Friday’s employment report in the United States turned sentiment back in a positive direction as investors weighed a renewed possibility of the Federal Reserve (Fed) achieving a soft landing. The U.S. unemployment rate fell from 3.7% to 3.5%, while in December, the economy added a more-than-expected 223 000 jobs. Encouraging for investors, robust job growth appeared to be accompanied by slowing growth in average hourly earnings, which rose 0.3% in December – below expectations. There is however little in the report to change the Fed’s hawkish outlook in the near term.
Friday also brought news that the U.S. service sector slowed rapidly in December. The Institute for Supply Management’s index of services sector activity fell to 49.6 in December (November: 56.5), below estimates and into contraction territory (<50) for the first time since May 2020.
The minutes of December’s Federal Reserve Open Market Committee (FOMC) were released this week. The committee’s tone was more hawkish than anticipated, with them emphasising that no FOMC members expect rate cuts in 2023, despite market pricing. Officials noted that a “misperception” of the Fed’s reaction function would complicate the bank’s goal of restoring price stability. The minutes also confirmed that the bank should slow the pace of rate hikes, but wants to remain ‘flexible’. “Participants reaffirmed their strong commitment to returning inflation to the Committee’s 2% objective,” the minutes said. “Many participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price stability goal.” On Thursday, the International Monetary Fund warned that the U.S. has not yet turned the corner on inflation and urged the central bank to stay the course on rate hikes.
The pace of inflation in Europe slowed in December, as energy prices fell. Eurozone inflation fell from 10.1% y/y in November to 9.2% y/y in December, however, core inflation, which strips out energy and food, rose a record 5.2% y/y. Investors nonetheless welcomed the news, sending European stocks higher. On the energy front, the cost of natural gas finally fell to levels last seen before Russia invaded Ukraine. In other European news, on 1 January 2023, Croatia formally adopted the euro as its currency, becoming the 20th member of the eurozone.
Most major indices ended the week in the green as global investor sentiment improved. In the U.S., the S&P 500 Index gained +1.45%, the Dow Jones rose +1.46% while the tech-heavy Nasdaq composite managed a +0.98% gain. Shares in Europe (Euro Stoxx 50) surged +5.91% on the back of positive inflation news, while the FTSE 100 jumped +3.32%.
Japan’s stock market returns were negative for the week, with the Nikkei Index falling by -0.46%. Chinese equities soared (Hang Seng +6.08%) amid reports that Hong Kong would reopen its border to mainland China and that Beijing was thinking about relaxing curbs on borrowing for the struggling property sector. Gold rose +2.32% while Brent Oil sunk -8.70%.
Market Moves of the Week:
South Africa’s (SA) private sector activity managed to expand in December, despite intensified loadshedding, with S&P Global’s SA purchasing managers’ index coming in at 50.2 (November: 50.6). December’s print remains just above the 50-point mark that separates expansion from contraction. “The latest findings suggest that GDP figures are likely to disappoint in the fourth quarter following a more robust expansion in Q3,” David Owen, economist at S&P Global Market Intelligence, said.
The African National Congress (ANC) met on Thursday to fine-tune its policies and implement new ones, with electricity shortages, welfare grants, central bank independence, immigration rules and the management of state companies among the items on its agenda. A number of the policies discussed were reiterations of previous rulings the party took years ago but never executed.
Some of the key proposals include:
The ANC recognised that SA’s energy crisis is the biggest obstacle to economic growth. They proposed a state-owned company continue to play a central role in sustaining the electricity supply and that the government consider natural gas and more nuclear power to ensure a transition to renewable energy doesn’t disadvantage the country.
The National Treasury has warned that an indefinite extension of the current temporary monthly stipend could threaten the sustainability of public finances unless a permanent source of funding is found. The ANC suggested that measures be taken to contain state debt and said that the introduction of a wealth tax should be considered to reduce inequality.
The documents state that the “historic anomaly of the private ownership of the South African Reserve Bank must be corrected, in a manner that does not enrich speculators or overburden the fiscus.” While the ANC first decided in 2017 that the state should own the central bank, the process — which will require a change to the Reserve Bank Act and an agreement on the price of shares — has stalled.
The JSE rallied +5.22% over the week, following global markets higher. Resources (+7.14%) and Industrials (+6.98%) surged, while Listed Property (-0.67%) struggled to maintain its momentum. Over the week, the rand weakened against the U.S. dollar to end at R17.10/$.
Chart of the Week:
2022 was the worst year for U.S. equities and bonds in the last 150 years, here are the total nominal returns in U.S. stocks and bonds, for each year from 1871 to 2022.
Source: Financial Times