Global Market Overview | April 2024

13 May 2024

In addition, heightened geopolitical tension in the Middle East contributed to the angst in the market. US first quarter earnings season also garnered attention. Approximately 214 companies in the S&P 500 have reported results so far – roughly 82% of these have reported better-than-expected earnings and around 55% have reported better-than-expected revenue.

Looking at the US market more closely, Federal Reserve Chair, Jerome Powell, noted that it will take “longer than expected” for inflation to return to the central bank’s 2% target level as recent economic data (weak growth numbers as well as three months of hotter-than-expected and sticky inflation prints) muddled expectations. This led to a dramatic change in interest rate expectations over the last few weeks, which generated renewed pressure on high-risk US assets. The market is currently pricing in between one and two interest rate cuts this year, after beginning 2024 with expectations of up to seven rate cuts. Interestingly, markets now suggest a roughly 20% chance of a US rate increase in the next year, up sharply from the start of the year (<10%). The dramatic change in expectations, and indeed heightened expectations that the Federal Reserve’s (Fed) next move could even be up, has sparked an overall bearish tone in the market, leading to the S&P 500 Index logging in a contraction of ~2.6%. Overall, the data seems to be countering the “no landing” or “goldilocks” narrative that the US economy would remain strong, inflation will come down because of supply pressures easing, and then interest rate cuts will be on the cards without a dent to buoyant US growth.

Moving over to the Eurozone (Euro Stoxx 600 Index: -0.2%), the most recent inflation reading surprised to the downside, supporting speculation that the European Central Bank (ECB) could cut rates before the US Fed, with traders adopting a more bullish stance regarding the quantum of European Central Bank (ECB) rate cuts.



This implies that even if the ECB starts to cut borrowing costs in June (as many investors expect after inflation fell sharply over the past year), it is likely to keep markets guessing on the timing and scale of any additional rate cuts. Inflation is expected to fluctuate around current levels in the coming months and to then decline to the 2% target next year. Economic growth, however, could be lower if the effects of monetary policy turn out stronger than expected.

Chinese equities performed well over the month with the MSCI China Index logging gains of 7.2%. This was bolstered by a host of strong economic readings, including better-than-expected first quarter GDP numbers as well as robust services and manufacturing activity data. GDP grew at its swiftest pace since 2Q23, lifted by continued support measures from Beijing, and as the Lunar New Year festival also helped buoy consumer spending. The statistics agency noted that while the latest GDP reading suggested an encouraging start to the year, the external environment is becoming more complex, severe, and uncertain, and the foundation for economic stability is not yet established. Other data released also showed that further intervention in the economy may be necessary to sustain high growth and reach government’s 5% growth target for 2024.

While the political landscape continues to be monitored in South Africa ahead of the 2024 general election, the All Share Index was able to gain some momentum (+3.5%, USD: +5.2%) as investors re-entered the market at fairly attractive levels following a recent sell-off. This was bolstered by firmer commodity prices, which led to the JSE Africa Resource Index rallying in excess of 11%, with recent news of BHP Group’s plan to take over Anglo American providing further thrust. Meanwhile, the South African Reserve Bank (SARB) released its semi-annual Monetary Policy Review (MPR) and reiterated that the uncertainty regarding the disinflation path back to target has risen in recent months as new risks emerged while others materialised. Given these developments, along with heightened uncertainty about global disinflation amid sticky services inflation, markets now expect rates to remain high for longer, and the long awaited cutting cycle to be shallower than initially envisaged.


Economic Data Review

Sticky inflation in the US weighs on rate cut expectations

Estimates show that composite PMI for the US declined to 50.9 in April (from 52.1 in March), signalling the softest expansion in private sector activity since December 2023. Retail sales increased 4% y-o-y in March (exceeding expectations of 2.5% growth), following a gain of 2.1% in the month prior. In February, the trade deficit widened to $68.9 billion (against expectations of $67.3 billion), the largest gap in over 10 months. The unemployment rate ticked lower to 3.8% in March and was slightly better than forecasted. Annual inflation came in hotter-than-expected at 3.5% (from 3.2% in February). As expected, the Fed kept the Fed funds rate steady for a fifth consecutive meeting in March 2024. Policymakers still plan to cut interest rates three times this year, similar to the quarterly forecasts in December. The plot also indicated three cuts in 2025, one fewer than in December, and three more reductions in 2026.

