As first quarter earnings season in the U.S. draws to a close, attention shifted to economic data releases this week. U.S. retail sales (which accounts for two-thirds of U.S. GDP) showed a rebound in consumer spending in May following a slow first quarter, providing evidence that U.S. consumers are still well-positioned. Consumer spending increased in the second quarter to a healthy 3.5%, topping even last year’s pace. Inflation slowed to 2.0% in May from 2.1% in April. With inflation remaining relatively low, it does provide the Fed with the necessary flexibility to raise or lower rates as warranted by economic conditions. Interestingly, the market now expects that the Fed will cut rates at least twice this year.
Trade tensions between the U.S. and China remain elevated as President Trump threatened to raise tariffs on China again if President Xi Jinping does not meet with him at the upcoming G20 summit in Japan. Negotiations between the U.S. and China have been at an impasse; and there are signs that trade tensions are taking a toll on both countries. China’s industrial production sank to 17-year lows in May, even as the country used a combination of tax cuts and business loans to stimulate its economy over the last year. China released better than expected May export numbers, rising 1.1%, but imports slid 8.5% from a year earlier. The higher-than-expected export reading was however most likely due to pre-existing orders and some shipments rushed ahead of U.S. tariff increases. U.S. industrial production has also weakened in recent months.
In the U.K. unemployment remained at a multi-year low of 3.8%. Average earnings including bonuses recorded a rise of 3.1% in the February-April 2019 period (year-on-year). Japanese Q1 2019 GDP recorded an increase of 2.2%, compared to expectations of a 2.1% increase.
Finally, Middle East tensions lifted the oil price mid-week, following attacks on two tankers near the Persian Gulf, 32 days after 4 others were attacked. The U.S. has released video footage showing that Iran was involved, where footage shows an Islamic Revolutionary Guard removing an unexploded limpet mine from the side of one of the ships. This is the first public evidence to support the U.S.’s theory that Iran is the primary protagonist behind these attacks.
For the week, global equities were mildly stronger. In the U.S., the Dow Jones (+0.41%), S&P 500 (+0.47%) and Nasdaq (+0.70%) indices were all positive, whilst the Euro Stoxx 50 (+0.02%) and FTSE 100 (+0.19%) indices were also marginally positive. Asian markets were relatively stronger: Nikkei 225 Index (+1.04%) and Shanghai Composite Index (+1.92%).
Market Moves of the Week
Locally, Tongaat Hulett requested the suspension of its listing on the Johannesburg Stock Exchange on Monday. The company’s secondary listing on the London Stock Exchange has also been suspended. The move comes amid concerns over possible financial irregularities at the company, and questions over corporate governance.
Economic data released during the week showed that South Africa’s manufacturing production rose the most since June 2016 as the output of iron and steel, as well as motor vehicles, parts and accessories increased. Factory output increased 4.6% from a year earlier and retail sales registered an unexpected rise of 2.4%. The business confidence index remained subdued at a level of 28. Mining production eased by 1.5%, more than market expectations for a decline of 0.5%.
Moody’s Investors Services came out during the week, stating that South Africa’s -3.2% annualised decline in GDP in the first quarter is credit negative for the government’s revenue and policy options, banks’ asset quality and profitability.
Finally, South Africa’s biggest union in the platinum industry (AMCU) has kicked off this year’s wage negotiations with a 48% wage increase demand from producers, demanding a minimum basic pay of R17,000.
The JSE All Share Index ended the week relatively flat, up 0.16%, with resources (+1.90%) and financials (+0.61%) stronger, whilst industrials (-0.67%) were weaker.
Chart of the Week
While the White House’s decision to forego across-the-board tariffs on Mexico, it is unlikely that much has changed when it comes to China. For one, Mexico was willing to deal quickly with the US, while US-China appear increasingly strained, especially considering President Trump’s threats to impose tariffs if President Xi does not meet him at the G-20 later this month. And, beyond that, Congress opposed tariffs on Mexico, which, as you can see in the chart of the week, was largely in line with public opinion; but Republicans and Democrats remain supportive of levies on China.
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