Week in Review: Mixed Data as S&P500 Regains Bull Market Status

On Thursday, the S&P500 index experienced a significant development as it entered a bull market. The broad equities benchmark demonstrated a 0.6% increase, concluding the day at 4,292.93 points. This surge represents a notable 20% leap from its lowest point on October 12, 2022, when it stood at 3,577.03 points. Investors reacted favourably to indications from the Central Bank, which suggested that it is nearing the conclusion of its interest rate hiking cycle. Last week, the Federal Reserve hinted that it is likely to abstain from implementing a rate hike during its June 13-14 meeting. This anticipated pause has acted as a catalyst, propelling stock prices to higher levels.

On Thursday, the US Labour Department reported that weekly jobless claims had unexpectedly increased this week to 261,000, well above expectations and the highest level since October 2021.

Economists at the World Bank have revised their global GDP forecast for 2023, increasing it from the earlier projection of 1.7% to 2.1%. This upward adjustment indicates an improvement; however, it also suggests a significant deceleration compared to the 3.1% growth rate observed in 2022. In addition, the World Bank has reduced its growth outlook for 2024 from 2.7% to 2.4%.

While major economies have exhibited more resilience than anticipated in 2023, the economists caution that the impact of higher interest rates and tighter credit conditions will likely dampen growth in 2024. These factors are expected to take a toll on economic expansion going forward.During a meeting at the White House, US President Joe Biden and UK Prime Minister Rishi Sunak reached an agreement to initiate negotiations on a trade pact between their countries. This trade agreement holds the potential to benefit British automakers by allowing them to qualify for electric car subsidies. Furthermore, it could facilitate the joint development of advanced weaponry. The focus of the trade discussions would revolve around critical materials that play a vital role in the production of batteries used in electric vehicles. The proposed trade package aims to foster collaboration and strengthen economic ties between the US and UK.

According to revised GDP data, the Eurozone’s economy experienced a technical recession during the winter period, albeit by a small margin. The data reveals that the economy contracted by 0.1% in both the fourth quarter of 2022 and the first quarter of this year. This weak growth performance is not unexpected, considering the significant impact of the war in Ukraine on European energy markets.

In Japan, revised figures released this week by the Cabinet Office indicates that the economy experienced stronger growth than initially estimated during the first quarter of 2023. Gross domestic product (GDP) expanded at an annualized rate of 2.7% quarter on quarter, surpassing the initial reading of 1.6% and exceeding economists’ forecasts. The upward revision of first-quarter GDP can be largely attributed to robust corporate investment. Despite apprehensions surrounding a slowdown in global growth, particularly in China, businesses in Japan demonstrated increased spending as sentiment remained resilient.

Saudi Arabia has announced its intention to implement an additional reduction of 1 million barrels per day in oil supply during July. This decision has been prompted by a decline in crude prices and will bring the country’s production to its lowest level in several years. Despite the potential consequences, this bold step has been taken by Saudi Arabia, which holds significant importance as a member of the OPEC+ coalition, with the aim of stabilizing the market.

However, it is important to note that this move does involve some concessions to key allies. Russia, a prominent member of the coalition, has not committed to further output cuts. Additionally, the United Arab Emirates (UAE) has negotiated a higher production quota for the year 2024. Despite these compromises, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, has expressed a strong commitment to taking whatever measures are necessary to restore stability to the market. Brent Crude Oil closed the week lower, down 1.65% to $74,94 bbl.

Chinese equities ended the week on a mixed note, following the release of the latest inflation data, which has increased concerns surrounding the post-pandemic recovery, China’s CPI rose 0.2% in May.  The recent release of weak export and import data has fuelled expectations for increased economic stimulus in China. The data indicates that both domestic and international demand remain subdued. In May, exports experienced a significant decline of 7.5% compared to the previous year, surpassing initial forecasts for a weaker performance. Additionally, imports fell by 4.5% compared to the same period last year. Notably, China’s share of US goods imports in April reached its lowest level since 2006, as reported by The Wall Street Journal. Analysts are concerned that exports may further decline, despite their current elevation compared to pre-COVID levels.

The Shanghai Composite index posted a modest gain of 0.04% for the week, while Hong Kong’s Hang Seng Index extended the previous week’s gains, posting a strong 2.32% week-on-week return.

US stocks ended the week slightly higher, with the S&P 500 up 0.39%, the Dow Jones Industrial Average up 0.34%, and the tech heavy Nasdaq Composite rising slightly 0.14%. The Euro Stoxx 50 ended the weak lower (-0.78%), while the FTSE 100 (0.96%) closed the week in positive territory. Japan’s Nikkei 225 index gained 2.35% this week, continuing its positive trend for the year (23.65% YTD).