Downward trending inflation supports speculation for ECB to cut rates before US counterparts

Composite PMI in the Eurozone (on a preliminary basis) rose to 51.4 in April (from 50.3 in March) and was better than the expected reading of 50.8. This points toward a second consecutive month of improving private sector activity and output. Retail sales were down 0.7% y-o-y in February, but still better than expectations of a 1.3% decline. The trade surplus improved to €23.6 billion (from €11.4 billion in January), significantly higher than the surplus of €3.6 billion in the same period last year. The unemployment rate stood at a record low of 6.5% in February (vs forecasts of 6.4%). Consumer Price Inflation (CPI) edged lower to 2.4% in March (in line with expectations) but remains above the ECB’s target of 2%. The ECB kept its benchmark interest rates at all-time highs during its April meeting, with policymakers stating that dovish measures could be implemented should inflation move closer toward the 2% target. President Christine Lagarde noted, however, that the central bank is not committing to any particular rate path and that future moves are entirely data dependent.

UK inflation drops to lowest level in almost two-and-a-half years

Per initial reports, composite PMI in the UK increased to 54 in April (from 52.8 in March), above expectations. This was the sharpest rise in business activity since May 2023, underpinned by service sector output. Retail sales volumes were 0.8% higher in March, following a revised decline of 0.3% in the month prior. The balance of trade shortfall narrowed to £2.3 billion in February, much better than expectations of a £3.7 billion deficit. The unemployment rate edged up to 4.2% between December 2023 and February 2024, above market forecasts of 4%. During its March meeting, the Bank of England (BoE) maintained the benchmark interest rate at 5.25% (the highest level since 2008) as policymakers looked for clearer signals on whether inflationary pressures have subsided or not. The announcement came a day after data revealed that the country’s Consumer Price Inflation (CPI) rate had dropped to 3.4%, its lowest level in almost two-and-a-half years. Governor Bailey expressed optimism about Britain’s economic trajectory, suggesting that conditions were favourable for the central bank to begin reducing interest rates, but stressed the necessity for greater certainty regarding the economy’s control over price pressures.

Upbeat Chinese 1Q24 GDP figures point to a solid start to the year, however, the external environment is becoming more complex

General Composite PMI in China ticked higher to 52.7 in March (in line with expectations) with growth in private sector activity underpinned by stronger manufacturing and services output. Retail sales were up 3.3% y-o-y in March (behind the market consensus of 4.5%) and marked a sharp slowdown from the previous month (where growth came in at +5.5%). The country’s trade surplus declined to $58.6 billion, well below expectations of $70.2 billion as exports fell faster than growth in imports. As expected, the unemployment rate ticked lower to 5.2% (from 5.3% in February). Consumer Price Inflation was up 0.1% y-o-y in March, compared to forecasts of 0.4%, much better than the previous month’s reading of 0.7%. In April, the People’s Bank of China (PBoC) kept the medium-term lending facility (MLF) rate unchanged at 2.5%, in support of the Nation’s currency that has come under some pressure lately. All-in-all, Chinese policymakers are still trying to manage economic risks and deal with policy divergence from the US, where inflation remains elevated.

The Bank of Japan (BoJ) kept interest rates around zero amid growing conviction that inflation was on track to hit its target

Early estimates show that Composite PMI in Japan rose to 52.6 in April (from a final reading of 51.7 in February). This was the fourth consecutive month of growth in private sector activity and the strongest increase since August last year. Retail sales increased 1.2% y-o-y in March, slowing from an upwardly revised gain of 4.7% a month prior and coming in below forecasts of 2.5% growth. Japan’s trade balance shifted to a surplus of ¥366.5 billion (compared to estimates of a ¥280 billion deficit) as exports grew significantly while imports fell. The unemployment rate was unchanged at 2.6% in March, slightly above market forecasts of 2.5%. As expected, annual inflation moderated to 2.7% in March (from 2.8% in the prior month), while core inflation softened to 2.6%. The Bank of Japan (BoJ) maintained its key short-term interest rate at around 0% to 0.1% (in line with expectations). Policymakers emphasised that the central bank would continue to increase government bond purchases while simultaneously reducing the pace of corporate bond purchases, in response to elevated rates.

Local inflation readings ebb lower but still remain above the midpoint of the SARB’s targeted range

In February 2024, the leading business cycle indicator in South Africa improved 1.7% MoM (following a decrease of 0.2% in the prior month), marking the strongest expansion since October last year. The SACCI Business Confidence Index remained at an over one-year high of 114.7 in March (January: 112.3), amid positive economic and business relations as well as increased inward tourism playing a key role in maintaining business sentiment. The trade balance in February amounted to a surplus of ~R14 billion (comfortably beating expectations of ~R8.6 billion) as exports advanced 12.4% while imports dropped 3.8%.

