Market Overview

16 May 2022

The sell-off in global markets continued during April as equities remained trapped in a volatile grind.  Inflationary concerns continued to dominate the headlines, with comments from US Federal Reserve officials pointing towards an even more assertive set of rate hikes. Geopolitical concerns stemming out of Eastern Europe, as well as a resurgence in Covid-19 cases in Shanghai also contributed to the sombre mood, fuelling concerns about global growth prospects. However, some reprieve was seen towards the end of the month as investors re-entered the markets following the heavy sell-off.

The US earnings season, while mostly positive, was overshadowed by ongoing concerns surrounding the inflation outlook. Technology stocks led the decline, with concerns about what higher rates and bond yields would mean for valuations leading to further pressure in the market. The VIX, which measures volatility in the US equity market, moved from lows of around 18.6 to a high of 33.4 towards the last week of the month. The US 10-year yield moved up from 2.3% at the start of the month to 2.8% at the time of writing. Tensions in Europe persisted after Russia warned that further Western intervention in Ukraine would be met with military intervention. Russia also halted gas supplies to Poland and Bulgaria towards month end, further magnifying supply constraints and the energy crises.

The JSE performed in line with global peers, ending the month in the red with localised events weighing further on sentiment and the economic outlook. Despite the rand being one of the strongest emerging market major currencies against the US dollar earlier in the year, the recent tumble has been in response to global risk aversion and a stronger greenback, with the re-introduction of load-shedding as well as the floods in KZN adding further pressure. Yields on short-end government bonds climbed and the curve flattened amid expectations that the South African Reserve Bank will have to match the US Federal Reserve’s steep monetary tightening path.

Economic Data Review

US data was mixed with the headlines dominated by inflation and the Fed’s hawkish comments

On a preliminary basis, the S&P Global Composite Purchasing Managers’ Index (PMI) for the US declined to 55.1 in April 2022, down from a final reading of 57.7 a month before. This was below expectations as inflation continued to weigh on consumer spending. Retail sales increased 6.9% year-on-year in March, however, this was well below the market consensus of 11%. The trade deficit was fairly unchanged at $89.2 billion in February, below the estimated gap of $88 billion, as imports continued to rise amid robust demand and rising oil prices. The unemployment rate edged lower to 3.6% in March – the lowest since February 2020. This was below market expectations of 3.7%. Annual inflation accelerated to 8.5%, reflective of elevated energy prices due to the Russia-Ukraine war. Policymakers raised the target for the Federal Funds rate to 0.5% during their meeting in May in an attempt to tame inflation. 

Eurozone benefits from easing Covid-19 restrictions but high inflation remains a concern

Initial estimates showed the S&P Global Eurozone Composite PMI increased to 55.8 this month as private sector growth soared, amid eased Covid-19 restrictions. This was ahead of the expectations of 53.9. The Eurozone posted a trade deficit of €7.6 billion in February 2022, compared to a surplus of €23.6 in the same period a year ago, as imports increased 38.8% year-on-year, driven by a surge in energy purchases, while exports rose at a slower 17% year-on-year. The seasonally adjusted unemployment rate in the euro area fell to a new record low of 6.8% in January, below estimates. Annual inflation climbed to its highest on record to a revised 7.4% in March 2022. This is now more than three times above the European Central Bank’s (ECB) target of 2%, as sanctions on Russia pushed natural gas and fuel prices to record highs. During its March meeting, the ECB said that it expects to conclude net asset purchases by the third quarter and that any adjustment in the interest rate will take place gradually after the asset purchase programme is concluded. On the economic front, the central bank has acknowledged intensifying inflation pressures, mostly due to the surge in energy costs.

UK unemployment rate returns to pre-Covid levels, however, geopolitical concerns remain at the forefront

Britain's gross domestic product grew 9.5% year-on-year in February 2022, in line with expectations. According to preliminary reports, the S&P Global/CIPS UK Composite PMI fell to 57.6 in April, below the forecasted 59.6, as momentum to pass-through escalating costs to consumers post the Covid-19 pandemic dried up. Retail sales volumes were almost flat at 0.9% year-on-year, well below expectations. The trade deficit reduced to £9.26 billion in February, from £12.84 billion in the previous month, as exports to European Union nations jumped 25.4%. The unemployment rate was in line with expectations at 3.8% returning to pre-pandemic levels. Annual inflation also increased in line with expectations to 7% in March. At its March 2022 meeting, the Bank of England raised its benchmark interest rate by 25 basis points to 0.75%, as widely expected.  Recent events, such as the invasion of Ukraine by Russia, 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 quarter two of 2022, to around 8%, and possibly even higher later this year.

China’s data was under pressure with its zero-Covid policy weighing on growth prospects

China’s composite PMI plunged to 43.9 in March, from 50.1 a month before. This was well below expectations of 49. Retail sales declined 3.5% year-on-year, overwhelming estimates of a 1.6% fall. This was the first drop in trade since July 2020 as consumption weakened amid widespread Covid-19 lockdowns. China’s trade surplus jumped to $47.4 billion, from $11.8 billion in the same period a year before, easily beating forecasts of $22.4 billion. Exports extended their double-digit growth, rising 14.7% year-on-year, while imports fell 0.1%. The surveyed urban unemployment rate was up to 5.8% in March – marking the highest jobless rate in over two years. China’s annual inflation rate rose to a three-month high of 1.5% as the cost of household goods and services increased. This was slightly ahead of the expected increase of 1.2%.