Market Moves of the Week:

On the domestic front, recent economic data indicates a notable resilience, as the South African economy narrowly averted a recession during the first quarter. According to the latest data released on Tuesday, the economy expanded by 0.4%, effectively returning to pre-COVID levels. Out of the ten industries monitored by Stats SA, eight experienced growth in Q1, with manufacturing and finance, real estate, and business services making the most significant positive contributions.

Furthermore, South Africa’s current account deficit exhibited a substantial narrowing, declining from 2.3% of GDP in Q4 2022 to 1.0% of GDP in Q1 2023, contrary to the consensus forecast of a widening deficit. The primary catalyst for this improvement was the balance of trade in goods and services, which shifted from a deficit of 0.8% of GDP in Q4 to a surplus of 0.6% of GDP in Q1.

Adding to the positive developments, there has been some relief from Stage 6 national loadshedding, and a constructive meeting between government officials and business leaders on Wednesday, which has reignited optimism that a potential solution could be identified to mitigate the persistent power outages.

Although there were some positive developments on the news and economic front, the JSE ALSI posted a modest decline for the week (-0.25%), the only positive sector contributor was Financials up 7.25%. Both Industrials (-1.95%) and Resources (-2.71%) were down for the week. The Rand made a strong recovery, receding below the R19/$ mark. The currency was trading at R18.72/$ by Friday close, appreciating 3.99% against the Dollar. The SA listed property sector continues to face headwinds, the sector closed the week marginally lower -0.15%.

Chart of the Week:

In May 2023, the European Union’s transition to clean energy reached a remarkable milestone. Solar panel generation exceeded the bloc’s coal power plants for the first time, production should be further boosted over the summer months. Power prices turned negative during some of May’s sunniest days as grid operators struggled to handle the surge. Source: Ember & Bloomberg.

Week in Review: Fed Rate Hike Pause on the Cards

This week marked the end of May, with the S&P 500 reaching its highest level since mid-August 2022 and the Nasdaq Composite hitting its best level since mid-April 2022. The agreement reached between the White House and Republican congressional leaders to raise the federal debt limit and avoid a default did not significantly impact investor sentiment, as indications of a deal had already emerged. Economic data took centre stage, with U.S. employment data in the spotlight.

The Senate passed legislation to suspend the U.S. debt ceiling and impose restraints on government spending through the 2024 election. President Joe Biden is set to formally end the month-long debt-limit crisis this weekend.

Employment data released during the week was mixed. A report on Wednesday showed that job openings rebounded much more than expected in April and hit their highest level (10.1 million) since January. However, Friday’s release showed that U.S. unemployment unexpectedly rose from 3.4% to 3.7%. The Labor Department also highlighted an increase in the number of people losing jobs or completing temporary positions, reaching the highest level since February 2022. Overall, these findings suggest a more challenging job market for workers. The Federal Reserve is signalling that they plan to keep interest rates steady in June while retaining the option to hike further in coming months. Friday’s unemployment data reinforces this possibility.

Another encouraging sign regarding interest rates was the release of U.S. manufacturing data for May. Data showed a seventh straight monthly contraction in factory activity, as expected. Encouragingly, prices paid for supplies and other inputs by manufacturers contracted at the fastest pace since December, defying expectations for a modest increase.

Eurozone inflation decreased more than expected in May, increasing by 6.1%, also down from a 7.0% increase in the previous month. The unemployment rate decreased to 6.5% in April, in line with market expectations, following a revised rate of 6.6% in March. Manufacturing PMI in the eurozone declined to 44.80 in May, down from 45.80 in the previous month.

UK house prices experienced a marginal decrease of 0.1% on a monthly basis in May, following a revised increase of 0.4% in the previous month. Market expectations had anticipated a 0.5% decline. This decline in house prices reflects wider concerns in the UK property market. Moody’s recently downgraded the debt of Canary Wharf, a prominent symbol of the global real estate downturn. The east London financial district, saw its debt rating lowered from Ba1 to Ba3.

In China, the official manufacturing Purchasing Managers’ Index (PMI) dropped unexpectedly to 48.80 in May, indicating a contraction for the second consecutive month. This suggests that the post-Covid recovery in China’s economy is facing challenges. However, the services PMI rose to 54.5, albeit below expectations, but still indicating expansion.

On the other hand, the private Caixin manufacturing PMI index surprisingly increased to 50.90 in May, contradicting the official data and showing a slight expansion in manufacturing activity. The Caixin index mainly covers smaller and export-oriented businesses.

U.S. and Asian markets were stronger this week, whilst European markets ended in negative territory. In the U.S., the Dow Jones (+2.02%), S&P 500 (+1.83%) and Nasdaq (+2.04%) all ended the week higher. Similarly, the Nikkei 225 (+1.97%), Hang Seng (+1.05%) and Shanghai Composite Index (+0.55%) also ended the week higher, whilst the Euro Stoxx 50 (-0.32%) and FTSE 100 (-1.80%) were negative.

