Stock markets remained volatile this week with central banks and policymakers navigating the difficult trade-offs between keeping inflation under control and preventing a severe economic downturn. In the US, markets vacillated as investors balanced robust economic indicators against fears that this same economic strength will provoke the Fed to raise interest rates higher and for far longer.
Corporate earnings, employment figures and consumer spending all point to underlying strength in the US economy. But the Fed has not yet hit its inflation target, so it may continue to act to squash price pressures. US consumer prices, or CPI, rose at a higher-than-expected 0.5% in January, the highest in three months, while the annual inflation rate came in at 6.4%.
This has prompted some economists to suggest that the Fed reconsider its CPI target of 2%, which might be unattainable without a hard landing for the economy. It is said that a target of 3-4% might facilitate a softer landing in an environment where global supply-side issues are driving inflation. However, the Fed would lose total credibility if it were to officially pronounce this revised target. As such, the Fed appears to be stuck between a rock and a hard place, but perhaps the markets are pricing in that – unofficially at least – an incremental decrease in the inflation rate from current elevated levels to a 3-4 % range by year-end, might just be sufficient to appease the Fed and alleviate the requirement for it to crush the economy through more aggressive monetary policy.
In South Africa, the National Treasury and Finance Minister found themselves between a rock and a hard place of their own, as reflected in Wednesday’s National Budget Speech. Government has had to increase its budget deficit by taking on a major portion of Eskom’s debt. Yet raising taxes to fund the deficit is out of the question, given the cost-of-living crisis, high unemployment and weaker economic growth prospects due to persistent load shedding.
Not only is load shedding hampering growth in South Africa – repaying Eskom’s debt will crowd out other social and infrastructure spending for years to come. Government is only now starting to face the many difficult trade-offs it will need to make in the years ahead if it is serious about restoring growth to the South African economy.
The US Federal Reserve is walking a tightrope — if it acts too quickly it risks hampering growth and market volatility, but if it acts too slowly it risks spiralling price increases.
– Franklin Templeton Investment Solutions
Global News
- American president Joe Biden and Russian president Vladimir Putin have been throwing verbal punches as they put forward different views of the world and the Ukraine war, with Biden promising to defend democracies and Putin asserting the West is a threat to Russia. Putin has sent a nuclear warning to the West over Ukraine, suspending a bilateral nuclear arms control treaty; announcing new strategic systems are on combat duty; and warning that Moscow could resume nuclear tests. On the other side, Biden wants to have the West continuing fighting to ensure Ukraine wins the war, following his trip to Kyiv, which he planned in secret. Chinese leader Xi Jinping reportedly plans to meet with Putin in Moscow as he seeks to mend relationships without distancing himself from Europe.
- US real wages have been breaking all records—and not in a good way. The year-on-year rate of real wage growth has been negative for 22 consecutive months. With such a collapse in living standards, the Fed’s relative focus on labour-led rather than profit-led inflation seems peculiar. If inflation doesn’t keep going down, the Fed will remain under pressure to keep hiking the rates. The current rate hiking cycle is, according to some analysts, anticipated to peak at 5%.
- Russian exports of discounted crude and fuel oil to China are at record levels as a result of the latter being, the world’s biggest energy importer, having resumed its economic growth trajectory after dismantling its Zero Covid policy. Overall flows last month were at the highest at any point since Russia attacked Ukraine a year ago and exceeded a record set in April 2020. At the same time, Russia and China have a stranglehold on the world’s food supplies. Moscow’s invasion of Ukraine has highlighted the role of fertilizers — and who controls them — as a strategic lever of global influence.
- This week, the European Parliament signed off on a deal reached with member states last year that requires automakers to reach a zero-emission target by 2035 and to cut pollution levels by 55% this decade. By 2030, the US expects to have an electric vehicle charging network of half a million stations across the country, through an ambitious $7.5 billion, federally funded programme. At the same time, popular Formula 1 says it will never go electric but, instead, has plans to reduce emissions. It is developing a zero-emission petrol that could be used by planes and vessels as well.
- Memory chips that power phones and PCs are going through a historic decline in demand, seeing two of the worst quarterly drops on record at the end of last year. The average price has dropped 34.4% in the fourth quarter, worsening a 31.4% fall in the quarter before it. This has been attributed to a demand hangover from the Covid-induced pull forward of tech spend.
- Microsoft founder and philanthropist, Bill Gates, is diversifying his investment portfolio with a purchase of 3.8% of Heineken Holding NV. Gates bought 6.65 million shares in his individual capacity, and another 4.18 million shares through the Bill & Melinda Gates Foundation Trust. The shares are valued at €848.2 million ($902 million). Concurrently, a deal between Distell Group Holdings Ltd., (South Africa’s biggest wine exporter) and Heineken NV continues to go through a regulatory approval process.
- A “secret” Apple endeavour, E5, aims to measure the glucose levels in our bodies, without needing to prick the skin for blood, through the Apple watch. The project, started in Steve Jobs’ time, could eventually bring this glucose monitoring to market, which would help cement Apple as a powerhouse in health care. Adding the monitoring system to the Apple Watch – the ultimate goal – would also make that device an essential item for millions of diabetics around the world.
- As at Thursday’s close the S&P 500 was 1.9% lower for the week.
