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In the US, the S&P 500 Index added 2.1% as sentiment gained a boost following the release of generally better-than-expected economic data as well as the US Federal Reserve’s first interest rate cut since the onset of the pandemic – the Fed cut rates by half a percentage point at its September meeting and signalled more reductions would follow. Fed Chair Jerome Powell highlighted that “the US economy is in a good place” and that the rate cut was designed to “keep it there”. The recalibration of the committee’s policy stance will help maintain the strength of the economy and the labour market and is not expected to halt further progress on inflation given that it is moving towards a more neutral stance. The “dot plot” also suggests further easing ahead, with total cuts for 2024 now projected at 100bps (up from 25bps in June) and 200bps by end 2025 (up from 125bps in June).
Across the pond, the Eurozone delivered a solid performance with the Euro Stoxx 600 Index adding 1.8% over the month, however, generally soft economic data as well as ongoing political concerns limited upward momentum. Expectations for further easing from the European Central Bank (ECB) surged recently following the run of weak economic data, including a contraction in private sector activity and an unexpected drop in Germany’s business confidence. The swaps market is currently pricing in ~50bps of easing through the end of the year, with the chance of a quarter-point reduction at the ECB’s October meeting now sitting at 60%.
China dominated headlines towards the end of the month with the MSCI China Index rallying in excess of 19% after the People’s Bank of China (PBoC) reduced its one-year policy rate by the most since its introduction in 2016 – the start of a wide range of support measures unveiled by Chinese authorities including interest rate cuts, more cash for banks, larger incentives to buy homes and plans to consider a stock stabilisation fund. Officials pledged action to make the real estate market “stop declining,” their strongest vow yet to stabilise the crucial sector after new-home prices fell in August at the fastest pace since 2014. The government will also strictly limit the construction of new-home projects, the Politburo said, as part of efforts to ease the current residential oversupply.
Locally (All Share Index: +4.3%, USD: +8.3%), sentiment remained robust with confidence levels rising to the highest levels since 2019 amid several positive key themes – these include the GNU outcome, the absence of load-shedding, a stronger currency, expectations for substantial fuel price declines, moderating inflation, interest rate-cuts and the impact of the introduction of the two-pot retirement system. Overall, there has been a clear acceleration in the perception that government’s reform agenda is taking preference and gaining momentum. This optimism has resulted in many economists upwardly revising medium-term growth expectations. In addition, the Monetary Policy Committee (MPC) decided to cut South Africa’s benchmark interest rate by 25bps at its September meeting (as expected) after nearly two years of interest rates at the highest level since 2009 – this follows a fall in inflation to below 4.5% and a 50bp reduction by the Fed. Policymakers expect this progress to be sustained, with inflation projected to remain below the 4.5% midpoint through the end of the forecast horizon in 2026. In terms of economic activity, the SARB maintained its 2024 projection at 1.1%, while revising its 2025 forecast up to 1.6% (prior: 1.5%) and its 2026 forecast to 1.8% (prior: 1.7%).
Economic Data Review
US central bank’s decision to cut rates marks milestone in two-year fight against inflation
Flash estimates showed that the S&P Global Composite PMI for the US softened to 54.4 in September (but ahead of a forecasted 54.3). The reading showed business activity growth in the US private sector remained robust, signalling sustained economic expansion over the third quarter. Retail sales edged up 0.1% in August, following an upwardly revised 1.1% surge in July, and beating forecasts of a 0.2% decline, signalling that consumer spending remains relatively strong. The trade deficit expanded to $78.8 billion in July, the biggest gap since June 2022, compared to a $73 billion shortfall in June. This was roughly in line with expectations. The unemployment rate edged lower to 4.2% in August from a 4.3% peak in July, also in line with expectations. The annual inflation rate eased to 2.5% in August beating the forecasted 2.6% and slowing for the fifth consecutive month and the lowest since February 2021. The Federal Reserve cut interest rates by 50bps in September – the first reduction in borrowing costs since March 2020. While the decision to cut rates was anticipated, there was speculation about whether the central bank would choose a more conservative 25bps reduction instead. The Fed also released new economic forecasts. Policymakers are pencilling in 100bps of easing by year-end, suggesting two more 25bps cuts this year.
