Transitory: Inflation or growth or both? News Flash

The market is closely watching US inflation, which was in line with July expectations after dramatically exceeding them in June. For much of the year, investors have been concerned that inflation, which is generally linked to growth, could spike – leading to a drastic, market-shaking change in monetary policy and that the US Federal Reserve doesn’t have its eye on the ball.

But these worries, reflected in the bond market in the first quarter of the year, seem to have eased. Consensus is emerging that inflation and economic growth may spike in the short-term but will not necessarily result in tighter monetary policy from the Fed that leads in turn to a taper tantrum. This transitory inflation scenario would be advantageous to equity investors. However, inflation will need to be carefully monitored in the months to come.

The $3.5 trillion budget recently passed by the Senate is also apparently not a cause for concern, as it will be funded by taxpayers in support of US President Joe Biden’s plan to rebuild America following the pandemic.

The same inflation concerns are also applicable in South Africa where consumer pricing shocks can be expected as commodity prices surge, and the rand remains on the back foot. In addition, the damage done during the recent riots will have an inflationary impact, as supply chains and production were disrupted. Meanwhile, the timing of the commodity price windfall has led to record trade account surpluses and kept a lid on rand weakness.

Transitory cross currents are likely to muddy the overall inflation picture for several quarters, but we expect that gauges of underlying inflation will reveal a durable, cyclical pickup. Dynasty’s investment stance continues to incorporate a mildly pro-growth view on a six-to-twelve-month horizon. The near-run outlook, however, is murkier as risk asset markets are generally still overbought and in a digestion phase, buffeted by fears of being marooned in a Covid-shutdown world.

“There are a lot of different theories for what’s keeping inflation elevated these days, how long it will last, what policies caused it, whether it will all be ‘transitory’ and what transitory actually means… It’s a matter of supply and demand eventually doing its thing and bringing the market into balance.”

– Joe Weisenthal, editor at Bloomberg

Global News

The rapid pace of US inflation steadied at a 13-year high in July while month-on-month gains moderated slightly, as input pressures persisted because of supply-chain constraints and soaring demand. The consumer price index published by the Bureau of Labor Statistics rose 5.4% in July from a year ago, surpassing the 5.3% expected by economists. This is in line with the 5.4% increase reported in June, which was the largest such surge since 2008. On a month-to-month basis, prices rose 0.5%, compared with a 0.9% gain in June.
The United States Senate has passed a $3.5 trillion budget blueprint, the first step in an arduous process designed to allow Democrats to push through a sweeping package of education, healthcare, climate, and other provisions without GOP support. However, not everyone is happy, with Leader Mitch McConnell saying the blueprint was “full of reckless taxing and spending”. The budget is seen as an initial victory for President Joe Biden and congressional Democrats seeking to pass as much of their legislative agenda as possible this year before next year’s mid-term elections overtake Capitol Hill.
Further afield, the corporate crackdown in China that has hammered internet stocks is driving investors to sectors still in Beijing’s good graces, such as high-tech manufacturing and renewable energy. Shares of Chinese semiconductor companies, electric vehicle manufacturers, and solar panel makers listed in mainland China climbed over the past month while shares of technology giants and companies that provide after-school tutoring suffered massive selloffs.
On what might signal structural changes to the tourism industry in a post-pandemic environment, Italian Prime Minister Mario Draghi has made what some call a courageous move to ban giant cruise ships from Venice’s lagoon. This follows the Covid-19 lockdowns emptying out cities from Paris to Sydney, which gave city dwellers a glimpse of what life without the hazards of mass tourism could be. Now, as the sound of jet engines and cruise ships fills the air once again, we should push for a more balanced return to normality. It should be just the start as the tourism industry calls for regulation alongside longer-term reinvention. Read more here.
This comes as US President Biden will meet with the chief executives of United Airlines and Kaiser Permanente in a bid to encourage more companies to follow their lead and require workers to get vaccinated against Covid-19. Select companies and a university have said all staff must be vaccinated. This is seen as a model for other private-sector leaders, as officials race to get more Americans vaccinated and slow the spread of the highly transmissible Delta variant, which has triggered a rise in cases and hospitalisations across the US.
In the United Kingdom, the latest surge of Covid-19 cases is giving rise to growing optimism among doctors and scientists that the Delta variant can be held at bay with high levels of vaccination and public caution. The UK experienced a wave of Delta-driven infections earlier than other Western nations and has achieved broader vaccine coverage than many of its peers, including the US. This makes the UK a test case for how well vaccinations can push Covid-19 into the background alongside other common respiratory ailments.
In commodities news, oil prices consolidated strong overnight gains on Wednesday as a bullish outlook for US fuel demand outweighed concern about mobility curbs in Asia with the spread of the highly infectious Covid-19 Delta variant. Industry data showed US crude oil and petrol inventories fell last week, while the US Energy Information Administration raised its forecast for fuel demand in 2021 and said consumption in May to end-July was higher than expected.
Companies are increasingly being forced to measure their carbon footprint closely with maths. Consider the fact that – from farm to bottler to supermarket cooler – a litre of Coca-Cola creates 346 grams of carbon dioxide emissions. That’s less than half the tree-to-toilet 771-gram carbon footprint of a mega roll of ultra-soft toilet paper, as measured by the Natural Resources Defence Council, an environmental group. Investors are increasing pressure on businesses to disclose the emissions of greenhouse gases related to their products and services. Regulators are starting to ask about that, too. Within the next couple of years, every public company in the US may be required to report climate information.

