Markets briefly fell on Tuesday with the news that consumer prices in the US rose by a higher-than-hoped-for 3.1% for the twelve months to the end of January. But, by the end of the week, the S&P 500 had powered back to record highs. The rapid retracing of the value equities had lost earlier this week suggests that investors remain confident that the fight against inflation is over.
Despite the shock of the announcement, the market took heart as people started to probe the meaning of the inflation read, along with other economic data. Investors were quick to note that ‘shelter i.e. housing and accommodation—fuelled a disproportionate chunk of inflation for the month.’
Other elements of core inflation that matter more to the Fed than shelter continued to glide downwards, reaffirming hopes for interest rate cuts. A drop in retail sales and slower manufacturing activity helped to support a narrative that the US economy isn’t in much danger of overheating (though labour market strength offers some reason to be concerned).
The US dollar strengthened, and gold fell this week, both underlining investor confidence in a soft landing for the US economy and markets. The contrast with the Eurozone and the UK is stark, where high interest rates have battered growth forecasts. The UK announced that it slipped into recession in 2023, while growth outlooks for Europe were slashed this week.
The world has moved on since 2022 and the first ten months of 2023, where markets were jittery and moved more sharply in response to inflation readings. The Fed and some economists warn that we are not out of the woods. However, there is growing confidence that the US will be able to ease out of sticky inflation and high interest rates without triggering a long or deep downturn. This should provide a measure of resilience to equity markets.
“There’s still a viable path to a soft landing, but the January inflation report is a reminder that getting there won’t be a walk in the park.”
– Lauren Goodwin at New York Life Investments
Global News
- The first measure of US inflation for 2024, the Consumer Price Index, showed that prices rose by 3.1% for the 12 months ended in January, according to the Bureau of Labor Statistics data released on Tuesday. This marks a step back from December’s 3.4% rate and a dramatic cooling from the 6.4% increase seen in January 2023. On a monthly basis, CPI rose by 0.3% in January, with stubbornly high housing costs accounting for two-thirds of the gain. The risk-off momentum pushed the S&P 500 down 1.4% on Tuesday, its worst CPI-day performance since September 2022, but it has essentially seen a full recovery since then.
- The dollar traded near three-month highs to major peers on Wednesday after CPI numbers were released, as traders pushed back bets for a first Fed interest rate cut. Federal funds futures currently price in no rate cut in March and a lower than 50% chance of easing in May, according to LSEG’s rate probability app.
- UK inflation gained less than forecast in January, with downward trends in the cost of food and household goods boosting expectations that inflation could soon return to the Bank of England’s target. Consumer prices rose 4% compared to a year earlier, the same pace as in December. The BoE and private-sector economists had expected inflation to come in at 4.1%.
- The UK economy contracted a worse-than-expected 0.3% in the fourth quarter of 2023, tipping it into a technical recession. The Pound weakened slightly in reaction to the data, while FTSE 100 futures headed higher, and traders fully priced in three BoE rate cuts in 2024.
- An errant zero in US company, Lyft’s, fourth-quarter earnings report caused its company’s stock to surge and then dramatically reverse course on Tuesday. In an earnings statement released after the bell, Lyft estimated its gross margin would expand by 500bps, but its actual estimate is much lower, at 50bps. Lyft’s stock surged to 62% gain before dropping to a gain of 18%.
- Nvidia briefly overtook Amazon in market value on Monday, and then Alphabet on Wednesday, the latest milestones in a stunning rally over the past year fuelled by soaring demand for its chips used in artificial intelligence computing. Nvidia has been a top beneficiary of technology companies’ race to build AI into their products and services.
- Uber Technologies will buy back as much as $7 billion in shares to return capital to shareholders after reporting its first full year of operating profit and consistent positive free cash flow in 2023. The stock jumped about 8.2% in premarket trading in New York. It has more than doubled over the past 12 months through the close of trading Tuesday. Uber is the latest of a handful of tech companies announcing plans to boost returns to shareholders.
- Nike is set to cut its global workforce by about 2% as it seeks to reduce costs to counter a weaker sales outlook and growing competition. The sportswear giant currently has 83,700 employees across the globe.
- As at Thursday’s close the S&P 500 was 0.3% down for the week.
