Market overview

20 January 2022

Global equity markets pushed higher in December. In the United States (US), the S&P 500 returned 4.5% while the tech-heavy Nasdaq gave 0.7% in the month. Global bond yields rose in anticipation of tighter monetary policy globally. As expected, December’s Federal Reserve (Fed) communications confirmed quantitative easing (QE) tapering should end by quarter two of 2022. The potential timing of the rate hiking cycle moved, with the hawkish shift in the Federal Open Market Committee (FOMC) dot plot showing a median three hikes in 2022, possibly starting in June 2022. Despite the upward revisions to inflation, risks are still viewed on the upside, but the market has already been pricing an early start to the cycle.

The Johannesburg Stock Exchange (JSE) All Share Index gained 4.8% over the month and in US dollar terms retuned 5.1% month-on-month. In South Africa, the holiday spirit prevailed after Level 1 lockdown restrictions were eased as the fourth wave of Coronavirus (COVID-19) infections appeared to have peaked without overwhelming the healthcare system. Basic materials (5.4% month-on-month) rose, with the industrial materials sub-sector leading (8.8% month-on-month) and the chemicals sub-sector lagging (-2.2% month-on-month). Consumer-facing sector returns were mostly positive, with consumer discretionary delivering a positive return (2.1% month-on-month) while consumer staples returned 6.5% month-on-month. Financials turned positive, delivering 8.56% month-on-month. Listed property had a particularly strong December, delivering 7.9% on a total return basis. Bond yields came down and the ALBI returned 2.7%. 

Economic Overview

United States economic data was better than expected

On a preliminary basis, the IHS Markit Composite Purchasing Managers’ Index (PMI) for the US rose to 57 in December 2021 from 57.2 in the previous month. This was slightly above expectations and signalled an increase in output growth. Retail sales increased 18.2% year-on-year in November, well ahead of forecasts. The trade deficit widened to $80.2 billion, below the estimated $81.8 billion, as imports jumped 4.6% while exports edged 0.2%, both reaching new all-time highs. The unemployment rate dropped to 3.9% in November, the lowest since February 2020, pointing to a sustained recovery in the job market. This was below market expectations of 4.0%. United States annual inflation was forecast to reach its highest ever levels, at 7%, in December 2021, with Federal Reserve Chair, Jerome Powell, expecting inflationary pressures to last well into the middle of 2022. The Fed announced at its December 2021 meeting it would end its pandemic-era bond purchases in March, paving the way for several interest rate hikes in 2022.

Eurozone data pointed to a deterioration in growth, but the European Central Bank maintained its dovish narrative

The IHS Markit Eurozone Composite PMI stood at 53.3 in December, slightly below market expectations of 53.4. Consumer confidence deteriorated even further, amid a decline in sentiment surrounding the general economic situation. The trade surplus narrowed sharply to €3.6 billion in October 2021, from €29.8 billion in the same period last year. This was well below the market consensus of €7.6 billion as exports rose 7.3% year-on-year while imports climbed at a faster 24.1% year-on-year. The seasonally adjusted unemployment rate in the Euro area edged down to 7.2% in November, in line with estimates. Annual inflation, as expected, accelerated for the sixth consecutive time to a record 5% high in the final month of 2021. Policy makers announced the European Central Bank (ECB) will decrease the pace of asset purchases under its €1.85 trillion Pandemic Emergency Purchase Programme in the first quarter of 2022. Officials maintained the narrative that the latest spike in inflation is “transitory”.

United Kingdom data was on balance better than expected and the Bank of England unexpectedly increased its benchmark interest rate 

Britain's gross domestic product (GDP) grew 4.6% year-on-year in October, below market expectations of 4.9%. According to preliminary reports, the IHS Markit/CIPS UK Composite PMI came in at 53.6 in December, from 57. This was just above the forecasted 53.2 but still signalled the weakest pace of expansion since March 2020. The Growth for Knowledge (GfK) Consumer Confidence index edged lower to -15 last month, compared to expectations of -16. Retail sales volumes rose 4.7% year-on-year in November, beating forecasts of 4.2%. The UK’s trade deficit narrowed to £2 billion in October, above consensus of ~£3.2 billion, as imports declined 0.4% while exports were up 1%. The unemployment rate declined to 4.2% in the three months to October 2021, in line with expectations. Annual inflation jumped to 5.1% year-on-year in the penultimate month of 2021, the highest since September 2011. This was above the forecasted 4.7%, with upward pressure coming from rising energy prices, supply chain disruptions and a low base effect. The Bank of England increased its benchmark interest rate by 15 basis points to 0.25% amid mounting inflationary pressures. Inflation is expected to remain at ~5% through much of the winter period and is anticipated to peak at around 6% in April 2022.

China’s data pointed to an uneven recovery 

China’s composite PMI for December rose to 53, from 51.2 a month earlier, signalling the fourth consecutive month of private sector growth. This was above expectations. Retail sales eased to 3.9% year-on-year in November, missing forecasts of a 4.6% increase, as consumption spending moderated. China's trade surplus narrowed to $71 billion in November, after surging to $84 billion in the month before. This was far below market estimates as export growth slowed sharply on the back of a strong yuan. In line with expectations, China’s surveyed urban unemployment rate inched up to 5.0% in November 2021. The annual inflation rate fell back to 1.5% in December after reaching 2.3% a month earlier. This was below the forecasted 1.8%, amid efforts by the government to secure supply, as well as the reimposition of lockdown measures in various regions as the Omicron variant of COVID-19 spread rapidly.