Expectations for a rate cut at the ECB’s October meeting surge
HCOB Flash Eurozone Composite PMI fell for a fourth consecutive month to 48.9 in September, the lowest since January, compared to 51 in August and forecasts of 50.6. It is the first fall in private sector activity in seven months, with the downturn in manufacturing output extending to an 18th consecutive month. Retail sales increased 0.1% in July– in line with expectations. The Eurozone posted a trade surplus of €21.2 billion in July, wider than €21.7 billion in the same month of the previous year and higher than market forecasts of €18 billion. The unemployment rate decreased to 6.4% in July from 6.5% in June and below the forecasted 6.5%. The annual inflation rate in the Euro Area eased to 2.2% in August, the lowest since July 2021, from 2.6% in the previous month, and matching a preliminary estimate. The ECB cut the deposit facility rate by 25bps to 3.5% at the September meeting, as expected, reflecting an updated inflation outlook and better transmission of policy. Also, the interest rates on the main refinancing operations and the marginal lending facility were lowered to 3.65% and 3.9% respectively staring from 18 September. The ECB remains committed to bringing inflation back to its 2% target, adjusting rates based on data and economic conditions without committing to a specific rate path.
The Bank of England (BoE) kept rates steady despite a cut in the prior month
The S&P Global UK Composite PMI fell to 52.9 in September from 53.8 in the previous month, missing market expectations of 53.5, but extending the growth momentum for private economic activity to an 11th consecutive month. Retail sales jumped 1% in August, following an upwardly revised 0.7% rise in July and well above forecasts of 0.4%. The UK’s trade deficit increased to £7.5 billion in July from £5.3 billion in June – this was worse than the forecasted deficit of £4.8 billion. The unemployment rate fell to 4.1% from May to July, down from 4.2% in the previous three-month period, aligning with market expectations. The BoE kept its benchmark rate unchanged at 5% during its September meeting, following a 25bps cut in August, the first reduction in over four years. This decision was in line with market expectations.
The PBoC reduced its one-year policy rate by the most since its introduction in 2016
The Caixin China General Composite PMI remained unchanged from July with a reading of 51.2 in August and the tenth month of growth in private sector activity with faster manufacturing output growth offsetting slower services activity expansion. Retail sales grew 2.1% in August, moderating from 2.7% growth in July and missing market consensus of 2.5%. China’s trade surplus expanded to $91.0 billion in August from $67.8 billion in the same period a year earlier and exceeded market expectations of $83.9 billion, as exports gained traction against imports. The surveyed unemployment rate edged higher to 5.3% in August compared to a reading of 5.2% in July. This was higher than the forecasted 5.2% and the highest reading since February, highlighting the impact of graduation season. China’s annual inflation rate rose to 0.6% in August from 0.5% in July, below the forecasted 0.7%. This was the seventh straight month of consumer inflation being impacted by supply issues due to the heat and pouring rains. The PBoC kept key lending rates unchanged at 3.35% during the September fixing, aligning with market forecasts. Activity data in August highlighted that an economic upturn was uncertain, as industrial output grew the least in five months, but retail sales were soft, and the jobless rate increased.
Bank of Japan (BoJ) maintained rates and noted that the economy remains on track for a moderate recovery
The Jibun Bank Flash Japan Composite PMI fell to 52.5 in September from a final 52.9 in August, which was the highest reading in 15 months. Still, it marked the eighth straight month of growth in private sector activity this year, largely supported by the service economy as manufacturing activity shrank for the third month. Retail sales increased by 0.2% in July 2024, slowing from a 0.6% gain in June. On an annual basis, retail sales rose 2.6% in July, slowing from 3.8% growth in June and missing market expectations for a 2.9% gain. Japan’s trade deficit decreased to ¥695.3 billion in August from ¥940.1 billion in the same month a year earlier, but it was still better than market expectations of a ¥1.4 trillion shortfall. The unemployment rate unexpectedly rose to 2.7% in July, compared with market estimates and June's figure of 2.5%. The annual inflation rate in Japan rose to 3.0% in August from 2.8% in the prior three months – the highest level since October 2023. The BoJ unanimously retained its key short-term interest rate at around 0.25% during its September meeting, keeping it at the highest level since 2008, in line with market consensus. This decision underscored that the central bank was not in a hurry to raise rates further after hiking them twice this year, in March and July. The BoJ also maintained its assessment that Japan's economy remains on track for a moderate recovery, despite some areas of weakness. Private consumption continued its upward trend, helped by improving corporate profits and business spending. However, exports and industrial production remained relatively flat.
Local confidence levels rise, with growth estimates being upwardly revised
In July, the composite leading business cycle indicator advanced 0.7% m/m (following a decline of 0.1% in June). More encouragingly, the RMB/BER business confidence index climbed to a reading of 38 in 3Q24 – the highest in almost two years. Retail sales, however, increased at a slower rate of 2% y/y (compared to 4.1% in June). The trade balance narrowed to a surplus of ~R17.6 billion, from a surplus of ~R24.2 billion a month prior, and this was slightly behind forecasts (~R18 billion) as imports rose 6.6%, while exports rose just 1.8%.
