The annual Jackson Hole symposium hosted by the Federal Reserve Bank of Kansas City commenced on Thursday. During the event, several Federal Reserve officials indicated that although there might not be an immediate need to increase rates, they are likely to keep rates at a restrictive level for an extended period. Jerome Powell, the Chair of the US Federal Reserve, stated on Friday that even though there has been progress in controlling high inflation, it is still a work in progress. He emphasized that the Fed plans to stick to a restrictive policy until there is a significant reduction in inflation and is willing to raise rates further if required. Powell restated the Fed's commitment to the 2% inflation target and dismissed any notion of accepting a higher inflation rate. He acknowledged the potential lingering impact of previous rate hikes and noted that if the job market remains strong, adjustments in monetary policy might be necessary.
In August, the growth of U.S. business activity approached a point of stagnation, representing its most subdued expansion since February. This deceleration was particularly pronounced within the service sector, where the demand for new business declined. According to S&P Global, the flash U.S. Composite Purchasing Managers' Index (PMI), which assesses both the manufacturing and service sectors, saw a notable decline from 52 in July to 50.4 in August. This decline marks the most significant drop since November 2022. While the streak of growth continued for the seventh consecutive month, the reading for August was only marginally above the pivotal 50 threshold, demarcating the boundary between expansion and contraction.
Meanwhile, the British economy is showing early indications of heading toward a contraction in the ongoing quarter, raising concerns about a potential recession. A recent survey conducted on Wednesday highlighted a sharp downturn in factory output and broader economic frailty in response to elevated interest rates. The preliminary estimate of the S&P Global/CIPS composite PMI revealed a drop from 50.8 in July to 47.9 in August, falling below estimates. This reading, the lowest since January 2021 during a COVID-19 lockdown, marks the first instance of falling below the 50 mark — indicative of a contraction — since January of this year.
In the Eurozone, business activity suffered a more pronounced blow than initially projected in August, with Germany experiencing a notable decline. Simultaneously, certain inflationary pressures resurfaced, further complicating the scenario. The eurozone composite PMI also came in below economists' projections at 47.0 compared to 48.6 in July. The weaker PMI data poses a significant challenge for the European Central Bank, which aims to curb rising prices while avoiding a recession.
Growth stocks saw robust performance over the week, buoyed by significant earnings and revenue achievements from artificial intelligence chipmaker NVIDIA. In the US, major indexes ended a volatile session higher on Friday. For the week, the S&P 500 Index recorded a 0.82% gain, while the Nasdaq Composite gained 2.26%. In contrast, the Dow Jones ended the week 0.45% lower.
In spite of the less favourable PMI data, both the pan-European STOXX Europe 50 Index and the UK's FTSE 100 Index concluded the week on a positive note, marking weekly gains of 0.55% and 1.05% respectively.
After last week’s drop, Japanese stocks rebounded over the week, with the benchmark Nikkei 225 closing 0.6% higher. Conversely, Chinese equities faced a weekly decline as investor confidence in the country's economic outlook decreased. The Shanghai Composite Index saw a weekly decrease of -2.17%, reaching its lowest point since December, while in Hong Kong, the Hang Seng Index gained some momentum, wrapping up the week with a modest 0.15% increase, although remaining at its lowest level since November.
Market Moves of the Week
In July, South Africa saw another year-on-year decline in headline inflation, providing a measure of relief for consumers. Stats SA's data revealed that annual consumer price inflation (CPI) dropped from 5.4% in June to 4.7% in July, marking the lowest reading since July 2021 when it stood at 4.6%. Inflation is now close to the midpoint of the South African Reserve Bank’s inflation target range of 3% to 6%. Inflation first fell to within the central bank's target range of 3%-6% in June of this year for the first time since April 2022, allowing the South African Reserve Bank (SARB) to leave its repo rate on hold at its last monetary policy meeting in July after 10 consecutive hikes. The SARB's Monetary Policy Committee (MPC) has emphasized that it wants to see inflation sustainably around the midpoint of its target range, around 4.5% before it contemplates rate cuts.
President Cyril Ramaphosa hosted Chinese President Xi Jinping on a State Visit in Tshwane on Tuesday, coinciding with eminent global leaders assembling in Johannesburg for the 15th BRICS Summit in Sandton, Gauteng. During this event, the Chinese government extended their support to South Africa’s energy crisis by providing R170 million worth of emergency power equipment and offering a development assistance grant of approximately R500 million. Subsequently, on Wednesday, Minister of Electricity Kgosientsho Ramokgopa, acting on behalf of the government, formalized cooperation through the signing of a collaborative memorandum with Chinese entities.
The summit of the BRICS major emerging economies, consisting of Brazil, Russia, India, China, and South Africa, took place from August 22 to 24. The expansion of the BRICS bloc was the central discussion point during the three-day summit. While all BRICS members publicly support its growth, there were varying opinions among leaders regarding the extent and speed of expansion. Notably, the BRICS nations have chosen to invite six countries — Argentina, Egypt, Iran, Ethiopia, Saudi Arabia, and the United Arab Emirates — to join the bloc, as stated by South African President Cyril Ramaphosa on Thursday.
During the past week, the JSE All-Share Index recorded gains of +1.03%, attributed to notable performance in the financial (+3.19%), property (+2.09%), and resource (+1.68%) sectors, while the industrials sector experienced a decline of -1.25%. By Friday’s close, the rand was trading at R18.64 against the U.S. Dollar, marking an appreciation of +1.85% for the week.
Chart of the Week:
As per the chart above the current fed funds futures market is pricing in a small chance of another hike by November, when the terminal rate is predicted to be reached. The Federal Open Market Committee meeting in July as well as this week’s publication of the minutes of the meeting hasn’t shifted that market view.
Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.
Credits: Strategic IQ