Global capital markets have been under pressure since the start of the year. First, fears over rising inflation and the prospect of tighter monetary policy stoked investor trepidation. Then, at the end of February, Russia invaded Ukraine, stoking investors’ fears.
Global equities were positive in March, driven by strong US markets, with European markets also ending the month slightly higher. This is somewhat surprising as inflation has continued to remain high, reaching 7.9% in the USA, and unemployment levels appearlow. China equities were further sold off on regulatory fears, geopolitical issues and growth fears amid a continued hard-line approach to Covid-19 which kept investors at bay. However, China equities did see a recovery from mid-March after the Financial Stability and Development Committee of the State Council sent a signal that concrete steps would be taken to bolster the economy in the first quarter and that Chinese and US regulatory bodies had made progress with regards to regulation over US-listed Chinese companies.The US yield curve is now close to inverting which historically has shown an increased probability of recession. All else equal we would expect equities to perform poorly in this environment, however liquidity remains elevated, and many other available assets offer unappealing negative expected returns.
We remain cautious on the returns for global equity markets as supportive monetary and fiscal policy that helped propel equities last year is indeed fading.
- Data out of China continues to improve, although we remain relatively cautious as high yield credit spreads are elevated. While monetary policy is becoming accommodative, more easing needs to be initiated to stimulate credit demand. Our expectation is for improved credit conditions, which, combined with low market multiples, could see us become more constructive this year.
Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding government transfer payments, and as real disposable income is eroded by inflationary pressures.
The relative hawkishness of the US Federal Reserve compared to other major central banks has helped increase the relative attractiveness of the dollar. This will resultantly lead to less supportive liquidity dynamics in 2022.
While price pressures remain sticky, particularly against the backdrop of elevated tensions between Russia and Ukraine, we continue to believe that the inflation profile will subside in the second half of the year.
We continue to believe that inflationary pressures will dissipate in H222 as we assume supply chain bottlenecks will likely unwind as trading conditions normalise. In addition, shelter price base effects from 2021 will likely lead to a disinflationary backdrop, particularly in H222, as a more meaningful acceleration seems unlikely, due to rising affordability concerns likely limiting house and rental price appreciation.
US data was mixed with news flow dominated by the Fed’s first-rate hike in three years
Retail sales increased 17.6% y/y in February, well ahead of forecasts. The trade deficit widened to $89.7 billion in January, from an upwardly revised $82 billion in the previous month and above the estimated gap of $87.1 billion. The unemployment rate edged down to 3.8% in February – a new pandemic low. This was below market expectations of 3.9%.
Annual inflation accelerated to 7.9%, amid elevated energy and commodity prices. Policymakers raised the target for the Federal Funds rate to between 0.25% and 0.5% during the Fed’s March meeting - the first increase in three years - and signaled further rate hikes ahead. Chair Jerome Powell also reiterated that the Fed would take all necessary action, including rate hikes in iterations of more than 25bps, to combat rising inflationary pressures.
On a preliminary basis, the S&P Global Composite PMI for the US rose to 58.5 in March from a final reading of 55.9 a month before. This was well above expectations, as demand and supply conditions continued to improve.
Eurozone data was still mixed but high inflation and a deterioration in confidence dominated
The seasonally adjusted unemployment rate in the euro area fell to a new record low of 6.8% in January, below estimates.
The eurozone posted a trade deficit of €27.2 billion in January 2022, well ahead of expectations. Imports climbed 44.3% y/y, driven by a surge in energy purchases, while exports rose at a slower 18.9% y/y. Annual inflation edged to a fresh record high of 5.9% in February 2022, almost three times above the European Central Bank’s (ECB) target. During its March meeting, the ECB unexpectedly sped up its asset purchases schedule for the coming months. Regarding the war in Ukraine, ECB President Lagarde emphasised the material impact on economic activity and inflation through higher energy and commodity prices, as well as weaker sentiment.
Initial estimates showed the S&P Global Eurozone Composite PMI fell to 54.5 this month as consumer confidence deteriorated. This was, however, still ahead of the estimated 53.9.
UK data was also mixed – confidence tempered but remained strong in March
Britain’s gross domestic product grew 10% y/y in January, above expectations of 9.3%. Retail sales volumes increased 7% y/y, below expectations. The trade deficit widened to £16.2 billion in January, from £2.3 billion in the previous month, as exports were dragged by a decline in sales to European Union nations. The unemployment rate declined to 3.9% in the three months to January 2022 – the lowest in over two years - as the labour market continued its recovery.
