Weekly Note – Resurging Inflation Concerns Subside

CAPTA WEALTH on 2024-05-20

This week, investors remained closely attuned to Wednesday's U.S. inflation report for April, which revealed figures largely in line with or slightly below expectations. This tempered concerns regarding a resurgence in inflationary pressures, following three consecutive months of higher-than-anticipated readings. Notably, the U.S. consumer price index (CPI) rose by 0.3% month-on-month, slightly below the projected 0.4%, with year-on-year CPI inflation easing to 3.4%, marking the lowest level since April 2021. Despite this, Federal Reserve Governor Jerome Powell reiterated the importance of patience in assessing signs of inflation cooling, while maintaining the stance that borrowing costs should remain elevated for an extended period.

Reports this week, including weaker-than-expected U.S. new home construction, manufacturing, and a sharp decline in retail sales, suggest a sluggish start for the U.S. economy in the 2nd quarter. This provides hopeful signs for the Federal Reserve that it might consider cutting interest rates without risking a soft landing. While robust consumer spending and near-record employment continue to keep recession fears at bay, cooling inflation remains a challenge. However, investors responded positively to these developments, propelling stocks to record highs.

In other news, President Joe Biden announced new tariffs on Chinese imports, including semiconductors, batteries, solar cells, and critical minerals, aiming to safeguard American workers and businesses. Accusing China of unfair subsidies and dumping practices, Biden emphasised the importance of fair competition without seeking confrontation. These tariffs, added to existing levies on steel, aluminium, and electric vehicles, will impact about $18 billion in annual imports, further heightening trade tensions between the two economic giants.

Across the Atlantic, the eurozone's first-quarter GDP met market expectations, mirroring the previous quarter's growth with a 0.3% increase quarter-on-quarter. European Central Bank (ECB) policymakers hinted at a potential rate cut in June, though uncertainty looms over the extent of future policy measures. The UK’s unemployment rate rose to 4.3% in March, compared to the prior month’s 4.2% reading.

Meanwhile, Japanese companies are increasingly announcing dividends and share buybacks at a record pace, bolstering support for their market. Yet, Japan's annualised GDP contracted by 2.0% in the first quarter of 2024, partly attributed to the negative impact of the January earthquake on the Noto peninsula and the suspension of some auto production activities.

Amidst an ongoing property market downturn, China’s government convened key officials to discuss support measures. The People's Bank of China (PBOC) introduced measures to stimulate demand, including reducing the minimum down payment ratio by 5% for first-time buyers and abolishing the nationwide floor level of mortgage rates, allowing cities to set their own rates. These efforts aim to address China's persistent housing crisis.

Finally, China's substantial divestment of $53.3 billion worth of U.S. Treasury and agency bonds in the first quarter raises concerns about a potential shift away from American assets amidst escalating tensions. President Biden's recent tariff hikes on Chinese imports and former President Trump's threats of severe tariffs add to the geopolitical complexities shaping global markets.

Global stocks generally performed well this week. In the U.S., the Nasdaq (+2.11%) and S&P 500 (+1.54%) posted significant gains, while the Dow Jones (+1.24%) surpassed the 40,000 mark for the first time. European shares, however, were the exception, with the Euro Stoxx 50 (-0.41%) and FTSE 100 (-0.16%) ending the week slightly lower. Asian markets also showed strength, as Japan’s Nikkei 225 rose by +1.46% and China’s Hang Seng Index surged by +3.25%. Brent oil prices increased by +1.49%, and gold prices climbed by +2.30%.

Market Moves of the Week

President Cyril Ramaphosa signed South Africa's largest health policy reform, the National Health Insurance (NHI) Bill, into law just fourteen days before the elections. Aiming for universal health coverage, the Bill restricts medical schemes to covering only minor private elective procedures. Numerous industry bodies have already threatened litigation against the NHI, likely resulting in a lengthy multi-year legal battle.

Additionally, South Africa's unemployment rate increased to 32.9% in the first quarter of 2024, up from 32.1% in the previous quarter. On a positive note, retail sales saw a 2.3% year-over-year increase in March, rebounding from a revised 0.7% decline in the previous month.

The JSE (+1.36%) mirrored the global uptrend this week, with all three major sectors posting gains: Resources (+0.17%), Industrials (+1.84%), and Financials (+1.36%). The rand also showed significant strength, closing at R18.15/$.

Chart of the Week

This Bloomberg Economic Analysis chart divides US inflation (CPI) into four key components: food, fuel, other goods, and other services. While significant price shocks in food, fuel, and goods from two years ago have now dissipated, resulting in lower overall inflation, the cost of services remains persistently high and currently drives most of the headline inflation. Since services are labour-intensive and wages are a critical factor in their pricing, monetary policy can effectively counteract wage inflation. This provides the Federal Reserve with a reason to maintain current interest rates. Source: Bloomberg.

Credits: Strategic IQ

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