Local mining production was down 1.4% y/y in July (against expectations of a 1.1% gain), and this followed a revised slump of 3.6% in June. Growth was largely impacted by a 4.8% decline in PGMs, a 9.5% decline in iron ore and a 4.9% decline in gold production. Manufacturing production rose 1.7% y/y, which was much higher than the expected increase of 0.7%. This followed a drop of 5.5% in the prior month, marking a strong rebound in industrial activity. Composite PMI (for August) improved to a reading of 50.5 (from 49.3 in July), suggesting stronger private sector activity. Manufacturing PMI, however, dropped to a reading of 43.6 (compared to 52.4 in July), signalling a sharp contraction in factory activity.
Annual consumer price inflation softened for a third consecutive month to 4.4%, below expectations of 4.5%. This was the lowest rate of inflation since April 2021 and is below the midpoint of the SARB’s targeted range. This was underpinned by a slowdown in pricing for transportation, fuel, housing & utilities, and restaurants & hotels. Core inflation (which excludes the price of food, non-alcoholic beverages, fuel, and energy) eased further down to 4.1%. As was widely anticipated, the SARB cut its benchmark interest rate by 25bps in September, signalling the start of the monetary policy easing cycle.
Outlook
Local
- The interest rate cutting cycle is in full swing. Interest rate cuts across the globe, bar countries such as Japan that are normalising policy rather than restricting activity, should support economic growth in the medium term. Easing monetary policy in South Africa’s major trading partners (the Euro Area, Unites States, and China) should foster a more supportive external trading environment.
- When combined with improving confidence in South Africa’s policy trajectory, easing logistical constraints, and a better consumer backdrop, the domestic growth outlook becomes more broad-based over the medium term. We forecast real GDP growth to exceed 2% in 2027.
- Inflation continued to surprise to the downside in August, and a stronger deceleration trend is underway. This has been supported by positive base-effects, weak demand, softer oil prices, and a stronger rand. We foresee inflation below 4.5% for nearly the next year of monthly data, with the annual average oscillating around 4.5%.
- This, along with a faster cutting cycle in “risk-free” markets, creates space for an even deeper cutting cycle by the SARB. Nevertheless, they will remain cautious, and the cutting cycle should be gradual.
- Lower cost-of-living is pivotal for the spending growth of lower-income households, while improving sentiment will be more fundamental for those with higher incomes. This suggests that consumer spending and investment should improve over the medium term, and we affirm our expectation that the property market is likely at a trough. House Price Index growth is expected to surpass 4% in 2027.
Global
- US growth has held up very well over the last few quarters despite a very aggressive interest rate hiking cycle. Final 2Q24 GDP came out at 3.0%, beating market expectations of 2.9% and well above potential growth. Consensus estimates for 2024 growth has been revised higher to 2.6%. In the latest Bank of America survey, it was revealed that participants are becoming more optimistic that monetary easing will generate a ‘soft’ landing, with 79% participants favouring this outcome, versus only 11% of the participants calling for a ‘hard’ landing. The remaining 7% sees a ‘no landing’ outcome. 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 and 2025.
- Inflation has peaked and is now gradually falling towards target after a ‘sticky’ first quarter. This month CPI came in on expectations, confirming the lower trend. Shelter inflation and core services should continue to trend lower; causing overall inflation to move down towards target.
- The Fed’s interest rate cutting cycle started this month with a bigger than expected 50bp. The Fed has clearly indicated that labour market conditions will dictate the pace of future cuts. The market has reacted strongly to these comments and is currently pricing in a further 75bpcut for 2024, as well as a terminal rate of 2.8% by October 2025. 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, Chinese macroeconomic data has consistently disappointed to the downside. Authorities have eventually responded with the biggest stimulus package so far this year. Most of the announcements so far have been around monetary policy (lower interest rates) and measures to stop the property market from collapsing further. Fiscal policy is what is needed to structurally get China out from their deflationary slump and to restore confidence. Fiscal policy announcements are expected over the next few weeks; the magnitude will dictate market movements.
- The Jackson Hole speech caused the US dollar to weaken quite substantially in August and this trend has continued in September. It is expected that the US will cut rates more aggressively than peers so that interest rate differentials will favour a weaker USD.
- 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. The buildup to the November US elections should also be monitored very closely. Gold had another good month, returning over 6% as central banks (and retail money) kept buying the yellow metal as an inflation/geopolitical/currency hedge.
- 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.