Annual inflation increased slightly above estimates to 6.2% in February. During its March 2022 meeting, the Bank of England raised its benchmark interest rate by 25bps to 0.75%, as widely expected. Recent events, such as the Russian invasion of Ukraine, are likely to heighten both the peak in inflation and the adverse impact on economic activity by further pressuring household income. Inflation is expected to increase further in Q222, to around 8%.
According to preliminary reports, the S&P Global/CIPS UK Composite PMI eased to 59.7 in March, but was still well ahead of the forecasted 57.8 as growth in private sector activity remained strong.
China data pointed to an unsteady recovery
Retail sales rose 6.7% y/y, considerably beating estimates of 3%. China’s trade surplus widened sharply to $116 billion, from $97 billion in the same period a year before. This was ahead of the forecasted $99.5 billion, as exports extended their double-digit growth, rising 16.3% y/y, while imports rose at a softer 15.5%. The surveyed urban unemployment rate was up to 5.5% in February – marking the highest jobless rate in over a year. As anticipated, the annual inflation rate stood at 0.9% as food costs remained subdued.
China’s composite PMI remained unchanged at 50.1 for February 2022, slightly below expectations of 50.8.
Japan’s central bank maintained its dovish stance
Retail sales rose 1.6% y/y in January, ahead of the estimated of 1.5%, driven mainly by sales in fuel, general merchandise and medicine and toiletries. Japan posted a trade deficit of ¥668 billion compared to forecasts of ¥112 billion. This marked the seventh consecutive month of a trade shortfall as imports jumped 34% y/y. The unemployment rate increased ahead of expectations to 2.8% in January 2022, reflecting the impact of the Omicron variant on the labour market. As widely expected, the Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained its target for the 10- year Japanese government bond yield at ~0%. Despite noting an uptick in the economy, policymakers warned of fresh risks
from the Russia-Ukraine conflict, including further pressure on raw material costs, but reiterated that the bank will not hesitate to take extra easing measures if necessary.
Flash estimates showed that the Jibun Bank Composite PMI reading for Japan increased to 49.3 in March 2022, from a final 45.8 in the previous month. This was well ahead of expectations.
In South Africa, data remained strong but has not yet fully factored in the impact of the Russia-Ukraine conflict
GDP growth advanced by 1.2% q/q in the three months to December 2021, following an upwardly revised 1.7% contraction in the previous period. Considering the full year of 2021, the economy expanded by 4.9%, the most in 14 years, recovering from a 6.4% decline in 2020.
Retail trade surged by 7.7% y/y in January, well above market estimates of a 4.9% gain. It was the fifth straight month of growth in retail activity, and at the fastest pace since last June. Private sector credit grew by 3.12% y/y in January, after a 2.58% gain a month earlier. This marked the seventh consecutive monthly increase, and the strongest rise since January 2021.The value of recorded building plans passed climbed 44.5% from a year earlier in January. It was the strongest growth since last July, as building plans increased for all segments.
The current account surplus narrowed to R120 billion in Q421, from a downwardly revised R216 billion in 3Q21. As a ratio of GDP, the current account surplus narrowed to 1.9% in 4Q21. The trade surplus narrowed to R3.55 billion in January from R29.02 billion in December. Exports fell 16.1% while imports edged up 0.3%.
Mining production rose 0.1% y/y in January, after a downwardly revised 1% fall in the previous month. Manufacturing production advanced 2.9% y/y in January, following three consecutive months of decline. It was the strongest increase in factory activity since last June.
Consumer price inflation was unchanged at 5.7% in February, slightly below market expectations of 5.8%. Core inflation, which excludes prices of food and energy, printed at 3.5%, also unchanged from January, but below estimates of 3.7%.
The South African Reserve Bank raised its benchmark repo rate by 0.25% to 4.25% at its March meeting, as widely expected. This was the third consecutive hike due to increased inflation risks stemming from the conflict in Ukraine. The SARB’s headline CPI forecast has been revised sharply higher to 5.8% in 2022 (vs 4.9% in January), primarily due to higher food and fuel prices. Three members voted for a 0.25% hike, while two members favoured a 0.5% increase.
The FNB/BER business confidence index rose to 46 in Q122 from 43 in the previous period, the highest level since 2Q21, and pointed to an improvement in sentiment among manufacturers. This was helped by strong domestic sales and exports. The FNB/BER consumer confidence index fell to -13 in Q122 from -9 in the previous period, mainly on concerns over the global impact of Russia’s invasion of Ukraine on growth and inflation. The IHS Markit PMI was at a 3-month high of 50.9 in February, unchanged from January.
The composite leading business cycle indicator increased by 1.0% from a month earlier in January, rebounding from a downwardly revised 0.3% fall in December.
Overview as at 01 March to 29 March.
By Hashmeel Suka, Nico Els, Chantal Marx and Jarred Sullivan.