Local News
- South Africa’s unstable power supply and its poor ranking in public debt sustainability could heighten the risk of a credit downgrade, according to Allianz Trade. South Africa is already ranked as junk by rating agencies. France-based Allianz Trade upgraded South Africa’s risk rating for last year mostly due to resilience to global shocks, especially against one of the most aggressive global monetary policy tightening cycles.
- National Treasury may have to hike VAT on some goods and services to bring in new revenues, according to accounting firm PwC. The country needs to raise an additional R15 billion, through additional tax measures, based on Finance Minister Enoch Godongwana’s November Medium-Term Budget Policy Statement. To raise this money, VAT would have to go up 0.5 percentage points. Government debt could reach 80% of GDP within two years and 90% by the end of the decade. Old Mutual Group says the upcoming National Budget will be one of the toughest budgets in years as it takes place against a backdrop of economic recovery efforts and possible fiscal slippage and fiscal consolidation will have to continue.
- Over the past three years, government has bailed out six failing SOEs, including Eskom and Transnet, to the tune of R281 billion. The cash that has been allocated for bailouts in just three years is more than South Africa’s annual budget for basic education or social grants, and significantly more than its health budget. It is equivalent to more than half the R554 billion the government expects to have to borrow each year.
- The arrival of Stage 6 load shedding over the weekend shows just how powerful the issue of the energy crisis will be in this year’s elections. As commentator Stephen Grootes says, the timing of the latest round of problems at Eskom, between the State of the Nation Address and the launch of the EFF’s election manifesto, could not have been worse for the ANC. In addition, the response to it from the party’s secretary-general shows that the ANC tends to react with emotion, not rationality.
- Former President Jacob Zuma’s new political party, MK, could end the ANC’s dominance according to the Social Research Foundation. Polling by the foundation suggests the new party could pick up 24% of the vote in Zuma’s home province of KwaZulu-Natal, South Africa’s second most populous province.
- On the populist political front, the EFF has called for an overhaul of central bank policy and higher corporate taxes in a campaign manifesto released in anticipation of this year’s national elections. The EFF has also stated that it would end the power crisis within six months by reactivating all South Africa’s coal-fired power plants and developing nuclear energy, and promised to create 9 million new jobs, including through the formation of a state-owned security company.
- The DA will launch its election manifesto over the weekend and the upcoming polls will be crucial for the party’s future. After the elections, the DA could become an anchor member of a governing coalition or manage several provincial administrations. However, it could also lose momentum, especially if the EFF surpasses it as the official opposition — which is a possibility. Yet, most opinion polls predict the party will garner less than a fifth of the vote, making it unlikely the EFF will form the next government.
- Industrial gas users have warned that the country only has 4 months to act to avoid “day zero” for gas supply in 2026 when Sasol will stop supplying natural gas from Mozambique under its current contract. There are still no confirmed supply solutions that will come on stream early enough to prevent the flow of gas coming to a halt in 2026. Jaco Human, executive director of the Industrial Gas Users Association of Southern Africa, said they had been warning the government about this impending crisis for at least six years.
- Coronation has argued that the South African Revenue Service’s (SARS’) tax calculations should be overturned in a R716 million tax dispute involving its Irish subsidiary. The Constitutional Court’s decision may affect all local companies with foreign businesses operating overseas and how their tax calculations are conducted. SARS’ view of tax regulations regarding foreign subsidiaries’ exemption from income tax will “materially impede South African tax residents” from competing on a level playing field in foreign markets.
- Santam expects to report double digits profit growth in the year ended December, telling shareholders to expect profit growth of up to 37% in the year. South Africa’s largest short-term insurer said it expects headline earnings per share to increase by at least 17% and by as much as 37% when it releases its full-year results later this month.
- TymeBank, backed by Patrice Motsepe, says its partnership with TFG has brought it 1 million customers in just over a year. It now has 8.7 million customers locally and says it is the first digital bank to break even in Africa. The partnership has the potential to reach 30 million TFG rewards customers, and plans are in the works to offer personal loan products.
- As at the time of writing the rand was 0.8% stronger and the ALSI was 0.35% up for the week.
Sources: Dynasty, CNN, News24, Bloomberg, Daily Maverick, TechCentral, BusinessLIVE, NewYorkTimes, etc.