September can be summed up as a consolidation month after the dismal performance of the previous month. Most equity markets were up slightly, as expectations rose that the United States (US) and China were closer to signing a trade deal. Monetary easing from most central banks also offered some support to the markets. A drone attack on Saudi oil fields caused some tensions during the month, but supply disruption was short term and oil prices are back at unchanged levels after an initial 15% spike to USD72/barrel. House Speaker Nancy Pelosi also announced that the House of Representatives will open a formal impeachment inquiry into President Donald Trump.
In the US, most indicators improved from the previous month. Housing starts jumped 12.3% from a month earlier to a seasonally adjusted annual rate of 1 364 thousand units in August, the highest level since June 2007. This was aided by lower mortgage rates, with 30-year rates as low as 3.5%. The IHS Markit Manufacturing Purchasing Manager’s Index (PMI) rose to 51.0 in September from a decade low of 50.3 in the previous month. This reading signalled a modest overall improvement in manufacturing sector business conditions, as both output and new orders grew at a faster pace. University of Michigan’s consumer sentiment rose to 92 in September from 89.8 in the previous month. The improvement was across both current and expected economic conditions. The US consumer still held up well, with retail sales up 0.4% in August, boosted by spending on new motor vehicles, building materials, healthcare and hobbies. Consumer inflation fell to 1.7% in August from 1.8% in July, as food prices and a range of other goods continued to increase while energy deflation deepened sharply. The Federal Reserve lowered the target range for the federal funds rate to 1.75% to 2.00% during its September meeting, as inflation remained subdued amid heightened concerns about the economic outlook and ongoing trade tensions with China. This decision was not unanimous, with a vote of seven to three in favour of the cut.
Data from the Eurozone was mostly negative. The IHS Markit Manufacturing PMI slumped to 45.6 in September from 47.0 in the previous month. This reading pointed to the steepest contraction in the manufacturing sector since October 2012 as output fell the most since December 2012. Industrial production declined 2% from a year earlier in July, following a 2.4% fall in the previous month. This was the ninth consecutive month of contraction in the industry sector. The annual inflation rate was at 1% in August, unchanged from the previous month. It remained the lowest inflation print since November 2016, as energy prices fell while the cost of food, alcohol and tobacco rose further. Core inflation, which excludes volatile prices of energy and food, was confirmed at 0.9%, also unchanged from the previous month. The European Central Bank left its main refinancing rate unchanged and lowered the deposit rate by 10 basis points to -0.5% during its September meeting. Policymakers also approved a new round of bond purchases at a monthly pace of EUR20 billion as from 1 November, in an attempt to boost growth and inflation.
In the UK, the threat of a hard Brexit intensified as the deadline draws closer. Inflation fell to 1.7% in August from 2.1% in July, amid a slowdown in the cost of transport and a fall in clothing and footwear prices. The unemployment rate fell to 3.8% in the three months to July, back to its lowest levels since the October to December 1975 period. The trade deficit rose slightly to GBP0.22 billion in July from a revised GBP0.13 billion shortfall in the previous month. Imports rose 2.7% while exports rose at a slower 2.5%. Retail sales rose 2.7% from a year earlier in August, following an upwardly revised 3.4% growth in July. The IHS Markit Manufacturing PMI fell to 47.4 in August from 48.0 in the previous month. This reading pointed to the steepest month of contraction in the manufacturing sector since July 2012. The Bank of England’s Monetary Policy Committee voted unanimously to hold the bank rate steady at 0.75% during its September meeting, and reaffirmed its pledge to gradual and limited rate rises under the assumption of a smooth Brexit and some recovery in global growth.
In China, data remained mixed. The Caixin Manufacturing PMI rose to 50.4 in August from 49.9 in the previous month. Inflation was at 2.8% in August, unchanged from July. It remained the highest rate since February 2018 boosted by food prices, especially pork prices in the wake of an outbreak of African swine fever. The trade surplus widened to USD34.83 billion in August from USD26.30 billion in the same month a year earlier. Exports declined unexpectedly by 1% to USD224.8 billion, while imports fell at a faster 5.6% to USD179.97 billion. Industrial production increased by 4.4% year-on-year in August, easing from a 4.8% rise in the previous month. This was the smallest gain since February 2002, on the back of escalating trade disputes and sluggish domestic demand.
