Yesterday has been called “Super Thursday,” the day central banks around the world followed in the Fed’s footsteps, hiking rates by anywhere between 0.5 and 0.75 percentage points. The aftermath has been a major sell-off in equities as well as a spike in bond yields.
The Bank of England raised interest rates to 2.25% and in Switzerland, interest rates were hiked to 0.5%, bringing it out of negative territory for the first time in 15 years. Indonesia, Taiwan, the Philippines, South Africa and Norway also lifted rates. Looking ahead, we expect monetary tightening in these countries to continue, while in Europe, the ECB is expected to raise rates once again at its meeting in October, even though Russia’s war in Ukraine is throwing that region’s economy into turmoil.
The aggressive moves are, of course, a bid to stop rampant inflation from escalating further across the globe. Central bankers remain resolute to avoid embedded or escalating inflation, but the fear remains that the price to tame inflation will usher in a period of pain, being a global recessionary environment. Furthermore, some economists believe that aggressive rate hiking may prove to be a blunt tool, in that many countries are experiencing administered price inflation (for example energy and commodity price hikes), over which central banks have little control.
This confrontational stance means that central banks are entering a new and risky territory, with the danger that rapid global tightening when growth in China and Europe is already slowing, could mean a deeper recession across the globe.
However, it is worth noting that policy tools work with a lag, and so the full effects of these measures – positive or negative – may only be apparent in months to come.
Under these circumstances, we expect a bumpy road for equity markets for the balance of the year, with much dependence on month-to-month inflation data. Market participants will continue to focus on the US, where the pace of rate hikes will be very sensitive to even the smallest basis point movements in core CPI.
Amidst the gloom in which the S&P 500 has retracted more-or-less to its June lows, the consensus forward price/earnings ratio of this index has fallen to a historically inexpensive 16X, a level last seen in 2013. In addition, the price of Bent Crude at 5pm today was down to $85.77/BBL, a decline of 5.18% since yesterday.
Although we are unable to call short-term market direction, we remain resolute in investing in fundamentally good businesses that are able to maintain or even grow their revenue streams in an inflationary environment, We prefer to position our clients in this manner, rather than to obsess over market prices, which have often caught investors unaware… the most recent, unpredicted, upward swing being the 2020 market rebound in the midst of the Covid-19 pandemic.
“So, you know, a good example is – a noneconomic example would be you’re walking through a room full of furniture and the lights go off. What do you do? You slow down. You stop, probably, and feel your way.”
– Jerome Powell in 2018 – Current Chair of the Federal Reserve of the United States
Global News
- The Fed has again hiked interest rates, by 0.75 bps, the third successive big increase this year. The Fed expects to keep increasing rates and keeping them elevated for longer, even though long-term expectations of inflation are the lowest in more than a year.
- Although the Fed’s interest rate hike is hardly good news, the situation – and outlook – has been worse before. The last time severe inflation tested the mettle of the Federal Reserve was in 1979 when inflation was 11% and still rising. It fell below 4% by 1983, but at the cost of two recessions, sky-high unemployment, and horrendous volatility in financial markets.
- Central banks across Asia and Europe followed in the Fed’s footsteps on Thursday as they try to limit the effects of inflation that is crushing consumers and worrying policymakers around the globe. The Bank of England raised its key rate for the seventh consecutive time by 50 bps to 2.25% as it teeters on the edge of a recession. Switzerland announced a 0.75 percentage point increase that will lift its benchmark lending rate above 0% for the first time since 2014. Some countries took other action to ease their growing inflation pressures: Japan intervened in the foreign-exchange market by buying yen for the first time in 24 years. All of this led to ING analysts calling yesterday “Super Thursday”.
- On the inflation front, Japan’s August consumer price inflation rose to 3% year-on-year, as food and fuel continue to be pressure points. On an international calculation of the core measure, inflation is running at 0.7% year-on-year.
- German August producer price inflation saw disinflation in most sectors, but 139% year-on-year for energy. This caused the headline numbers to beat consensus, although these are unlikely to be precise given the fact that a single item is pushing the numbers up.
- Russia is expected to send more oil to Asia and the Middle East in the coming months as Europe will ban most imports of Russian crude from early December in response to Russia’s invasion of Ukraine. Asia and the Middle East have, according to data from S&P Global Commodities at Sea, already bulked up with Russian oil.