Local News
- South African Minister of Finance, Enoch Godongwana, delivered his second National Budget on Wednesday in a time of a challenging macro-economic environment. The “acceptable” budget needs to be seen in the context of a range of social and economic factors, including extremely high unemployment, weak consumer and business confidence, low fixed investment, high inflation, rising interest rates, failing infrastructure (most especially the persistent electricity outages) and a weakening exchange rate. As a result, the minister’s ability to make policy choices was severely limited. National Treasury predicts that South Africa’s economy is forecast to grow by 0.9% in 2023 (which is three times that of the South African Reserve Bank’s forecast of 0.3%). Without a meaningful and sustained increase in the overall level of fixed investment spending and employment, South Africa’s economic activity will struggle to gain momentum, curb the growth of South Africa’s tax base, and – by implication – limit government’s ability to implement meaningful socio-economic reforms. Kevin Lings, chief economist at Stanlib, has put together this handy video that summarises his key Budget takeouts.
- For readers who are more technically inclined, we have included our edited slide pack on the Budget, courtesy of Stanlib, that graphically illustrates the deteriorating trend in the country’s economic metrics, with specific reference to fixed investment, employment levels, business confidence, and the ramifications of the Eskom debt relief package. Slide 14, headed “Estimates of Individual Taxpayers Contributions” is of particular interest.
- The local currency was stable following the Budget speech, showing that the market had already factored in yet another National Treasury bailout of the state power utility. However, the rand would have weakened dramatically if Eskom had not been provided with the financial relief package The rand has also been impacted by the US dollar spot index which has continued to move higher since its recent low point at the beginning of the month. The US dollar spot index has moved up by 3.3% this month while the USDZAR exchange rate is weaker by 7.0%, reflecting an elevated level of South African-specific risk as a number of significantly negative local developments (and non-developments) all converge to pile on the pressure. The latest fair value estimate of Analytics Consulting is R17.26, up from an estimated level of R16.67 at the beginning of the month. Since 12 April last year, when the exchange rate was at R14.51, the local currency has weakened by 25.7%.
- It was announced today that the global crime watchdog, Financial Action Task Force, has added South Africa to its list of countries that require additional scrutiny to combat money laundering and terrorist financing. This move scars the country’s international reputation and may result in both government and state-owned companies battling to borrow, while banking and asset-management fees may rise.
- Commentator RW Johnson has said, in a must-read opinion piece, that South Africa’s foreign policy has gone through multiple phases over many decades, with even the ANC period seeing little continuity. He writes that our former president, Jacob Zuma, had no interest in international relationships, although the country’s relationship with G20 and BRICS (which it joined in 2010) became more important and was a more lasting landmark than anything Thabo Mbeki achieved. When it comes to president Cyril Ramaphosa, his period has been one of drift, internally and externally. Crucially, the country has aligned South Africa with Russia in the Ukraine war, refusing to condemn Russia’s open defiance of the UN Charter.
- More trouble hit Eskom after news on Wednesday that its CEO Andre De Ruyter was “released from his position with immediate effect.” Eskom chief financial officer Calib Cassim has been appointed as interim CEO. De Ruyter’s immediate departure follows an interview with e.tv aired on Tuesday, 21 February, where he said it appeared that Cabinet members were aware of and accepted widespread corruption at the embattled power utility. He also claimed that a high-level politician was involved in corruption and that a senior minister had suggested that “some people needed to eat a little bit” after he stated his concern over governance of $8.5 billion in climate financing. Eskom chairman, Mpho Makwana, has said that De Ruyter behaved “reprehensibly”. The former CEO is reportedly temporarily leaving the country to ensure his safety.
- Should De Ruyter’s allegations, as discussed in the interview with Annika Larsen be true, this would mean that, within the ANC, corruption continues to be the order of the day; that the billions spent on the Zondo Commission have been somewhat negated; and that it is likely that certain ANC members aim to unduly benefit from the huge US/European Union fund intended to facilitate the Just Energy Transition.
- It has become harder for South Africans to obtain the so-called Golden Visas in Europe. Some of the countries to which the wealthy wish to migrate (or which represent a “Plan B”), have announced that their investment-based residency programmes will either be scrapped or modified. Ireland was the first EU country to end its Golden Visa scheme this year, followed quickly by Portugal providing notice, while a Bill has been submitted to Congress in Spain to terminate the Spanish Golden Visa currently obtainable by purchasing real estate.
- After two Russian aircraft were denied landing rights to refuel at OR Tambo last year due to Western Sanctions, the Airports Company South Africa is changing operations at its airports to ensure that Russian aircraft can land to take on fuel. The airport operator is now creating its own, independent, fuel company.
- Naspers, which invested early on in China’s Tencent and is still its largest shareholder, is backing rent-to-buy car firm Planet42 in a $100 million debt and equity fund-raising. This startup mainly operates in South Africa and will use the funds for growth within the country and further expansion in Mexico.
- Sasol disappointed when it only reported a 9% increase in headline earnings for the year to December. Shareholders were anticipating that a weaker rand and a high oil price would give the company a big boost. The share price dropped by more than 5% soon after the results were released.
- Despite not declaring an interim dividend, Discovery’s shares rose to a 10-month high. The company may consider shareholder payouts at year-end. Headline earnings per share increased 11% to R2.943 billion in the six months to end-December 2022.
- Reporting its results for the year ended December, Anglo American said that portfolio quality, diversification and growth supported underlying earnings before tax, depreciation and amortisation of $14.5 billion. The company believes it is positioned for structurally attractive long-term dynamics, although it is anticipating an earnings decline for the year ahead.
- As at the time of writing, the rand was 3.1% weaker for the week and the ALSI was 1.2% lower.
