Economists believe that people’s expectations are an important influence in their decisions, whether these be to invest in expanding a business, or to defer or accelerate purchases. Economist John Maynard Keynes labelled the role of expectations “animal spirits.”
Consequently, what we think may happen in an economy in the future could determine how we act today, thereby shaping the actual outcome.
In an interview with Bloomberg News this week, Raphael Bostio, President of the Federal Reserve Bank of Atlanta, identified the biggest economic risk to the US as consumers expecting prices to continue to rise and then starting to make specific decisions based on those assumptions. Bostio added that although these expectations have not yet become unanchored, the risk will grow the longer inflation levels remain elevated.
Dynasty research points towards a base case scenario whereby US inflation may have already peaked at around the 9% level, and that this number is likely to decline to the 3 to 3.5% level by the end of next year. If the inflation numbers for July and the ensuing months were to decline, the trend could begin to temper expectations that high inflation is embedded in the economy. On this news, modified business and consumer behaviour should provide some underpin to July’s market strength, its best month since 2020.
“Prices are reflexive, driven by positive feedback loops between prices and expectations.”
– George Soros, billionaire investor and philanthropist, on the general theory of reflexivity
- Germany has three months to save itself from an unprecedented winter energy crisis. Most of Europe is feeling the strain from Russia’s squeeze on natural gas deliveries, although Germany, the region’s biggest economy, will feel the most pain as nearly half the homes rely on the fuel for heating.
- Meanwhile, food prices hang in the balance and will be determined based on commodity and price volatility. Headwinds are likely to persist as costs remain elevated, with some easing brought about by the Ukraine grain deal.
- The Bank of England raised interest rates by the most in 27 years to smother surging inflation on track to top 13%, even as it warned a long recession is coming. One of the major causes is a constrained energy supply due to Russian sanctions.
- In the ongoing war in Eastern Europe, the Kremlin has told the United States that time is running out to negotiate a replacement for the “New Start” nuclear arms reduction treaty and that if it expired in 2026 without a replacement, global security would be weakened. The treaty, signed in 2011, obligated the US and Russia to limit deployed intercontinental ballistic missiles, deployed submarine-launched ballistic missiles, and deployed heavy bombers equipped for nuclear armaments.
- In the UK, global management consultancy Bain & Company has been banned from tendering for UK government contracts for three years because of its “grave professional misconduct” in state capture in South Africa.
- In corporate news, ride-share companies like Uber and Lyft are now benefitting from a new world of high inflation and driver shortages. Uber doubled quarterly revenue, improved its financial performance, and said high inflation was causing more people to use its platform to help offset rising household costs. Uber’s revenue grew 105% to $8.07 billion for the three months through June. The company also posted adjusted earnings – a figure that excludes some expenses – of $364 million, its strongest ever. These numbers beat Wall Street expectations.
- Expedia Group reported sales up 51% year-on-year to $3.2 billion in the second quarter, beating analysts’ estimates and suggesting a solid start to the busiest travel season as voyagers shake off two years of Covid-19 restrictions. The shares jumped about 6% in extended trading after the report.
- Gold traded near a one-month high after jumping the most since March on Thursday, heading for its third weekly gain as US-China tensions and a deepening global economic slowdown buoyed demand for haven assets.
- A collapse in cryptocurrencies is easing supply of the most sought-after luxury watches on the second-hand market, pushing down prices for rare models. The supply of trophy timepieces, such as the Rolex Daytona and Patek Nautilus 5711A, is now much larger, causing prices to fall.
- At the time of writing, the S&P 500 was up 0.5% for the week based on Thursday’s close.
- The South African rand experienced what can be considered respectable trading this past week, gaining ground against 14 of the top 19 currencies. In the absence of local catalysts, this can be largely attributed to recent weakness in developed market currencies.
- With the rand being a most volatile currency, it has proven very difficult for most economists to accurately predict its short-term direction. However, factors that could positively influence the rand for the remainder of 2022 include Ramaphosa’s potential re-election; South Africa continuing to record a relatively large monthly trade surplus; and the country’s fiscal position which continues to improve.
- However, factors that could weaken the rand are narratives and data releases relating to global growth, inflation, and interest rates. For example, if US inflation comes out next week with a decade-high inflation rate of 10%, the dollar would rally and emerging market currencies would weaken. The rand could also weaken because international commodity prices have declined, a symptom of slowing global growth. (There is a powerful link between commodity prices and rand performance).
- Seven opposition parties (the DA, EFF, IFP, ATM, UDM, ACDP and NFP) have unanimously decided to hold Ramaphosa accountable over the Phala Phala scandal. They have agreed that the concealment of the president’s responses to the public protector is unacceptable and must be challenged.
- Under National Treasury’s “Two-Pot” system, retirement savings will be divided into two “pots”. The “savings pot” (one-third of savings) will be accessible for emergencies, while the second “retirement pot” (the remaining two-thirds) will be available only at retirement. This stemmed from Treasury’s annual set of draft legislative changes to South Africa’s tax acts.
- The ANC revived plans over its policy conference last weekend to introduce a new tax on the wealthy to fund its basic income grant – first mooted at the ANC’s national conference in 2017. It calls for an appropriately structured wealth tax, which would be linked to a land tax, to promote equity and raise revenue. The target should ideally be the top 5% of high-net-worth individuals and estates with significant assets. (Dynasty believes that the introduction of a new tax is totally unnecessary).
- In an indictment on South African society and law enforcement, Investec will pay up to £100 000 (about R2 million) to cover the personal security costs of each of its executive directors in SA due to concerns about the country’s rising crime levels.
- At the time of writing, the JSE All Share was up 0.2% for the week, while the rand ended flat against the US dollar.
Sources: Dynasty, Bloomberg, BusinessLive, Daily Maverick, Reuters, Business Report, Wall Street Journal, etc.