pointing to the highest reading since last August, a flash figure showed. The reading indicated that private sector expansion continued to accelerate for the third successive month, with strong activity in the service economy prevailing. Retail sales rose 1.2% in March, slowing significantly from an upwardly revised 4.7% gain in February and coming in way below market expectations for 2.5% growth. Japan’s trade deficit increased to ¥462.50 billion in April from ¥429.79 billion in April 2023, more than market estimates of a ¥339.5 billion shortfall. The unemployment rate was at 2.6% in March, the same pace as in the prior month but above market forecasts of 2.5%. The annual inflation rate fell to 2.5% in April from 2.7%, moderating for the second straight month. The BoJ flagged upside risks to inflation and indicated that it stands ready to adjust monetary policy but expects accommodative financial conditions to remain for the time being.

Local interest rates remain on hold, CPI expected to reach SARB’s target ahead of initial forecasts

In March, the leading business cycle indicator declined 1.9% m-o-m (following an increase of 1.3% in February), marking the largest contraction since August 2022. The SACCI Business Confidence Index was unchanged at a reading of 114.7 during March, as positive economic and business relations as well as increased inward tourism continued to play a key role in maintaining business sentiment. Retail sales increased 2.3% y-o-y, following a decline of 0.7% in February, but was slightly below expectations of 2.5% growth. The trade balance in March amounted to a surplus of around R7.3 billion (below expectations of around R10 billion) as exports advanced at a slower 1.8%, while imports rose 6.1%.

Local mining production was down 5.8% y-o-y in March (compared to forecasts of a 3% decline) due to lower output of iron ore (6.8%) and coal (9.1%). Manufacturing production contracted 6.4% y-o-y (vs. forecasts of 0.4% growth) marking the first decline in industrial activity for over five months. Composite PMI improved to 50.3 in April (March: 48.4), suggesting a stabilisation in private sector activity. Manufacturing PMI climbed to 54 (March: 49.2), pointing toward a renewed uptick in factory activity, with better domestic demand filtering through to higher new sales orders.

Annual CPI moderated to 5.2% in April (slightly below expectations of 5.3%) amid softer price hikes across food & non-alcoholic beverages, alcoholic beverages & tobacco, miscellaneous goods & services, as well as housing & utilities. This, however, is still above the midpoint of the SARB’s targeted inflation range of 3% to 6%. Core inflation, which excludes the price of food, non-alcoholic beverages, fuel and energy, cooled to 4.6%, below forecasts of 4.9%.

As anticipated, 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 that stated 4Q25. The inflation projection for this year was left unchanged at 5.1%.


Outlook

Local

• Global activity in the near term is still expected to be dampened by restrictive monetary policy, structural constraints in emerging markets, and escalated geopolitical tensions. Over the medium term, lower interest rates should stimulate activity.
• This will support the primary and secondary sectors in the economy, which will also benefit from reduced loadshedding intensity. The tertiary sector should be supported by the recovery in tourism, employment gains, and a gradual improvement in household spending power.
• Furthermore, reform-friendly election outcomes should drive an improvement in confidence, allowing for more robust structural investment and spending on big-ticket items such as property. It should also support a less-depreciated rand and entrench lower inflation. Nevertheless, near-term volatility as a new government is formed is anticipated and risk on this front remains.
• Overall, we see growth improving from 0.6% in 2023 to 1.6% by 2026 and inflation from 6% to 4.5% over the same period.
• In line with this, we still anticipate a 25bps cut to interest rates before year-end and for rates to fall to 7.5% over the medium term.
• Over the longer term, improved productivity and the successful implementation of a lower inflation target should support less rand depreciation, lower risk premium, as well as structurally lower economy-wide borrowing costs.
• Risks to the outlook continue to be dominated by geopolitical tensions and climate change.