Local mining production climbed 9.9% y-o-y in February (well ahead of forecasts of 3.5% growth) due to significantly higher output of iron ore (+43%), chromium ore (+21%), and coal (+15%). Manufacturing production improved 4.1% y-o-y, marking the fifth consecutive month of growth in industrial activity. This was slightly ahead of forecasts (+3.5%). In March, composite PMI moderated to a reading of 48.4 (vs. a reading of 50.8 a month before), as private sector activity remained soft. Manufacturing PMI dropped to 49.2 (February: 51.7) pointing towards a renewed contraction in the manufacturing sector amid a sharp decline in both business activity and new sales orders.

Consumer Price Inflation declined to 5.3% in March (against expectations of 5.4%) amid softer price hikes across food & non-alcoholic beverages, alcoholic beverages & tobacco, transportation, as well as restaurants & hotels. This is still above the midpoint of the SARB’s targeted inflation range of 3% to 6%. Core inflation (which excludes the price of food, non-alcoholic beverages, fuel and energy) cooled to 4.9%, but was above forecasts of 4.7%.

Outlook

Local

• The April 2024 IMF World Economic Outlook shows improved global growth in 2024 from 3.1% to 3.2%. This is on account of better growth in both advanced, mainly the US, and developing markets such as Russia and Brazil. Ultimately, global growth flatlines at 3.2% between 2023 and 2026, and remains below the 4% average over the past two decades (excluding GFC and Covid-19 lockdowns). This highlights tighter financial conditions, structural constraints in emerging markets, and escalated geopolitical tensions.

• While this should weigh on external demand conditions, continued structural reform should support local potential growth. We still expect load-shedding to be less of a binding constraint from this year, while logistical issues slowly unwind over the forecast period. Higher potential growth should have positive spillovers to the labour market and allow for improved household spending.

• That said, the SARB has been socialising a lower inflation target. While we do not know the exact process and timing of such a change, we think it is inevitable. The SARB suggests that moral suasion is most important in the process and would support lower administered price inflation as well as expectations of slower inflation in wage and price setting developments. Nevertheless, there should be some short-term implications for nominal interest rates and, when combined with a shallower rate cutting cycle by the Fed, we should only see a 25bps cut in November this year and higher rates over the medium term (7.5% versus 7.0% in the previous view).

• This should result in slightly lower local growth (1.2% in 2024, 1.5% in 2025, and 1.6% in 2026) and inflation (5.2% in 2024, 4.7% in 2025, and 4.5% in 2026).
  

• Over the longer term, structurally lower inflation should support less rand depreciation, lower risk premium, as well as lower neutral and nominal interest rates.

• Risks to the outlook continue to be dominated by geopolitical tensions and climate change.

• US growth has held up very well over the last few quarters despite a very aggressive interest rate hiking cycle. However, GDP for 1Q24 came out at a ‘disappointing’ 1.6%, versus consensus estimates of 2.5%. In the last Bank of America survey, participants continued to favour a better outcome for the US economy, with 54% calling for a soft landing, 7% for a hard landing, and a growing 36% calling for a no landing (economy to grow above potential).The long and variable lags of monetary policy are in progress, but so far the impact has been relatively small (as most companies/individuals have locked in low rates). We expect this soft vs hard landing rhetoric to continue throughout the year as new data becomes available. Our house view is for US growth to underperform consensus in 2024 and 2025.

• Inflation has peaked but is proving to be sticky. This month confirmed the stickiness of getting inflation lower, with US CPI surprising to the upside for a third straight month. However, shelter inflation should continue to trend lower, causing inflation to continue its gradual downward trend.

• The Fed’s interest rate hiking cycle is over. The question for 2024 becomes the pace and quantum of these cuts. Markets are now only pricing in between one to two interest rate cuts by the Fed for 2024, versus the six cuts priced into the market just three months ago. The ‘soft’ landing narrative is based on the Fed cutting rates fast enough, so real rates don’t become too restrictive on the economy. Our house view has three cuts for 2024, starting in 3Q24.

• In Emerging Markets, it is encouraging to see the PBoC maintaining loose monetary policy and further injecting liquidity into the banking system. However, the recovery will remain fragile in the absence of fiscal stimulus targeted at restoring confidence to the consumer and addressing the property sector issues. With low levels of inflation and notable excess savings combined with attractive valuation multiplies, we believe that selected opportunities remain in the Chinese economy and will be on the lookout for more palatable policy responses from fiscal authorities. Economic data has been encouraging lately with GDP for Q1 surprising to the upside (+5.3%) and PMI data also showing some improvements.

• With ‘rates higher for longer’, the USD has remained resilient. We expect the USD to remain well supported over the short term as interest rate differentials favour the USD.

• Geopolitics are always important for asset markets, but the election calendar for 2024 is exceptionally busy. This year, 76 countries will be voting, representing more than half of the world’s population and over 65% of global GDP. This, together with two major ongoing wars, could exacerbate uncertainty and volatility over the next few months. The impact from these developments, especially on oil, should be monitored very closely.

• Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.