Market Outlook – January 2022

08 February 2022

Markets were extremely volatile in the first month of the year as the inflation and interest rate outlook globally remained front of mind. Political pressure in the United States (US), saw the Federal Reserve (Fed) turn more hawkish with market participants fearing that a policy mistake could hurt the US economy and by extension the stock market. Geopolitical tension around a possible Russian invasion of Ukraine also kept investors fearful. Unites States earnings season did little to spur confidence in the corporate growth outlook. While most companies performed in-line or better than expected (both in terms of revenue and earnings) in the fourth quarter, rising bank costs and more restrained outlook statements dampened the mood.

The US equities sold off with other equity markets globally following suite. The S&P 500 retreated sharply at the start of the month before stabilising somewhat in the last third of January. Technology stocks led the decline. Concerns around what higher rates and bond yields would mean for valuations in that sector triggered the sell off. The VIX which measures volatility in the US equity market moved from 17 to 32 at the time of writing. The Bloomberg Global Bond Index was volatile and ended slightly lower for the month. The US 10-year yield moved up from 1.5% at the start of the month to 1.8% at the time of writing. The US dollar weakened.

The Johannesburg Stock Exchange (JSE) was volatile but ended the month flat, outperforming global equities in aggregate and emerging market stocks in both rand and US dollar terms. The local bourse was carried by resources stocks that held up well amid an improvement in commodity prices. Local bond yields came down, but the property sector moved backwards. The rand strengthened and is the third strongest major currency against the US dollar so far this year.

*29 December 2021 to 27 January 2022

ECONOMIC OVERVIEW

US data pointed to sustained expansion, and the Fed’s rhetoric turned more hawkish as inflation soared.

On a preliminary basis, the IHS Markit Composite Purchasing Managers’ Index (PMI) for the US collapsed to 50.8 in January from 57 in December. This was well below expectations and signaled the weakest expansion in output growth since July 2020. Retail sales increased 16.9% year-on-year in December but just missed forecasts of 17%. The trade deficit widened to $80.2 billion, below the estimated $81.8 billion, as imports jumped 4.6% while exports edged 0.2% higher - 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%. The US annual inflation accelerated to 7% in the final month of 2021, as guided for. As such, the Fed said that it expects to raise its target range for the federal funds rate in March, if it is appropriate to do so.

Eurozone data was mixed, and the European Central Bank maintained its dovish stance on rates

Initial estimates showed the IHS Markit Eurozone Composite PMI dropped to 52.4 in January, marginally below market expectations of 52.6. Consumer confidence deteriorated further, amid a decline in sentiment surrounding the general economic situation. The Eurozone posted a trade deficit of €1.5 billion in November 2021 – well below the market consensus of an €11.5 billion surplus as exports rose 14.4% year-on-year while imports scaled at a faster 32% 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, was confirmed at a record high of 5% in the final month of 2021. Policy makers noted that the increase was driven by temporary factors that are anticipated to ease in 2022. The central bank reiterated that the Pandemic Emergency Purchases Program could be scaled down and discontinued by the end of March, while interest rate hikes are still unlikely this year.

United Kingdom data was mixed

Britain's gross domestic product grew 8% year-on-year in November 2021, ahead of market expectations (7.5%). According to preliminary reports, the IHS Markit/CIPS UK Composite PMI edged down to 53.4 in January. This was below forecasts of 55 and signaled the slowest expansion since March 2020. Retail sales volumes decreased 0.9% year-on-year in December, missing forecasts of a 3.4% rise. The unemployment rate declined to 4.1% in the three months to November 2021, below expectations. Annual inflation jumped to 5.4% year-on-year in the last month of 2021 – the highest since March 1992 as inflationary pressures from rising energy prices and supply chain disruptions persisted. The Bank of England increased its benchmark interest rate by 15 basis points to 0.25% in December and is scheduled to meet again at the start of February. Inflation is expected to remain at ~5% through the rest of winter, and to peak at around 6% in April 2022.

China’s data looked better, but its zero-Covid policy continued to dampen its growth outlook

China’s composite PMI for December 2021 rose to 53, from 51.2 a month earlier, signalling the fourth consecutive month of private sector growth. This was above expectations. Retail sales growth eased to 1.7% year-on-year, significantly missing forecasts of 3.7%, as consumption spending weakened. China's trade surplus widened sharply to $94 billion in December, easily ahead of estimates ($75 billion) as exports realised double-digit growth of 20.9% year-on-year. Below expectations, China’s surveyed urban unemployment rate inched up to 5.1%. 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 the coronavirus spread rapidly.

Japan’s data was mixed while the Bank of Japan raised its inflation outlook

Flash estimates showed that the Jibun Bank Composite PMI reading for Japan dropped to 48.8 in January 2022 from a final 52.5 in the previous month. This was below expectations. Retail sales rose 1.9% year-on-year in November, compared to estimates of 1.7% as consumption spending moderated. Japan posted a trade deficit of ¥582 billion in December last year, compared to forecasts of ¥784 billion. This, however, marked the fifth consecutive monthly trade deficit as exports advanced 17.5% year-on-year while imports soared at 41.1% 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 first 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%. For the first time since 2014, however, policymakers adjusted the inflation outlook, raising forecasts for 2022 to 1.1% amid rising energy and raw materials costs.

In South Africa, economic data were mostly positive

The composite leading business cycle indicator increased by 0.6% from a month earlier in November, accelerating from a 0.1% rise in the previous month. The IHS Markit PMI dropped to a 5-month low of 48.4 in December from 51.7 in the previous month, which was the strongest growth in 6 months. Covid-19 cases rising were the main culprit, but sentiment remained strong, due to hopes that activity should recover quickly as case number decreased. 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 4.5% while imports dropped 0.9%. Retail trade rose by 3.3% year-on-year in November, well above market estimates of a 1.9% gain. The value of recorded building plans passed fell 3.7% from a year earlier in November, after a downwardly revised 3.3% rise in October. Mining production grew by 5.2% year-on-year in November, compared to an upwardly revised 2.2% rise in October and better than market estimates of a 4.25% increase. The main contributors were PGM’s and iron ore. Manufacturing production shrank by 0.7% year-on-year in November, following a downwardly revised 8.5% decline in October. Private sector credit grew by 2.5% year-on-year in November, beating expectations.

Consumer price inflation accelerated to 5.9% in December, from 5.5% in November, above market expectations of 5.7%. This was the highest rate since March of 2017. Main upward pressure came from transport (fuel) and food. The annual core inflation rate stood at 3.4% in December, up from 3.3% in the prior month, matching expectations. The South African Reserve Bank raised their benchmark repo rate by 0.25% to 4.0%, as widely expected. Four members of the committee voted for the increase, while one voted for an unchanged rate. The bank hiked its forecast of headline inflation for the year, from 4.3% to 4.9% and warned that risks to the inflation outlook are to the upside.

OUTLOOK

Global

• China remains as one of the few markets to underperform in 2021 and among one of the worst in the emerging market basket. However, the credit impulse has improved, 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.
• Developed market consumption expenditure is expected to be more muted as savings unwind, government transfer payments subside, and as real income is eroded by inflationary pressure.
• The dovishness of other central banks such as the ECB and BoJ compared to the Fed has helped increase the relative attractiveness of the dollar. This will resultantly 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 off 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 gross domestic product 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 Monetary Policy Committee 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.