Local News

Nedbank has resumed dividends, with a R2.2 billion interim pay-out for patient shareholders. However, it has lowered expectations for South Africa’s 2021 growth by almost one percentage point as the country grapples with the fallout from a third wave of Covid-19 and its worst riots in decades.
It also expects interest rates to remain low for the rest of the year, before starting to creep up slowly in 2022. The company points out that a 53-year low in interest rates has supported robust demand for retail credit.
However, more needs to be done to stimulate economic growth, with South Africa now ranked 131 out of 181 countries in the Global Youth Development Index 2020, which tracks progress on the Sustainable Development Goals associated with youth development. The youth population refers to persons between the ages of 15 and 29 years. Data used to compile the index was gathered before the Covid-19 pandemic.
BusinessLive believes it might be unreasonable to complain about the uninspiring choices that emerged in the wake of President Cyril Ramaphosa’s decision to reorganise his cabinet late last week. After all, many commentators had bemoaned not just the weakness of the existing cabinet, but also that of would-be replacements. To get a sense of that, one should look at parliament and the members the ruling ANC has chosen to head up important committees. Read more here.
This comes as Ramaphosa testified before the Zondo Commission on State Capture this week, which exposed how the ANC’s shadow state has come to dominate how South Africa works through a set of parallel party practices mostly obscured to ordinary citizens, according to the Daily Maverick. Evidence at the Zondo Commission reveals the powerful hand of Deputy President David Mabuza in how the state is shaped.
Efforts are under way to postpone South Africa’s local government elections, set for October 2021, because of the Covid-19 pandemic. Elections in October would have ensured that the poll met the current constitutional requirement that local elections be held every five years, and within 90 days of the date of the previous municipal elections. However, the constitution doesn’t pronounce on postponement of elections beyond the 90 days’ window period. Because of this, the electoral commission has asked the Constitutional Court to rule on the matter.
South Africa’s financial services companies have an increasingly difficult battle when it comes to balancing two seemingly opposing issues: how to deliver investment returns while fostering economic growth and taking proactive steps to mitigate climate change. Achieving that seemingly impossible balancing act just became that much harder due to the latest report by the UN Intergovernmental Panel on Climate Change (IPCC) that has been described as a “code red” warning for humanity. The IPCC’s sixth climate change assessment since 1990 says the global reliance on fossil fuels is causing the earth’s surface temperature to rise at a faster pace than at any other time in the past 2,000 years.
In corporate news, the Companies and Intellectual Property Commission (CIPC) reports that a record 510 000 companies were registered in 2020, a 32% leap over the 385 000 new companies registered in 2019. This is not unusual in a time of economic hardship when people form companies out of economic necessity.
South Africa’s newest digital bank, Bank Zero, has finally launched to the public after numerous delayed public launches. While the digital-only bank has Johannesburg-based offices, it claims to be a pioneer in being the “world’s first” fully fledged bank to start live operations with all staff members working remotely, as a safety measure due to the Covid-19 pandemic.
Used car prices have risen significantly, as hard-pressed consumers try to take advantage of the wide differential between the price of new and used vehicles caused by the recent sharp depreciation of the rand. TransUnion Africa’s latest data shows that the rate of increase in used vehicle prices rose dramatically in the second quarter of 2021 to 4.9%, from 1.6% a year ago.
South Africans looking to travel to the UK will pay significantly more in quarantine costs from Thursday as South Africa remains on the ‘red list’ for entering England. Under the current travel regulations, anyone who has been in a country or territory on the red list in the last ten days will only be allowed to enter the UK if they are a British or Irish National or have residence rights in the UK.