Japan’s central bank maintained rates

Flash estimates showed that the Jibun Bank Composite PMI reading for Japan rose to a four-month high of 50.9 in April 2022, from a final 50.3 in the previous month. This was well ahead of expectations. Retail sales rose 0.9% year-on-year in March, ahead of the estimated 0.4%, driven by a recovery in consumption of general merchandise, medicine and toiletries. Japan posted a trade deficit of ¥412 billion compared to forecasts of ¥100 billion. This marked the eighth consecutive month of a trade shortfall as imports jumped 31.2% year-on-year. The unemployment rate fell to 2.6% - the lowest in over a year. This slightly exceeded expectations of 2.7%. As widely expected, the Bank of Japan, 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%. The central bank also said that it expects the economy to grow more slowly, amid headwinds from a resurgence in Covid-19 cases and a rise in commodity prices due to the war in Ukraine.

In South Africa, data was mixed

The seasonally adjusted Absa PMI increased to 60 in March from 58.6 in the previous month. The latest reading pointed to the eighth straight month of expansion in manufacturing activity, and at the strongest pace since records began in March 1999. Retail trade fell by 0.9% year-on-year in February, compared with a 7.7% surge in the previous month. It was the first decrease since last August. Private sector credit grew by 3.62% year-on-year in February, after a 3.11% gain a month earlier. This marked the eighth straight month of increase, and the strongest rise since August 2020. The value of recorded building plans passed slipped by 19.5% from a year earlier in February, after an upwardly revised 49.4% jump in the prior month. This marked the first decline since January 2021 as building plans declined for all segments. The trade surplus rose to R10.6 billion in February from R4.07 billion in January. Exports advanced 8% while imports increased at a slower 3.1%.

Mining production plunged by 6% year-on-year in February, after an upwardly revised 1.7% rise in the previous month. It was the steepest decline in mining activity since January 2021. Manufacturing production went up by 0.2% year-on-year in February, decelerating from a revised 2% growth in the prior month and well below market expectations of a 3.1% rise.

Consumer price inflation rose to 5.9% in March, from 5.7% in the previous month and slightly below market expectations of 6%. Main upward pressure came from fuel, food and housing. Core inflation, which excludes prices of food and energy, printed at 3.8%, the highest since February 2020, from 3.5% in the prior month. The South African Reserve Bank did not have a Monetary Policy Committee (MPC) meeting in April. The next MPC meeting is scheduled for 19 May.

Moody’s changed South Africa’s sovereign credit rating outlook to stable from negative and affirmed the Ba2 rating, citing the improved fiscal outlook that raises the likelihood of the government’s debt burden stabilising over the medium term.

Outlook

Local

• Real economic activity is expected to soften from the elevated levels seen in 2021. Slower economic growth in Europe and pressure on domestic household consumption from higher inflation will contribute to this trend.
• Policymakers and the private sector will continue to muddle through the complexity of implementing meaningful structural reform. Without these reforms, the 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-enterprise, particularly Eskom.
• Domestic inflation is expected to remain elevated through the first half of this year. Most of this inflation pressure is attributed to food and oil prices, both of which are expected to peak towards the middle of this year.
• Short-term interest rates are expected to lift to 5.25% by the end of the year and 5.75% by the end of 2023. If inflation expectations lift more than expected, a 50 basis points hike in May cannot be ruled out.
• 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 will remain weak.
• Successful implementation of growth-enhancing economic and fiscal reforms represents an upside risk to our baseline view.

Global

• We remain cautious on the returns for global equity markets as the supportive monetary and fiscal policy that helped propel equities last year continues to fade.
• Increasing hawkish rhetoric from the US Federal Reserve compared to other major central banks has helped increase the relative attractiveness of the dollar. Year to date, the US dollar has appreciated by more than 11% vs the Japanese yen (as of 25 April 2022).  The two regions’ central banks continue along diverging paths of monetary policy with the Bank of Japan continuing its stimulus package as inflation remains below its 2% target.
• ·       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.
• ·       China’s economy continues to show signs of weakness with PMIs falling below their neutral 50 mark. Further Covid outbreaks across the region in April have added to declining investor sentiment as the government stands by its economically detracting zero-Covid policy. Low relative valuations compared to other equity regions mean we keep a close eye on the region, however, for now, we remain neutral until we see signs of an improving economic backdrop.
• Commodity prices, which had one of their strongest first quarters in 2022 due to tailwinds such as supply constraints, strong demand and the escalating conflict between Ukraine and Russia, stalled in April. The slow-down of the world’s second-largest economy, China, has become a headwind for most commodities with copper, an industrial metal renowned for being a leading indicator of global growth, starting to point towards an economic slowdown. 
• 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 believe inflationary pressures will dissipate in the second half of 2022 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. Increasing headwinds for consumer demand will also likely add to disinflationary pressures as regions such as Europe continue to struggle with high staple prices such as food and energy.