The Japanese economy grew 0.3% quarter-on-quarter in the three months to June 2019, slightly lower than the preliminary estimate of 0.4%. Consumer price inflation fell to 0.3% in August from 0.5% in July, below expectations of 0.6%. It was the lowest inflation rate in six months, raising chances of further stimulus. The trade deficit narrowed to JPY136.3 billion in August from JPY448.1 billion in the same month a year earlier as exports fell 8.2% while imports plunged 12%. The Bank of Japan left its key short-term interest rate unchanged at -0.1% at its September meeting and kept the target for the 10-year government bond yield at around zero percent, as widely expected. They also indicated that they would review economic and price developments more thoroughly at the next policy meeting, heightening the chance of expanding stimulus as early as October.
On the local front, inflation increased to 4.3% in August from 4.0% in July, above market expectations of 4.2% but below the midpoint of the South African Reserve Bank’s (SARB) target range of 3% to 6%. Prices of housing and utilities and food were the key inflationary drivers. Gross Domestic Product growth grew 3.1% quarter-on-quarter in the three months to June, following a downwardly revised 3.1% contraction in the previous period and beating market expectations of a 2.4% expansion. It was the strongest growth rate since 2017, partly due to low base effects and the positive impact of reduced power cuts in mining and manufacturing. A trade deficit R2.88 billion was recorded in July, compared to an upwardly revised R5.54 billion surplus in the previous month. Exports rose at 3.4%, while imports soared 11.7%. The manufacturing PMI slumped to 45.7 in August from 52.1 in July. It was the lowest reading since May, as all of the major sub-indexes fell back into contraction territory. Retail sales went up by 2.0% year-on-year in July, easing from a 2.4% rise in the prior month. The SARB unanimously kept its benchmark repo rate unchanged at 6.5% in September, as widely expected, after trimming it by 0.25% in the prior meeting.
From a market perspective, the JSE Top 40 Index was flat for the month, after being up over 5% at the middle of the month but losing all those gains by the end. The rand was slightly stronger after starting the month at 15.21 against the US dollar. Bonds also had a flat month.
While recent global indicators remained on the soft side, the Fidelity leading indicators suggested that global growth appeared to be entering a bottoming phase which, in the absence of material deterioration on the trade war front from current levels, suggested potential improvement in the latter part of 2020. Trade war risks remain, but increased tariffs are likely to be accompanied by greater Chinese stimulus. The uncertainty around trade wars has increased the possibility of a recession, however, this is not our core view. The US economy remained on track to “catch down” to the rest of the world and the US dollar continues to be regarded as expensive. Inflation remains well contained globally and central banks are expected to cut rates further. Bond yield forecasts are higher than spot rates across the board. Global equities have more investment merit than global bonds based on an elevated earnings yield versus bond yields.
Locally, evidence of reform will be necessary to boost policy confidence and yield higher private sector investment. Economic growth will likely be constrained to below 2% until then. A reform paper released by the Minister of Finance, Tito Mboweni, is a step in the right direction, but this document still needs NEC sign-off. While we anticipate better than money market returns from growth assets over the next 12 months, mostly on valuation grounds, muted business confidence remains a significant impediment. An improvement in confidence would be required to generate returns in the double-digit range. Concerns over the fiscal deficit have risen sharply over the last few months as the country is experiencing low nominal growth (due to lower tax collections) and further state-owned enterprise (SOE) (especially Eskom) bailouts. The Medium Term Budget Policy Statement (MTBPS), which is scheduled for 30 October, would shed more light on this subject. We also await the Eskom white paper in this regard. Rating agencies are voicing their concerns and Moody’s is expected to review South Africa on 1 November. There is a high possibility that Moody’s will change our outlook from “neutral” to “negative” at this meeting, but we don’t expect a downgrade to below investment grade this year.