The unemployment debate, Dynasty Asset Management

The Economist recently published an article on whether unemployment really has to rise to bring down inflation. Persistently high inflation will remain unresolved as long as rapid growth in wages continues to power a spending boom. Higher wages cause embedded inflation, and this is what most troubles the Fed, and what it seeks to address through higher interest rates.

The approach by the Fed to this problem in the early 1980’s was extremely aggressive, and a repeat of this policy is what is most feared by today’s stock market bears. In the face of persistent inflation which reached 14.8% in 1980, then Governor Paul Volcker resolutely raised interest rates to 20% to achieve an inflation target of 5.5%. The inflation rate eventually dropped to 3% in 1983, ushering in a decade of prosperity and low inflation, but this did not come without considerable pain. Unemployment during the rate-hiking phase rose to 10% and brought about the worst downturn since the Great Depression of 1929!

Ahead of today’s conference at Jackson Hole, some Fed officials have put forward a less radical solution to the current 7% wage inflation problem. Because the number of job vacancies is so high at present, simply “tapping” the monetary brakes could potentially be a sufficient measure to ease the number of job openings, without having to cause rampant unemployment. A lower number of posted job openings would hamper workers’ ability to move to higher-paying jobs, whilst only yielding a little extra unemployment. Outside of this balance between job openings and unemployment, an increase in labour supply through increases in average hours worked, could also bring down wage growth without unemployment having to rise.

It is implicit that a drop in wage inflation would allow the Fed to adopt a much less aggressive stance than Volcker in hiking rates, thereby providing some underpin to a stock market recovery for the balance of the year.

“There is a strong correlation between a low unemployment rate and inflation. A business’ increased costs are simply passed on to the consumer.”

– John Church (lecturer in economics)

Global News

Ahead of a Fed move amid weakening economic data, Asian stocks have dipped, while the dollar has gained. Later today, investors will be all ears as chairman Jerome Powell speaks at the Jackson Hole symposium as they wait for a sense of how hawkish the US central bank will be in the face of mounting economic challenges.
Taking a bullish view, JPMorgan Chase & Company strategists believe the Fed is likely to deliver the last of its big rate hikes in September, setting up stocks to continue rallying in the second half of the year.
Business activity in the US, Europe and Japan dropped in August, pointing to a slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine scrambles supply chains. High inflation, material shortages, delivery delays and interest-rate hikes all weighed on business activity, a S&P Global survey said.
According to EDF, A ‘dramatic and catastrophic’ energy crisis awaits Britain this winter. This is the latest warning that the recent surge in energy prices will have millions of British households in the doldrums. Energy poverty is defined as spending more than 10% of income on gas and electricity bills. The cost is set to rise 80% from this fall.
Credit Suisse Investment bankers are bracing for brutal cutbacks. Staff are expecting deep cuts from its latest emergency restructuring, as the Swiss bank gives up its ambitions to be a Wall Street Titan.
Intel has agreed to what is being termed an unusual funding partnership with Brookfield Asset Management. The $30 billion investment will help finance its factory-expansion ambitions, which shows that some big investors are upbeat about the long-term demand for semiconductors. Intel wants to regain its manufacturing advantage over competitors in Taiwan and South Korea.
Once seemingly indispensable during lockdown, Zoom has cut its financial forecasts as demand cools off and it faces stiff competition from the likes of Microsoft and Cisco. It expects annual revenue of between $4.39 billion and $4.4 billion, down from its earlier outlook of $4.53 billion to $4.55 billion.
In the ongoing tussle between billionaire Elon Musk and Twitter, a whistleblower has complained that Twitter ignored a rash of spam and bot accounts, which could help Musk walk away from a $44 billion buyout of the social-media platform. The concern regarding deficiencies against hackers was raised by Peiter Zatko, Twitter’s ex-head of security. Musk is also seeking documents from Twitter co-founder Jack Dorsey about the spam, as well as his April deal to buy the company. In a twist, he has been ordered to hand over information about investors.
Revlon is in bankruptcy and has told the judge overseeing this process that its shareholders don’t need a special, company-funded committee to represent them in the Chapter 11 case because there is no evidence the equity is worth anything. The underlying Revlon brands could present opportunities for L’Oréal and Estee Lauder, both of which are represented in our preferred offshore funds.
At the time of writing, the S&P 500 was down 0,7% for the week based on Thursday’s close.