Data out of Japan was mixed in December 

The Jibun Bank Composite PMI reading for Japan dropped to 52.5 for December last year, from a final 53.3 the month before. This was still ahead of expectations though, as growth in private sector activity held strong. Retail sales rose 1.9% year-on-year in November, compared to estimates of 1.7% as consumption spending consolidated. Japan also posted a trade deficit of ¥955 billion, compared to forecasts of ¥675 billion. This was the weakest trade position since January 2020 as exports advanced 20.5% year-on-year while imports soared at a higher 43.8% year-on-year. The unemployment rate increased slightly above expectations to 2.8% in November 2021, the first increase in over six months. As widely expected, the Bank of Japan (BOJ), during its final meeting for the year, 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%. Policymakers noted that the economy has picked up, with exports, industrial output and private spending continuing to grow.

In South Africa, economic data mostly improved 

The FNB/BER Consumer Confidence Index rose marginally to -9 in quarter four of 2021 from -10 in quarter three of 2021, well below the long-term average of +2, as consumers faced higher fuel prices, load-shedding and further job losses. The composite leading business cycle indicator edged up 0.1% from a month earlier in October, rebounding slightly from a 2.3% fall in September. The IHS Markit PMI increased to 51.7 in November, the highest since May, pointing to a renewed expansion in the private sector. Gross domestic product shrank 1.5% in quarter three of 2021, after a downwardly revised 1.1% rise in quarter two of 2021 and compared with market estimates for a 1.2% decline. This was the first contraction after four consecutive quarters of growth, mainly due to the twin impact of social unrest during July and tighter lockdown restrictions. The trade surplus widened to R35.83 billion in November from an upwardly revised R27.68 billion in October, well above market expectations of R16.8 billion. Exports rose by 4.5% while imports dropped 0.9% The current account surplus shrank to R226 billion, from R311 billion in quarter two of 2021, well below expectations. As a ratio of GDP, the surplus narrowed to a still healthy 3.6% from 5.1% in the prior quarter. Retail sales rose by 1.8% year-on-year in November, slowing from a 2.1% surge in October and in line with expectations. The value of recorded building plans passed rose 3.5% from a year earlier in October, after an upwardly revised 29.6% growth in September. Mining production rebounded by 2.1% year-on-year in October, compared to a downwardly revised 0.8% contraction in September, better than market estimates for a 0.85% fall. Manufacturing production shrank 0.7% year-on-year in November, following a downwardly revised 8.5% decline in October. 

Producer prices jumped 9.6% in November, up from 8.1% in October and above market expectations for an 8.9% rise. This was the highest rate since at least 2013. Consumer price inflation accelerated to 5.5% in November, from 5% in October, above market expectations of 5.4%. This was the highest rate since March of 2017. Upward pressure came from transport, food and housing. The annual core inflation rate stood at 3.3% in November, up from 3.2% in the prior month, matching expectations. The South African Reserve Bank’s next Monetary Policy Committee (MPC) meeting is in January.

Fitch ratings affirmed SA’s credit rating at BB-, but revised the outlook to stable from negative, citing the faster than expected economic recovery, the surprisingly strong 2021 fiscal performance and significant improvements to key GDP-based credit metrics following the re-basing of national accounts.

Outlook

Global

• China remains one of the few markets to underperform in 2021 and among one of the worst in the emerging market basket. However, the November credit impulse on a year-on-year basis registered a less negative downturn and monetary policy has indeed become more supportive. At this moment, we remain relatively cautious on China, although our expectation is for improved credit conditions, which combined with low market multiples could see us become more constructive during 2022.
• For now, the developed market consumer income statement and balance sheet position stand in good stead, although we expect precautionary savings to fully unwind in the near-term unless further lockdown restrictions are imposed.
• The dovishness of other central banks such as the ECB and BOJ compared to the US Federal Reserve has helped increase the relative attractiveness of the dollar. At this stage, we have a neutral view on a trade weighted basis, particularly due to the resurgence of COVID-19 cases in Europe.  
• After the most accommodative monetary policy stance on record, the US Federal Reserve recently opted to increase the pace of tapering, as asset purchases will now be reduced by $30 billion per month. This will lead to less supportive liquidity dynamics in 2022. 
• Price pressures from supply chain bottlenecks will likely begin to unwind in the new year as trading conditions normalise. In addition, shelter price base effects from 2021 will likely lead to a disinflationary backdrop as a more meaningful acceleration seems unlikely as rising affordability concerns may limit house and rental price appreciation. 

Local

• Economic growth is expected to recover from a low base. The favourable global macroeconomic backdrop should benefit SA.
• Policymakers and the private sector will continue to muddle through the complexity of implementing meaningful structural reform. Without these reforms, overall GDP will remain low by historical standards.
• The terms of trade boost seen in 2021 and a few other factors have improved the fiscal outlook over the short term, however, the longer-term outlook remains challenging. Fiscal pressures continue to be exacerbated by financial difficulties at state-owned-enterprises, particularly Eskom.
• Domestic inflation is being affected by some of the global supply-side pressures with higher oil prices contributing to higher forecasts this year. Overall, inflation remains contained by relatively subdued domestic demand. 
• Short-term interest rates are expected to lift but remain low by historical standards. Low inflation and accommodative global monetary policy should allow the MPC to keep policy accommodative by historical standards. The baseline forecast now projects the repo rate at 5% in 2023.
• We expect the rand to continue enjoying some temporary relief before depreciating over the medium term, within a wide trading range. 
• Despite an expected near-term improvement in the jobs market as the economy reopens, unemployment is expected to consistently trend higher and household income to remain weak.
• Successful implementation of growth-enhancing economic and fiscal reforms represents an upside risk to our baseline view.