Week in Review: Growth vs Inflation Weighs on Sentiment

The August producer prices index released on Friday, had its biggest advance on record since 2010, with wholesale costs for businesses rising by 8.3% on an annualised basis and 0.7% for the month. This hot print, concerns over the spreading Delta variant, coupled with last week’s poor job report – which the S&P500 and Dow still haven’t recovered from - intensified investors’ worries about a slowing economy facing rising inflation. Investors will be eagerly awaiting the more crucial consumer price index for August, set to be released on Tuesday next week. This upcoming print is likely to shape investor sentiment going forward.

In other U.S. economic related news, Treasury Secretary Janet Yellen stated that extreme measures to avoid breaking the congressionally mandated federal debt ceiling were likely to be exhausted in October and reiterated her plea for legislators to take action.

On Thursday, U.S. President Joe Biden ordered all large employers to require workers to either be vaccinated or submit to weekly testing, while vaccination would be compulsory for all executive branch employees, federal contractors as well as health-care workers. Federal employers who fail to comply may be fired.

President Biden and China’s Xi Jinping spoke by telephone for 90 minutes on Thursday night as both sides look to ease U.S. – China relations. The White House stated that “The two leaders had a broad, strategic discussion in which they discussed areas where our interests converge, and areas where our interests, values, and perspectives diverge.” They also said the two sides “agreed to engage on both sets of issues openly and straightforwardly,” and “discussed the responsibility of both nations to ensure competition does not veer into conflict.”

The European Central Bank (“ECB”)  announced it is set to trim pandemic bond purchases in the final quarter of 2021, but ECB President Christine Lagarde added that it didn’t indicate a winding down in stimulus. In addition, the ECB raised its forecast for 2021 economic growth from 4.6% to 5.0% and its inflation estimate to 2.2%, up from 1.9%.

In the UK, Prime Minister Boris Johnson secured parliamentary approval from the House of Commons to raise taxes, to the highest level on record, to fund changes to social care and the National Health Service.

Major U.S. indices pulled back over the week as both growth and inflation weighed on investor sentiment. For the week, the S&P 500 ended down 1.69%, while the Dow fell 2.15% in its second negative week in a row and the technology laden Nasdaq ending 1.61% lower. Stocks in Europe declined amid uncertainty over the future state of the economy, with the Euro Stoxx 50 ending 0.75% weaker. The FTSE 100  also declining 1.53% for the week. Asian indexes had a strong week, with the Nikkei 225 up 4.30% and Shanghai Composite Index up 3.39%. Brent crude (0.58%) managed a slight gain while Gold dipped to close the week 2.28% weaker.

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Market Moves of the Week

South Africa’s Gross Domestic Product rose 1.2% for the three months ending June, compared to 1% in the previous quarter, as coronavirus restrictions were eased. The second quarter growth was primarily driven by a more robust growth performance of 6.9% q/q in the transport sector, 2.5% q/q in the personal services sector and 6.2% q/q in the agricultural sector. The economy managed to grow 19.3% from a year earlier, the first year on year increase in five quarters. In other economic related news, South Africa's current account balance grew in the second quarter to the largest surplus ever, reported by the SARB.

There is talk in numerous circles that the South African Government is preparing to ease coronavirus restrictions further, as cases continue to decline across all the provinces.

The JSE all-share index ended the week 3.13% weaker, following a global risk-off sentiment, with the resource (-5.00%) and listed property (-2.96%) sectors taking the biggest knock. The Rand managed to strengthen over the week to close at R14.21 to the USD.

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Chart of the Week

Growth and Value stocks both had a good run last year as the U.S. economy expanded due to stimulus – with growth leading the way. For much of this year, the tide appeared to have turned decisively in favour of value stocks which benefitted from the opening and expanding economy. However, this seems to no longer be the case as Growth stocks surge ahead.

Chart of the week

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