Week in Review: Sharp Increase in US Producer Price Index

U.S. stocks strengthened over the week as investors focused on the prospects of a robust economic rebound, improving vaccine supplies and increasing vaccination rates. The technology-heavy Nasdaq Composite Index (+3.12%) outperformed the broad market S&P 500 Index (+2.71%) over the week with stocks linked to the recovering economy leading the gains as well as large cap technology counters like Amazon and Alphabet, both gaining more than 6% over the week.

The U.S. Labor Department reported that its producer price index (PPI) increased more than expected in March, jumping by 1% from last month after climbing by half that amount in February (See our chart of the week below). Most of the increase in producer prices last month was tied to higher costs of energy, which jumped 5.9%. Chemical and steel-related products also rose sharply.

The International Monetary Fund (“IMF”) expects the world economy to grow 6% this year, the most since 1980. That is an upgrade from a projection for 5.5% growth the IMF made in January. The U.S. and China, the world’s biggest economies, are driving the recovery. The U.S. economy is projected to expand 6.4% this year while China’s economy is projected to expand 8.4% this year, up from an earlier forecast of 8.1%. The eurozone is expected to grow 4.4% (up from 4.2%), Japan 3.3% (up from 3.1%) and India 12.5% (up from 11.5%).

Speaking Thursday, Fed Chair Jerome Powell stressed that the global economy would remain fragile until the pandemic is brought under firm control and that the U.S. recovery remained “uneven and incomplete.” Minutes released from the recent March Federal Open Market Committee meeting reaffirmed that the Fed will wait for the economy to achieve broad-based, inclusive, full employment before changing its current supportive monetary policy stance.

Shares in Europe rose on growing hopes of a rapid recovery in economic growth offsetting doubts over the euro zone’s COVID-19 vaccination programme. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 0.83% higher while the UK’s FTSE 100 Index advanced 2.65%.

Chinese stocks recorded a weekly loss, with the benchmark Shanghai Composite Index shedding 1.0%. While Japan’s Nikkei 225 ended the week relatively flat after breaching the 30,000 mark earlier in the week.

On Saturday, China slapped a record $2.8 billion fine on Alibaba Group Holding Ltd, after an anti-monopoly probe found the e-commerce giant had abused its market dominance.  The fine amounts to about 4% of the company’s 2019 revenue, the company said in a statement that it accepted the penalty and will comply with the regulator’s determination.

The U.S. earnings season gets underway in the week ahead with the major banks first to report.

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Market Moves of the Week

Locally, the New Development Bank of the BRICS (Brazil, Russia, India, China and SA) group of nations approved a second $1bn (R14.5bn) loan to South Africa's government to fight the Covid-19 pandemic. The funds are earmarked to support the government’s efforts to contain the economic fallout of the pandemic and assist in the country’s economic recovery.

In corporate news, Anglo American Plc will separate its South African coal mines into a new business this year, as the company accelerates its response to investor pressure over the most-polluting fuel. The new business, called Thungela Resources Ltd., will be listed in Johannesburg and London in June, the miner said in a statement on Thursday. Investors will receive one Thungela share for every ten Anglo American shares that they hold.

The JSE closed firmer on Friday, with the All-Share Index ending flat over the week. By Friday close, the rand was trading at R14.61 to the U.S. Dollar. The rand has reached some of its best level in weeks and is currently the only major emerging market currency that has strengthened against the U.S. dollar this year thanks in part to rallying commodity prices.

WeeklyMovements (6)
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Chart of the Week

U.S. producer prices increased more than expected in March, aligning with expectations for higher inflation as the U.S. economy reopens. The producer price index for final demand jumped 1.0% after increasing 0.5% in February, the U.S. Labor Department said on Friday. In the 12 months through to March, the PPI surged 4.2%, the biggest year-on-year rise since September 2011. While inflation is expected to rise this year most central bankers appear to believe such pressures will be transitory and likely to recede by 2022.

PPI

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