The market is now expecting that the U.S. Federal Reserve (“the Fed”) will hike the federal funds rate by 0.25% at each of its next three meetings. Minutes released this week from February’s Federal Open Market Committee meeting revealed that participants were displeased with the equity and bond market rallies that took place at the start of this year, indicating that a tighter monetary policy may be needed to counteract an unjustified loosening of conditions. Participants felt it was “important that overall financial conditions be consistent with the degree of policy restraint that the committee is putting in place in order to bring inflation back to the two percent goal.”
Upside inflation and growth surprises also came out of the U.S. this week. On Friday, January’s core personal consumption expenditures price index (the Fed’s preferred price gauge) was released, with the index jumping 0.6% m/m vs an expected 0.4% m/m over the month – its biggest gain since August 2022. The surprise sent stocks lower on the notion that slower progress is being made on inflation, which could turn the Fed even more hawkish. On the growth front, U.S. personal spending rose a solid 1.8% in January, the biggest increase in nearly two years and also well above expectations.
According to the flash Purchasing Managers’ Indices published this week by S&P Global, concerns about an immediate global recession are decreasing as demand increases, supply chain blockages ease, and confidence improves. On Wednesday, data was released indicating that the services sector is experiencing a stronger recovery compared to manufacturing in most developed economies. In the U.S., the composite PMI, which considers both manufacturing and services, increased from 46.8 in January to 50.2 in February. In the eurozone, the composite rose from 50.3 to 52.3, while in the United Kingdom it climbed from 48.5 to 53. These positive trends suggest that central banks may face greater challenges in controlling inflation than they would have if the data was weaker.
Friday marked the sombre one-year anniversary of the Russian invasion that upended Ukrainians’ lives and Europe’s security. One year after Russia launched its full-scale invasion of Ukraine, the conflict continues to take a terrible toll. According to statistics from the United Nations, more than 7,199 Ukrainian civilians have been killed and 11,756 have been injured since the start of the war, with most casualties caused by explosive weapons.
Russian President, Vladimir Putin, declared this week that Russia will halt its involvement in the Strategic Arms Reduction Treaty, which places a cap on the quantity of nuclear warheads that the United States and Russia can have. Putin stated that Russia will recommence nuclear testing if the US chooses to do so and confirmed that his country has deployed new land-based nuclear weapons in combat-ready positions.
The annual inflation rate in the eurozone fell to 8.6% in January from 9.2% the month before, slightly higher than expectations. The decline occurred despite consumer price growth remaining elevated in Germany, the largest economy in the bloc.
The growth and inflation data released this week sparked a sell-off in U.S. Treasuries, with the yield on the benchmark 10-year U.S. Treasury note nearing 4.00% for the first time since mid-November. On the equity front, the S&P 500 Index (-2.67%) had its worst weekly loss since early December, but still remains up 3.4% YTD. The Dow Jones (-2.99%) and Nasdaq index (-3.33%) also fell as risk off sentiment took hold.
Shares in Europe (Euro Stoxx 50) declined -2.25%, while the FTSE 100 dropped by -1.67%. Chinese stocks (Shanghai +1.34%) advanced after three weeks of losses as hopes for stepped-up regulatory support offset concerns about elevated U.S. tensions. In Japan, the Nikkei 225 fell -0.22%. Gold dipped -1.73% while Brent Oil fell -0.19% over the week.
Market Moves of the Week:
Notable events transpired in South Africa during the week, the outcomes of which, have clouded the outlook of the beleaguered country. On Thursday, Finance minister Enoch Godongwana announced his Budget speech. On balance, while macroeconomic risks persist, the 2023 Budget was in line with market expectations, reiterating government’s commitment to stabilising debt. Investors will draw some comfort from the continuity of fiscal discipline and more clarity around the support for Eskom. Fiscal risks however remain. Investors will continue to be concerned about the downside risks to economic growth and the recent surge in loadshedding as well as the upside risks to spending on social grants, wages and SOE support. Click to read a summary breakdown of the SA 2023 budget.
The Financial Action Task Force (FATF), an inter-governmental organisation that underpins the fight against money laundering and terrorism financing, added South Africa and Nigeria to its ‘grey list’ on Friday. The country was greylisted for failing to comply with anti-money laundering and terrorist financing standards. When the global FATF places a country under increased monitoring (ie the grey list), it means that a country is automatically considered a high-risk jurisdiction and is actively working with the organisation to address apparent strategic deficiencies in its regimes designed to tackle financial crimes. Greylisting is expected to hike the cost of doing business in South Africa, discouraging foreign investment and increasing the amount of due diligence companies have to carry out. The watchdog said in a statement that both South Africa and Nigeria have pledged to work with the FATF to address the concerns.
Eskom CEO Andre de Ruyter left the power utility with immediate effect, following a special Board meeting on 22 February 2023. The announcement followed an explosive interview in which De Ruyter exposed widespread crime and corruption at Eskom. De Ruyter has since said that he plans to spend time abroad after leaving Eskom. The embattled national power utility announced the appointment of Calib Cassim as the interim group CEO with immediate effect.
The JSE (-2.94%) followed global peers lower over the week. Resources (-8.10%) tumbled, while Financials (0.66%) managed to stay afloat. Over the week, the rand weakened against the U.S. dollar to end at R18.39/$.
Chart of the Week:
The U.S. dollar has managed to regain all of its 2023 losses. The greenback fell against global currencies at the start of the year as a result of the risk on rally which saw funds flow to emerging and other developed market assets. However, recent sentiment has changed, with investors now once again seeking the safe haven currency.