Week in Review: U.S. Labour Market Powers Ahead

Stocks touched new highs again this week, with the latest U.S. jobs report showing that the economy added 943,000 jobs in July.  The week started off on a down note, attributed to ongoing concerns about the delta variant of COVID-19 and worries over new regulatory measures in China.

Data published on Friday by the U.S. Bureau of Labor Statistics showed U.S. unemployment declined to 5.4% from 5.9% in June. The labor force participation rate also improved modestly to 61.7% and average hourly earnings increased by 4.0%, compared to the market expectation of 3.8%. At the same time, more than 5.7 million Americans remain unemployed compared with pre-pandemic levels.

U.S. 2nd quarter earnings season continued to produce some positive surprises during the week. Analysts polled by FactSet are currently expecting second-quarter earnings for the S&P 500 to have increased by over 85% versus the year before and unusually, revenues to have grown by nearly as much.

Simon Property Group saw sales at its shopping malls and outlet centres bounce back to pre-pandemic levels in its latest fiscal quarter, as Americans shopped for clothes, shoes and other items. Chief Executive David Simon told analysts Monday that retail sales at its properties in June were comparable to June 2019 levels, and up 80% from a year earlier.

New York City said workers and customers at indoor restaurants, gyms and some other establishments will need to show proof of vaccination. The move follows similar actions in Europe where leaders have restricted the unvaccinated as part of the strategy to encourage shots. Microsoft and Walmart have also made vaccines compulsory for employees returning to the office.

Despite this positive backdrop, the delta variant of COVID-19 threatens much of the progress made, as the U.S. enters its 5th wave. The variant has now been detected in 124 territories worldwide, and there were at least 640,000 new cases and 10,000 deaths on Aug. 3 alone, with a surge in reported cases also taking place across China. Roughly 40% of China’s population is fully vaccinated, according to the Centers for Disease Control and Prevention, a level that falls short of herd immunity.

The U.S. Senate is heading toward a weekend vote on President Joe Biden’s $550 billion infrastructure legislation, after an attempt to pass the bill late Thursday was thwarted by disagreements over cryptocurrency regulation.

The Bank of England (BoE) kept its interest rate unchanged at 0.1% this week, announcing that it expects interest rates to rise to 0.2% in 2022 and to 0.5% by the second half of 2024. The central bank updated its forecast for inflation, which is likely to peak at 4% either late in 2021 or in early 2022. It also kept its GDP growth outlook for 2021 at 7.25%, but increased its GDP forecast for 2022 to 6% from 5.75%.

Chinese economic momentum appears to have slowed in July, with PMI readings pointing to slower economic momentum in the country’s manufacturing and services sectors. This has been largely attributed to a resurgence in COVID-19 cases in Asia together with stricter government policies announced. This week, negative comments from state media regarding the Chinese online gaming industry, hurt investor sentiment. Despite this, Chinese stocks rebounded this week after last week’s pullback.

It was a strong week for global equities with major indices posting decent weekly gains. In the U.S., the Dow Jones (+0.78%), S&P 500 (+0.94%) and the Nasdaq (+1.11%) all ended the week stronger. Similarly, in Europe, the Euro Stoxx 50 (+2.08%) and FTSE 100 (+1.29%) posted positive returns, along with China’s Shanghai Composite Index (+1.79%) and Japan’s Nikkei 225 Index (+1.97%).

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Market Moves of the Week

Locally, President Ramaphosa announced the reassigning of 6 cabinet members and the appointment of 4 new cabinet ministers, including the appointment of close political ally Enoch Godongwana as his new finance minister. Given Mr. Godongwana’s training and experience, he is likely to be perceived by the market as a credible and effective policymaker. His appointment may however introduce some uncertainty into the mid-term budget until he elaborates further on his fiscal policy views and priorities.

Manufacturing PMI registered a drop to 43.5 in July (below 50.0 signals a contraction), compared with a reading of 57.4 in the previous month. This was mainly attributed to the looting and unrest that took place during July.

According to a survey conducted by Redflank Management Consultancy, small businesses need R16bn funding to recover after having stock looted in the recent wave of unrest. The survey found that two thirds of looted small businesses did not have insurance and estimate that the damage in the small and medium sector will reach R55bn. These figures dwarf the R4bn that trade & industry minister Ebrahim Patel announced had been set aside for businesses damaged in rioting.

The JSE All Share Index ended the week down -0.43%, led lower by the resource (-1.92%) and industrial (-1.39%) sectors. The financial sector (+5.15%) outperformed, with banking stocks (+6.53%) being the major contributor. By Friday close, the rand was trading at R14.67 to the U.S. Dollar.

Market Moves_8 Aug 2021
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Chart of the Week

Whilst global economic activity rebounds, airline seat capacity is dropping and is now just 68% of what it was in 2019. The Covid-19 pandemic has disrupted a multi-year travel expansion, fuelled by a rising number of middle-class tourists from China and Southeast Asia. The latest setback is largely attributed to the spread of the delta variant.

Chart of the week_8 Aug 2021

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