Global equity markets dropped dramatically on Tuesday, following the release of the US inflation numbers for August. The 12-month inflation number came in at 8.3% (against the median estimate of 8.1%), easing from July’s annual rate of 8.5%. At first glance, these seemingly small movements in the numbers should not have caused the S&P 500 to drop 4.3% on the day (its biggest drop since June 2020), which brutally erased its 5% gain for the preceding week leading up to the report. The yield on two-year Treasury notes was similarly impacted, rising to 3.75% on the announcement, representing a fresh high for the year.
On further examination of the data, monthly consumer prices rose only 0.1% from July, but against expectations for a drop. More disturbingly, core CPI, which strips out food and energy components, rose 0.6% from July, its first acceleration in six months on an annual basis.
This string of surprises eroded investor optimism for the balance of the week, and it is almost certain now that the Fed will hike rates by at least a further 75bps when it meets next week, with Japanese Bank Nomura predicting a 1% increase.
The interest rate curve is pricing in a revised upper limit of 4.25% for the balance of the year, adding an additional 25bps to previous forecasts. This translates to the Fed raising rates by 175bps over the next 3 months.
We have written previously of how the direction of markets will remain extremely sensitive to inflation data in the short-term. Outside of this, another factor impacting equity markets is the extent to which inflation-related bad news is already priced in: The forward P/E of the S&P 500 is now at 9-year lows and year-to-date corporate earnings have held up really well.
Certain market commentators believe that despite the latest CPI numbers, the US is now at/or approaching peak inflation. Empirical research has shown that times of peak inflation present a buy – and not a sell – opportunity for risk assets!
“70% of the CPI basket is seeing an annualised price rise of more than 4 per cent month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.”
– Seema Shah, chief global strategist at Principal Global Investors
Global News
- US inflation rose a slight 01% in August compared with the previous month, which led to the annual rate easing to 8.3%, from 8.5% in July. Core inflation has gained 6.3% year-on-year, a signal that inflation is not weakening at the desirable pace despite the ongoing economic slowdown, thereby strengthening the case for higher-for-longer interest rates.
- The markets expect the Fed to be more aggressive, making a recession more likely and severe. According to columnist Brian Kantor, the US economy is already in recession, despite a fully employed labour force. He states that the Fed failed to imagine the inflation that would follow the stimulus it and the US treasury had provided to the post Covid-19 economy.
- The US trade-weighted dollar is back at record highs. According to a currency research note received by Analytics consulting today, “dollar strength is being sustained by higher interest rates and safe haven status versus fundamental outperformance of the economy”.
- Gold dropped to $1665 today, to end the week 3% lower, following the higher-than-expected US inflation data. Gold had been on an upward trend this month before the inflation data surprised markets.
- Across the globe, soaring borrowing costs are squeezing homebuyers and property owners alike as interest rates start biting, amid falling prices. Housing prices have fallen sharply across highly priced cities such as Stockholm, Seattle and Sydney, with the latter recording its largest monthly decline in 4 decades.
- Several St Petersburg local politicians who called for President Vladimir Putin to be sacked over the war in Ukraine face the likely dissolution of their district council after a judge ruled that a series of past council meetings had been invalid, paving the way for it to be broken up by the regional governor.
- California’s wine country is facing a climate crisis so dire that it’s posing an existential threat to the future of the state’s industry. The produce has been hit with one extreme after another, starting with a deep frost this year, which was followed by drought and heat. At the same time, there’s the ever-present threat of wildfires and smoke damage.
- JPMorgan Chase’s investment-banking fees could drop by as much as 50% in the third quarter as clients stay on the side-lines amid uncertainty around inflation, interest rate hikes and the potential for a recession.
- Nintendo’s shares surged 6% in Tokyo after the family-friendly online shooter game Splatoon 3 has become the biggest Switch debut to date, with 3.45 million units sold in Japan over its opening weekend.
- The S&P 500 was down 4.1% for the week based on Thursday’s close.
Local News
- According to the latest BankservAfrica economic transactions index (Beti), the local economy is battling to gain momentum and will continue to muddle along as all sectors struggle to get going in the short-term. The monthly index of underlying trends in the local economy was 131.6 in August as it declined for the third month running and recorded its lowest number since the score of 130.6 in December 2021.
- Although retail sales soared 8.6% year on year in July, this reflects the low base effect of the previous comparable period when civil unrest led to widespread looting of shops and factories in KwaZulu-Natal and Gauteng, showing that consumer spending, which accounts for two-thirds of the economy, is taking strain in the face of rising inflation.
- Mining production fell for a sixth consecutive month due to load-shedding that reached stage 6 at times in July, hampering activity in the sector. Mining slipped 8.4% year-on-year in July, from a downwardly revised 7.1% contraction in the previous month. Economists surveyed by Thomson Reuters expected a 5% fall.
- Finance minister Enoch Godongwana is convinced that South Africa’s economy faces more risks because of escalating geopolitical tensions and China’s sluggish economy along with the impact of floods in KwaZulu-Natal earlier this year, frequent power cuts, and rising inflation. The medium-term budget policy is scheduled to be delivered in parliament on 26 October.
- Analytics’ Investment Committee’s fair value estimated of the ZAR has been revised higher at R17.91/USD on the back of the US inflation numbers. The positive SA-specific tailwinds that have supported the exchange rate since Q4 of 2020 seem to have died down completely and a light headwind now appears to be in play. At some stage a reversal in relative dollar strength is likely to occur, but not for now.
- The National Energy Regulator of South Africa is consulting with Eskom on its multiyear price determination for the 2024 and 2025 financial years, having just recently asking for public comment on proposed increases of 38.1% for 2024 and 5.12% for the following year. The proposed 32.02% price increase, if approved, will be implemented on 1 April 2023. Increases of this magnitude would be extremely damaging to the corporate and private sectors alike, exacerbate inflation, and accelerate the transition away from centralized Eskom power. All these effects would in turn lead to lower demand for Eskom-supplied power and in our view these conditions would only fuel an ongoing death spiral for the current Eskom business model.
- According to today’s Bloomberg News, South Africa may lose almost half of its university graduates and top earners to emigration, with people between the ages of 25 and 40 the most likely to be considering this move. The Social Research Foundation has stated that in surrendering these skills, the country is vulnerable by extension to eroding “much of its remaining tax base”.
- The Competition Commission has paved the way for Dutch beer maker Heineken to expand its offerings through buying Distell for R40 billion, although the deal still must be approved by the Tribunal.
- FirstRand has declared a combined dividend of 467c for the year to the end of June, its highest in its history as the group, which comprises FNB, Rand Merchant Bank, WesBank, and Aldermore, saw its earnings recover in the 2022 financial year, surpassing pre-pandemic levels.
- At the time of writing, the JSE All Share was 3.4% down for the week, while the rand was 2.1% weaker against the US dollar.
Sources: Dynasty, Bloomberg, Daily FX, BusinessLIVE, The Economist, Reuters, Daily Maverick, Analytics Consulting, etc.