- European governments are detailing measures to deal with potential energy shortages this winter and are racing to improve energy networks to share power, with Russian gas flows still running at severely reduced rates amid the Ukraine war. The UK has now cut electricity bills as many of its citizens would otherwise face dire poverty this coming winter.
- Mark Zuckerberg’s $71 billion wealth wipeout has squarely placed the spotlight on Meta’s Woes. Although it was a tough year for tech billionaires everywhere, the Meta CEO’s losses stand out. His fortune has been cut in half and then some, dropping by $71 billion so far this year, the most among the ultra-rich tracked by the Bloomberg Billionaires Index.
- At the same time, Meta Platforms plans to cut expenses by at least 10% in the coming months, in part through staff reductions, as it confronts stalling growth and increased competition, according to people familiar with the company’s plans. It has started slowly letting go of a significant number of staffers.
- Apple has unveiled major increases to its price tiers on apps and in-app purchases from Europe to Asia, protecting its margins as major currencies tumble against the US dollar.
- The S&P 500 was down 3% for the week, to Thursday’s close.
Local News
- South Africa’s inflation slowed in August to 7.6% from 7.8% in July, as lower fuel prices more than cancelled out higher food and electricity costs.
- Citing inflation risks on the back of geo-political tension, the South African Reserve Bank’s Monetary Policy Committee increased interest rates by 0.75 percentage points on Thursday, taking the prime rate to 9.75%. The South African economy is now expected to grow by only 1.9% in 2022.
- In what may be perceived as denial, South African Revenue Services boss Edward Kieswetter believes fears that South Africa’s personal income tax base is being hollowed out by unemployment and emigration are overblown. He argues that the tax base is growing, compliance is paying off and financial emigration is inconsequential. Nonetheless, there are, in our view, no positives to be extracted from the emigration trends amongst graduates and high-earners that were highlighted in last week’s News.
- Commentator Jabulani Sikhakhane has written in BusinessLIVE that, as with Hitler’s rise, South Africa’s chronic joblessness will erode most people’s faith in the economy. Mirroring the Weimar Republic, South Africa hasn’t had a stable, expansive financial system for more than a decade.
- This comes as Philip Nichols, the pre-eminent corruption expert, says South Africa is now at a crossroads on corruption. “Fifty years from now, the Zondo commission will either have been this immensely important pivotal point [in reversing corruption], or it will be just a footnote that few people know about.” Read more here.
- According to Alison Barker, Economist and Head of AC FX solutions ”the rand has been the worst performing emerging market currency in the past 30 days. For example, since the beginning of September the Rand has declined by -3.9% against the Dollar and has lost -6.2% of its value since the end of July 2022. Furthermore, while the Rand’s weakness has been especially noticeable against a stronger Dollar, it has also lost -2.4% of its value against a relatively weak Euro since the end of August 2022 and -1.3% against the British Pound.”
- Unfortunately, South Africa has its own unique set of factors that are currently undermining the Rand’s performance including severe electricity outages, weak economic growth, persistent political uncertainty, and the likelihood that South Africa will be grey listed in early 2023 by the Financial Action Task Force (FATF). This, coupled with a seasonal increase in imports has aggravated the Rand’s decline.
- In the short-term, while higher interest rates help to protect the Rand, the persistent array of global and local uncertainties will probably ensure that the Rand remains weak. Furthermore, this is likely to prevail until there is a significant easing of global uncertainty – at which point the Rand would offer foreign investors an attractive buying opportunity.”
- Loadshedding is costing the country about R4 billion a day, or R28 billion in the past week. Economists believe that the effect could be greater as it’s difficult to quantify the effect exactly because of the impact to smaller businesses, of which there are thousands in South Africa.
- Naspers’ biggest stake, Tencent Holdings’ buyback spree is not reviving investor sentiment as its shares are languishing near a 2018 low. It has spent nearly $1 billion in repurchasing shares over the past month to take the year’s total to $2.3 billion. The move gathered pace after its dominant shareholder, Naspers-controlled Prosus, said in late June that it will sell down shares in order to fund its own buyback.
- At the time of writing, the JSE All Share was down 4.8% for the week, while the rand was 1.2% weaker against the US dollar.
Sources: Dynasty, Bloomberg, BusinessLIVE, Daily Maverick, News24, BBC, Wall Street Journal, Sky News, New York Times, Forbes, Moneyweb, NinetyOne. AC FX Solutions, etc.
