U.S. inflation remained in the spotlight this week, with core consumer prices (excluding food and energy) increasing by 0.9% in June, nearly twice consensus estimates. This was also the fastest 12-month increase in the core rate (4.5%) since 1991. The ongoing debate as to whether higher U.S. inflation is transitory or permanent continues to test the Federal Reserve’s commitment to sticking to ultra-easy monetary support for the economy.
At his scheduled testimony before Congress this week, Fed Chair Jerome Powell acknowledged that the recent spike in inflation was larger than expected but repeated the Fed’s view that inflation pressures are temporary and “substantial further progress is still a way off” in terms of the Fed’s employment and inflation goals. Meanwhile, weekly jobless claims eased to a pandemic low of 360,000 in the week ended 10 July 2021.
The UK remains on course to lift its remaining COVID-19 lockdown controls on Monday. France has however implemented new social restrictions with people having to show a health pass, proving they have been vaccinated to use long-distance trains, to go out to eat and drink, and to visit shops, cinemas, and theatres.
UK inflation also surprised to the upside, increasing to 2.5% in June - the highest level since August 2018 and up from 2.1% in May.
China’s annual GDP growth rate for the second quarter came in at 7.9%, broadly in line with market expectations. Industrial production advanced by 8.3% in June, compared to expectations of a 7.8% increase with retail sales also strong, increasing by 12.1% year-on-year.
The World Health Organization called on China to cooperate in a second phase of studying the origins of the coronavirus. In the U.S. and Europe, delta-driven COVID-19 caseloads are rising, in what may be the beginnings of a fifth wave. In the U.S., death rates are rising with more than 330 Americans dying every day from Covid-19. The difference now as compared with the first four waves is that almost all victims are unvaccinated despite near-universal access to shots across the country.
For the week, global equity markets were mostly softer. In the U.S., the Dow Jones (-0.52%), S&P 500 (-0.97%) and Nasdaq (-1.87%) were all weaker. Similarly, the Euro Stoxx 50 (-0.79%) and FTSE 100 (-1.60%) were negative whilst Asian markets including the Nikkei 225 (+0.22%) and Shanghai Composite Index (+0.43%) were mildly stronger.
Market Moves of the Week
Riots, arson and looting rocked South Africa this week. Initial indications suggest that the estimated damage ranges from R20bn to R30bn. PwC believes that the national GDP growth rate could be 0.4 percentage points lower this year due to the week of significant disruption with 50,000 jobs potentially at risk.
South Africa’s biggest oil refinery, a joint venture between Royal Dutch Shell Plc and BP Plc known as SAPREF, also shut down because of safety concerns and logistical issues. This together with parts of KwaZulu-Natal experiencing food shortages due to the disruption of supply chains, could result in higher inflation for SA if conditions continue into the coming week. Whilst the environment remains extremely volatile, the deployment of 25 000 South African National Defence Force (SANDF) members to deal with the violence and looting that has gripped KwaZulu-Natal and Gauteng is expected to bring some stability.
Despite the domestic turmoil, the JSE All Share Index (+0.22%) managed to end the week in positive territory as rand hedge stocks offset SA focused sectors. Industrial shares (+2.79%) were the clear winner, whilst the financial (-4.17%) and property sectors (-5.01%) were negatively impacted by geopolitical instability. Resource shares (-0.82%) also ended the week down. By Friday close, the rand was trading at R14.46 to the U.S. Dollar, weakening against all of the major developed currencies this week.
Chart of the Week
The UK is a good example of how important vaccination programmes are at severing the link between hospitalisations and cases. In the recent surge in UK infections, 98% of new cases have been identified as the Delta variant, yet hospitalisations and deaths remain comparatively low compared to previous waves.