Have inflation and earnings forecasts in the US economy peaked? It is these twin peaks, or symbiotic key factors, that are likely to influence market direction over the coming months, as it’s still the US that pulls most of the levers on the global economy.
The Fed is well on a path towards monetary tightening, having already provided hints that interest rates will continue to increase until inflation hits two percent. Meanwhile, investors are increasingly concerned that this monetary tightening – to tame inflation – will throw the economy into a recession. There is a fear that the Fed will have little choice when it comes to this policy as it simply must address inflation as directly as it can. (Since March, the central bank has twice raised rates and signalled it will enact two additional 50 basis-point increases at its next meetings).
Importantly, markets are forward-looking and have already priced in an economic slowdown. We have previously written about technology stocks now trading below pre-Covid-19 levels and there can be no doubt that many other companies will follow suit, especially with consumers coming under pressure in terms of spending power.
The biggest factor affecting how the economy and markets will react going forward is the inflation trajectory and the response by the Fed. Another is future earnings estimates and the extent to which these are priced into markets. In the short term, we expect daily market movements to be both sensitive and data dependent, with any bad economic news potentially – and ironically – being positive for risk assets, as this will probably remove some pressure to hike rates aggressively.
“To me, the primary task in investing is to test and then retest some more the parameters and paradigms that appear to govern daily events. Betting against them is dangerous when they look solid but accepting them without question is the most dangerous step of all.”
– Peter L. Bernstein, American financial historian, economist, author, and educator
“We are in this kind of a bear market environment, yet we haven’t seen recession manifest in a macro data yet. We still think there is a path for the US economy to have a soft rather than a hard landing.”
– Greg Boutle, US head of equity and derivative strategy, BNP Paribas
- The US hiring spree continued in May as employers added 390 000 jobs despite government policymakers taking steps to cool the economy and ease inflation. Average hourly earnings rose 5.2% from a year ago. At the same time, the unemployment rate was 3.6% for the third straight month, near a half-century low. Record levels of consumer spending, which makes up about 70% of the economy, have driven business expansion and job creation as companies try to keep up with demand for various goods and services.
- Concerns about inflation ramped up a level this week, with several events indicating inherent risk that the global economy could descend into stagflation for the first time in five decades. Stagflation has been predicted several times this year that economists are crying wolf. But how often do you have the US president sitting down with the Federal Reserve chair (reminiscent of Ronald Reagan and Paul Volcker’s meeting in 1984), the US Treasury secretary admitting she was wrong in her assessment of inflation, and warnings that the world faces an economic hurricane – all in one week?
- In a futuristic look at food inflation, Futureworld has reported that since early 2020, we’ve seen a steady uptick in food prices, and now it has reached crisis proportions. This happened gradually, then suddenly because of Covid-19 and climate change, followed by the war in Ukraine. Within months, 25 countries had banned the export of various food products, seeking to protect their domestic food security, which only made the global situation worse, while super-exporters such as Brazil enjoyed a demand bonanza. Depressed yields due to flood or drought on three continents added to the crisis.
- At the same time, the US wheat crop is in trouble due to heavy rain. The world’s fourth largest wheat exporter is experiencing difficulties at a time when the world can ill afford to lose any more supplies of the staple grain amid a global food crisis. Benchmark Chicago Board of Trade wheat prices surged 50% to more than $13.60 a bushel after the Ukraine conflict in February halted shipments of nearly one third of the world’s wheat exports.
- European Union leaders have agreed to pursue a partial ban on Russian oil, which has been in the making for some time. This paves the way for a sixth round of sanctions to punish Russia and president Vladimir Putin for the invasion of Ukraine. The sanctions would forbid the purchase of crude oil and petroleum products from Russia delivered to member states by sea but include a temporary exemption for pipeline crude.
- Top Russian bureaucrats, officers and business leaders are not denouncing Russia’s invasion of Ukraine because of what they stand to lose: status and privilege. No deputy ministers or ambassadors have made a show of abandoning ship even as minister Sergei Lavrov has cast aside any pretence of diplomacy and joined the pro-war propaganda effort fulltime. Top bureaucrats, officers, managers, and business leaders know the rewards of serving Putin and the dangers associated with an open refusal to do so.
- On the back of the US economy downshifting, electric automaker Tesla has paused all hiring and may need to cut staff by 10% which may equate to almost 10 000 jobs. This is based on comments by CEO Elon Musk expressed in an internal email seen by Reuters stating he had a “super bad feeling” about the economy.
- In company news, Meta Platforms chief operating officer, Sheryl Sandberg, is leaving the company, although she will remain on Meta’s board. Sandberg joined Facebook in 2008 and was key to turning it into a social media giant that generated almost $120 billion in revenue in 2021.
- It was a relatively uneventful week for the S&P. At the time of writing, it appeared the index would end the week 0.6% weaker.
- Economists at Nedbank believe global financial conditions are likely to become less supportive of the rand despite data showing the local currency is already undervalued. The bank has noted that the US Federal Reserve’s move to increase interest rates at pace will likely support the dollar, placing renewed pressure on emerging market currencies such as the rand.
- As oil remains stubbornly high due to the ongoing Russia-Ukraine conflict, it came as no surprise when, on Tuesday afternoon, the government announced an increase in the cost of petrol and diesel. However, there was no increase in the general fuel levy. This despite warnings about the harm this will cause consumers in an already fragile economy. Ahead of the news of the hike, government announced an additional extension on the temporary reduction in the general fuel levy of R1.50. This is the second temporary reduction since the first implementation for April and May. Fuel price hikes are already filtering through to food and general inflation.
- The ANC in eThekwini has confirmed that councillor Mkhipheni Mzimuni Ngiba had been arrested and charged with killing his predecessor, Siyabonga Mkhize, in November 2021. The party said it would send a proportional representation councillor to serve the community until a by-election is held to replace the arrested councillor.
- Columnist Justice Malala has written in Business Day that former president Thabo Mbeki would have battled to recognise the ANC of today. Instead of being in a noble struggle, as it was in 1993, the party is in a messy, disgraceful war against itself. In 1993, following Chris Hani’s murder, Mbeki went to Boksburg bearing a message of hope. Now, however, the party is marred by constant infighting, which provides a glimpse of how the ANC behaves after it has lost power.
- President Cyril Ramaphosa this week confirmed a R60 million heist at his Limpopo farm after former spy boss and Correctional Services Commissioner Arthur Fraser laid charges against him. The Presidency confirmed that a robbery took place at Ramaphosa’s Limpopo farm in February 2020 in which proceeds from the sale of game were stolen. What was not known is that trades are in cash, which raises red flags for undeclared revenues and profits, and money laundering. Fraser’s charges reveal the start of an intelligence-driven campaign to unseat Ramaphosa at the ANC’s December elective conference. In the unlikely event of him being removed, the default acting president could be David Mabuza.
- Africa’s largest food franchisor Famous Brands will pay R200 million to shareholders after improved results following a recovery from Covid-19. The company, which owns Steers, Wimpy and Debonairs Pizza, reported revenue up 38% to R6.5 billion to end-February, in line with pre-pandemic levels, while operating profit rocketed 428% to R630 million. In the prior year, there had been hefty write-downs to its struggling UK business, Gourmet Burger Kitchen, which went into business rescue.
- At the time of writing, the JSE All Share Index was up 1.19% for the week, with the rand having strengthened 0.52% against the US dollar.
Sources: Dynasty, Daily Maverick, BusinessLive, Futureworld, Reuters, Bloomberg, New York Times, etc.