While we have already written much about inflation this year, it seems appropriate to continue in this vein as the actions of central banks, and the consequences of market participants pre-empting or second-guessing their actions, have global equity markets on the brink of being classified as bear markets – defined as being down 20% from the previous high-water mark. The Nasdaq has already dropped more than 20%.
US Federal Reserve chair Jerome Powell is quoted as saying the Fed will keep pushing interest rates up until there is clear evidence of an inflation retreat. This as other central banks face the same challenge, with the UK also reporting the highest increase in its consumer prices in 40 years. Locally, the SA Reserve Bank continued to try keep inflation (currently 5.9%) below the 6% cap by raising the repo rate by another 50bps on Thursday.
Stagflation is now increasingly becoming the fear, as analysts contemplate a scenario of slowing global growth and higher unemployment on the back of higher interest rates, but with inflation perhaps remaining sticky on war-induced shortages and sanctions, and other unrelated supply chain disruptions.
While Europe and Asia are concerned about getting squeezed by higher US interest rates and a strong dollar on the one side – and a slowdown in growth on the other – the US itself remains in a healthy state, for now. In fact, US Treasury Secretary Janet Yellen has noted that the US is enjoying “a great deal of economic momentum that’s allowed it to outpace most of its peers… but I really don’t expect the US to fall into a recession”.
What remains clear when reviewing all the expert analysis and opinions is that none of the outcomes – recession, stagflation, bear market, and Russia’s war on Ukraine – are predictable with any meaningful degree of certainty. We therefore have to zoom out to try and avoid the noise and see whether, on balance, the market correction is starting to present an opportunity, which we think it is.
“What we need to see is inflation coming down in a clear and convincing way, and Awe’re going to keep pushing until we see that.”
– US Federal Reserve chair Jerome Powell
“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”
– Warren Buffett
Global News
- US Fed chair Jerome Powell has said the US central bank will keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat. This is his most hawkish remark to date.
- This coincided with the key market indicator, the S&P 500, falling 4% on Wednesday – its biggest drop since June 2020 and its fourth decline of more than 3% in less than a month, erasing gains in the index since late last week. The tech-heavy Nasdaq composite also dropped 4.7%.
- While equity markets remain volatile, underlying economic fundamentals are not doing anything especially exciting. The trend towards slowing inflation and moderating growth remains intact. Some retailers have been talking of over-hiring workers, and inventory increases may have gone too far for some, but not in a way that suggests a major problem. Profits have been the main cause of US inflation over the past two years, so a lower inflation environment may bring profits into focus, UBS states.
- The US dollar has outperformed most major currencies during 2022, gaining 9.4% against the euro, 10% against the Swiss franc,12.3% against the Japanese yen, and 10.2% against the British pound. In fact, the dollar’s rise has some contemplating a rare, if not unthinkable, action: Major nations agreeing to manipulate the US currency until it falls, according to Bloomberg. The strength seems to reflect increased demand for safe-haven assets, coupled with some divergence in monetary policy between the major central banks. Most other traditional safe-haven assets have weakened in recent months, including the US bond market, gold, Swiss franc and Japanese yen.
- In the UK, inflation rose to its highest level in four decades – a time when Margaret Thatcher was prime minister. This adds to pressure for action from the government and the central bank. Consumer prices surged 9% in the year through April.
- Russian president Vladimir Putin has appeared to change his stance on the country’s objections to Sweden and Finland joining defence alliance Nato, saying Moscow had no issues with the two countries entering the military alliance they now aim to join in reaction to Russia’s invasion of Ukraine. Subsequently, Turkey has said it will block Sweden and Finland’s applications.
- This comes as Putin met with his five closest allies, only one of them in support of the war in Ukraine. During the 2 March UN vote, which condemned the invasion of Ukraine, Belarus was the only post-Soviet country to side with Russia. Putin again tried to justify his invasion, falsely declaring that “neo-Nazism has long reigned in Ukraine”.
- China’s top economic official gave an unusual public show of support for digital platform companies on Tuesday, suggesting Beijing may be ready to let up on a year-long clampdown on technology giants as it battles a slowing economy. The Hang Seng Tech Index rallied as much as 6% in response. Read more here.
- However, Chinese tech giant Tencent reported virtually no growth in first quarter revenue, its worst-ever such performance, and missed market estimates as China’s economic slowdown and a freeze on new gaming licences weighed on its business. Revenue totalled C¥135.5 billion (R320.8 billion) in the quarter ended March.
- According to UBS, building a bubble transfers genuine wealth from bubble buyers to bubble sellers. Anyone who sold Bitcoin at $70 000 locked in the wealth they received, and they now hold an asset (dollars) of economic value. The buyers, who thought they had something worth $70 000, now hold something that, if not worthless, is worth less. Bitcoin is now trading below $30 000, well below its hey days.
- At the time of writing, the S&P was down 1.7% for the week.
Local News
- As widely anticipated, the South African Reserve Bank hiked interest rates by another 50 basis points on Thursday as it seeks to keep a lid on inflation. This is the steepest increase since 2016, taking the prime lending rate to 8.25%.
- This hike was expected to draw an outcry from low-income earners as the cost of living will reach unsustainable levels. However, the Reserve Bank has justified previous hikes by having to keep inflation – caused by a stronger dollar and the war in Ukraine – under control.
- The main contributors to the 5.9% annual inflation rate were food and non-alcoholic beverages, housing and utilities, transport, and miscellaneous goods and services. However, within the food basket, fruit is tracking slightly lower at -0.7%.
- In politics, Business Day editor at large and columnist Peter Bruce, says president Cyril Ramaphosa has until Saturday to deliver the new, improved and much more determined social compact for growth, inclusivity and general national cheerfulness that he promised at his state of the nation speech in Cape Town on 10 February. Read more here.
- However, Business Day columnist Sam Mkokeli says Ramaphosa is cruising to a second term as head of the ANC. But choosing a running mate, filling the rest of the top six positions, and keeping key constituents happy may be more challenging. His allies have swept up votes in recent battles in the Northern Cape, Mpumalanga and the Eastern Cape, the provinces that have held provincial elections so far. Gauteng and KwaZulu-Natal should be next.
- Former president Jacob Zuma’s corruption trial has been postponed, purportedly to allow the Supreme Court of Appeal, and possibly the Constitutional Court, to decide on his ongoing efforts to have prosecutor Billy Downer removed. On 11 April, Zuma’s lawyers filed an application for appeal court president Mandisa Maya to reconsider her court’s dismissal of his so-called “special plea” appeal.
- Speaking during last week’s Mining Indaba, president Ramaphosa mentioned manganese, which BizNews points out as a connection to a rather profitable company in the Kalahari and Chancellor House, a funding source of the ANC. The oligarch, Viktor Vekselberg, has been censured by the US while his Cyprus company is a shareholder.
- At the time of writing, the JSE ALSI was down 0.7% for the week.
Sources: Dynasty, Reuters, Bloomberg, Stanlib, BusinessLive, News24, Daily Maverick, New York Times, UBS, etc.