On Wednesday, the US Fed hiked its benchmark rate by 75 basis points for a second consecutive month. This in the face of the June inflation number, which came in at a shock 9.1% and above the consensus estimate of 8.8%. Given that GDP fell by 0.9% in the second quarter, after declining in the first quarter, many will say the US is already in a recession. With recession fears mounting amidst aggressive monetary tightening, several major companies have reassessed their staffing needs, with some already implementing hiring freezes or rounds of layoffs.
“Bad news is becoming good news,” said Michael Arone, chief investment officer at State Street Global Advisors. “When the economy is slowing, inflation measures will likely fall. That will bring the end of the tightening cycle nearer and markets will like that.”
Indeed this was the case as “risk on” returned to markets subsequent to the rate hike announcement, with 85% of companies in the S&P 500 posting gains, while the Nasdaq 100 surged by 4%, the most since November 2020. US equities have now reached a seven-week high, led by defensive groups that are often in demand during challenging times. The prices of individual counters such as Alphabet (Google) and Microsoft (both represented in our offshore portfolios) had risen by 5.8% and 6.2% respectively for the week as at Thursday’s close, whereas Amazon rose 14% in post-market trade yesterday on the back of its results.
On the South African front, the rand strengthened against the US dollar while the JSE rose in sync with global markets.
In summary, a slew of poor economic data on the global and domestic fronts during July should translate into good news performance-wise for our investors this month, once again underscoring how difficult it is to predict market direction.
“Front-loading rate hikes eventually mean smaller hikes in the near future.”
– Jeffrey Roach, LPL Financial Research
- The US Fed added 0.75 percent to its benchmark interest rate for a second straight time. The rate increase to its highest level in four years, comes as inflation continues to reach new heights. At 9.1%, it has increased at its fastest rate in 41 years.
- Global markets are already pricing in further rate hikes over the next 12 months. For example, an additional 0.75% in the US, 1.62 % in the UK, and 1.9% in the Eurozone.
- The two quarters of economic contraction have brought the US economy in line with the common definition of a recession. However, a recession only becomes “official” once declared as such by the National Bureau of Economic Research (NBER). But there may be more modern and improved indicators as to what defines a recession, such as the Sahm Rule, developed by economist Claudia Sahm, which tries to identify the start of recessions by looking for significant increases in the unemployment rate… a development we have yet to experience in the current environment.
- After five months of a Russian attack into Ukraine, many Western commentators do not appear to understand the economic dimensions of the war and what it means for Russia’s economic positioning domestically and globally. Far from being ineffective or disappointing, as many have argued, international sanctions and voluntary business retreats may well have exerted a devastating effect on Russia’s economy. Nine popular myths about how Russia is dealing with the growing array of economic strictures include claims that Russia can redirect its gas exports and sell to Asia instead of Europe; Russia is making up for lost Western business and imports by replacing them with imports from Asia; and Russian domestic consumption and consumer health remain strong. You can read more about these myths here.
- EU countries have approved a weakened emergency plan to curb their gas demand. This after striking compromise deals to limit the cuts for some countries as they brace for further Russian reductions in supply. Europe faces an increased gas squeeze as Russian’s Gazprom was set to cut supply this week through the Nord Stream 1 pipeline to Germany to a fifth of capacity.
- With electric vehicles catching on, there is a scramble for market share among start-ups selling home chargers, which is expected to feed further dealmaking in the sector as tens of millions of units are installed globally over the next decade. According to a Reuters analysis, more than 100 companies in Europe offer home chargers and there are more than 50 such companies in the US. Many also sell public chargers.
- General Motors’ net profit tumbled 40% in the second quarter, hurt by a loss in China and supply chain troubles which left the third largest automaker in the US by sales, missing profit projections with tens of thousands of unfinished vehicles it couldn’t sell during the period.
- Microsoft’s quarterly sales and profit fell short of analysts’ projections due to the stronger dollar and weaker demand for cloud computing services, personal computer software, and advertising on its online properties. Nonetheless, revenue in three months to end-June rose 12% to $51.9 billion, while net income rose to $16.7 billion, or $2.23 a share. Analysts had estimated sales of $52.4 billion and $2.29 a share in earnings.
- Better-than-expected results at Google helped steady a nervous mood in stock markets on Wednesday. Nasdaq 100 futures bounced 1.5% and S&P 500 futures were up 0.9% in Asia after Google parent Alphabet posted solid search engine ad sales.
- However, companies such as Spotify are cutting jobs, while Google parent, Alphabet, is slowing down its recruitment drive. In April, Amazon said that with 1.6 million workers as of March, it is overstaffed, while Apple and Microsoft will also slow down on hiring.
- At the time of writing, the S&P 500 was up 2.8% for the week based on Thursday’s close.
- The IMF has raised its 2022 growth forecast for the South African economy to 2.3%, citing elevated commodity prices and putting it on a short list of countries that are expected to fare better in a darkening global outlook. This is an upgrade from the IMF’s 1.9% prediction in April.
- South Africa’s largest banks are at “high risk” of falling foul of money laundering, terrorism, and proliferation financing activity. This is according to the Prudential Authority’s second banking sector risk assessment on Tuesday. It surveyed 34 lenders active in South Africa, including five large banks, nine small to medium locally controlled banks, 17 foreign controlled banks and branches of foreign banks, and three mutual banks.
- Eskom is preparing itself for more competition in the South African electricity market after President Cyril Ramaphosa lifted the cap on what companies can self-generate. He also said that these companies would be able to, for the first time, feed power back into the grid. However, the state-owned utility needs private sector investors to help foot the R1.2 trillion needed to install sufficient new generation capacity.
- In addition – and what is not simply a debt restructure – National Treasury is completing a plan to take over a portion of Eskom Holdings’ R396 billion debt as part of a process to place the struggling electricity company on a sustainable footing, a top official said. In effect, this would hold significant benefits for Eskom’s balance sheet and the entity’s profitability profile. The yield on Eskom’s dollar bonds dropped by 150 basis points on the news. However, the debt will now be shifted onto the state balance sheet and as such taxpayers will still ultimately foot the bill for the utility’s mismanagement.
- The oddly named “Taliban” slate of the ANC in KwaZulu-Natal emerged victorious over the so-called “Ankole” slate last weekend. The former is aligned with the new provincial chairperson of the ANC’s biggest region, Siboniso Duma, while the latter included the now outgoing leadership headed by Sihle Zikalala (current KZN Premier) who is largely aligned with Ramaphosa. BizNews spoke to political analyst Dr Ralph Mathekga about the precarious position Ramaphosa now finds himself in ahead of the ANC’s December elective conference.
- The cost of tyres, the third-biggest cost driver in the transport industry after wages and fuel, could increase by up to 41% if an application for additional duties is successful. South African tyre producers are currently losing out to cheap imported Chinese brands. The South African Tyre Manufacturers Conference has applied to the International Trade Administration Commission to impose additional duties of between 8% and 69% on passenger, taxi, bus, and truck vehicle tyres imported from China.
- A global push to develop lab-grown meat is taking an exotic twist in South Africa where slaughter-free cuts of springbok, wildebeest, and impala could soon be on the menu. Mogale Meat has already produced Africa’s first cell-based chicken and is now researching the development of a range of game meats without having to kill wildlife.
- At the time of writing, the JSE All Share was up 1% for the week, while the rand was 1.8% stronger against the US dollar.
Sources: Dynasty, Bloomberg, Reuters, Wall Street Journal, BusinessLive, Daily Maverick, BizNews etc.