Local News

Although the official unemployment rate has dropped below 34%, analysts are cautious. In this editorial, BusinessLIVE points out that job growth is not nearly where it should be. However, the numbers could also be flawed because Statistics South Africa paused face-to-face stats gathering due to Covid, which skewed the last quarter of 2021’s numbers. The data should be treated with caution, the publication states.
Meanwhile, the country’s annual producer inflation for July escalated to 18%. PPI is a leading indicator of consumer price inflation (CPI ).
Disturbingly, domestic inflation has increased for the third month is a row due to rising input costs. It is now at 7.8% from 7.4% as of a month ago – a level last seen during the global financial crisis of 2008/09. This could see rates continue being aggressively hiked, as South Africa follows the US in trying to bring consumer prices under control. Nonetheless, the interest rate curve is pricing in a repo rate of 7.31% one year out, representing an increase of 1.81% above the current rate of 5.50%.
The strike action instigated by trade union federations Cosatu and Saftu raises some valid concerns regarding the living cost crisis faced by many South Africans. However, strikes of this nature are not simply confined to SA, but are prevalent across the world as a symptom of soaring global inflation.
Justice Malala has written another hard-hitting column, this time looking at why president Cyril Ramaphosa should go. “He has failed in almost every department he promised South Africa action on. The economy is in the doldrums and the nation is unemployed and living in poverty.”
Disgruntled ANC employees, who have not received any increases in the past four years, downed tools along with union federation Cosatu in a nation-wide shut down on Wednesday. The ANC has failed to pay salaries on time for the past year, while the provident fund, unemployment insurance fund and medical aid have been unpaid since 2018. Concerns raised in a memorandum handed over at the end of the March included the rising cost of living.
The Competition Commission has conducted search and seizure operations at the premises of eight major insurance companies in South Africa. The search and seizure operations were being conducted as part of an ongoing investigation initiated by the commissioner in January 2021. The companies include Discovery, Momentum, and Sanlam.
Absa aims to double renewable energy loans as a percentage of total group loans by 2030. At the group’s year-end in 2021, about 2.1%, or R23 billion, of total group loans of R1.134 trillion was for renewable energy projects. The group’s total loan book at the half-year in June was R1.2 trillion. These ambitious plans come as South Africa embarks on a huge power liberalisation project.
Standard Bank, the third of the big four to report earnings, said that headline earnings were up 33% to R15.3 billion in the six months to June. As a result, shareholders will receive an interim dividend of 515c a share.
Fuel producer Sasol has paid its first dividend in three years on the back of strong demand and a rise in oil and chemical prices, which aided it to increase full-year earnings four-fold and trim debt. It has also come up with a cost-effective technology to produce low-sulphur diesel.
Shoprite has wrapped up sustainability-linked loans worth R3.5 billion for investments to expand its key environmental programmes as part of its wider sustainability strategy. These include a R2 billion loan from Standard Bank, an R800 million sustainability-linked loan and a R700m green loan from RMB for investment in environmental projects.
The recent continued bout of strength in the US dollar spot index has resulted in another upward revision to our Investment Committee’s estimate of fair value for the ZAR/USD exchange rate. The current fair value estimate is R17.61. The ZAR/USD exchange rate is being well supported by some positive Emerging Market sentiment in general as our measure of aggregate Emerging Market currencies is also trading at levels that are slightly stronger against its US dollar fair value estimate.
At the time of writing, the JSE All Share was 0,7% higher for the week, while the rand was 1.1% stronger against the US dollar.