Market Moves of the Week:

Earlier this week, the foreign ministers of Brazil, Russia, India, China, and South Africa met in Cape Town. The BRICS nations have requested guidance from their dedicated bank regarding the potential implementation of a shared currency, aiming to shield member countries from the impact of sanctions like those imposed on Russia.

Despite a 9.61% tariff increase and a bailout of R21.9 billion from the Treasury, Eskom reported a loss before tax of R21.2 billion for the 2024 financial year, surpassing the projected loss of R13.6 billion. The company’s revenue fell short of expectations, while its expenses, particularly on diesel, amounted to R21.36 billion, more than double the previous year. Additionally, the Treasury informed legislators that the total invoiced municipal arrear debt rose to R58.5 billion.

South Africa’s trade surplus contracted to R3.54bn, lower than expectations, while the Absa Purchasing Managers Index (PMI) declined in May, indicating a contraction in manufacturing output for the second quarter following a modest rebound in the first quarter.

The JSE All-Share Index (+0.70%) ended the week in positive territory, driven higher by the resource (+4.24%) and financial (+1.01%) sectors, whilst industrial shares (-1.24%) were negative. By Friday close, the rand was trading at R19.50 to the U.S. Dollar, appreciating by +0.75% for the week.

Chart of the Week:

The U.S. unemployment rate rose in May to 3.7% from 3.4%, one of the fastest increases since early in the pandemic, according to Bureau of Labor Statistics data released Friday. About 440,000 more workers reported that they are unemployed; and most of those were from temporary jobs ending or layoffs, according to the data.

Source: Bureau of Labor Statistics via FRED, Washington Post.

Week in Review: US Job Market Shows Signs of Cooling

For the month of February, the United States (U.S.) saw a drop in job openings to under 10 million, marking the first time this has happened in nearly two years. The Job Openings and Labour Turnover Survey (JOLTS) report showed that job openings, which are an indicator of labour demand, decreased by 632,000 to 9.9 million – the lowest level since May 2021. This figure was below the 10.4 million job openings forecasted by economists surveyed by Reuters. Despite the larger-than-expected decline, the labour market remains tight, with 1.7 job openings available for every unemployed person in February, down from 1.9 in January. Moreover, the JOLTS report showed a slight decrease in both hires and separations with quits increasing by 146,000 to just over 4 million, indicating confidence in the labour market’s ability to switch jobs.

Payroll processing firm ADP reported that private sector hiring slowed down in March.  Company payrolls increased by 145,000, which was lower than the Dow Jones estimate of 210,000 and down from 261,000 in February. The average monthly hiring rate for the first quarter was 175,000 jobs, lower than the 216,000 in the previous quarter and a significant reduction from the average of 397,000 in the first quarter of 2022. Similarly, the Labour Department’s Nonfarm payrolls report also showed signs of an early-stage slowdown in the jobs market, with payrolls growing by 236,000 in March, below the upwardly revised 326,000 in February and the Dow Jones estimate of 238,000. The Labour Department also reported that the unemployment rate ticked lower to 3.5%, against expectations that it would hold at 3.6%.

For the week, the benchmark S&P 500 fell by -0.10% while the tech-heavy Nasdaq dropped by -1.10%. In contrast, the Dow Jones ended the week on a positive note, with a weekly gain of +0.63%. Oil prices experienced a third consecutive weekly gain of +6.27% as market participants evaluated the impact of OPEC+’s planned production cuts and declining U.S. oil inventories, while also factoring in concerns about the global economic outlook.

According to the Bank of England’s (BOE) Chief Economist, Huw Pill, officials might need to increase interest rates to prevent a rebound in prices caused by households and companies trying to recover their lost income, even as inflation decreases. This view differs from that of colleague Silvana Tenreyro, who suggested at a separate event on Tuesday that the BOE may have to reduce rates “earlier and faster” due to the rapid pace of tightening. The Chief Economist, Pill, did not provide any guidance on how he would vote at the BOE’s next rate decision on May 11. Financial markets currently predict a 70% chance of another quarter-point rate increase at the BOE’s next meeting.

Like their British counterparts, ECB officials, including President Christine Lagarde, Vice President Luis de Guindos, and Chief Economist Philip Lane, have indicated that another interest rate hike is imminent. Lane has stated that if inflation follows the projected path outlined in the ECB’s March economic projections, the bank will need to raise rates in May. Although the ECB has already raised rates by a total of 350 basis points since July 2022, it has not given any specific guidance for its upcoming May 4 meeting, citing turbulence in the financial sector as a reason for caution. While several other policymakers echoed the view that rates might rise, they also said they believed rates were nearing a peak.

For the week, the FTSE 100 ended positively, gaining +1.44%, while the Euro Stoxx 50 declined by -0.13%

On Tuesday, Finland officially joined the North Atlantic Treaty Organization (NATO) as its 31st member. This marks the end of Finland’s seven-decade-long military non-alignment and abandonment of their neutrality. Finland’s decision to join NATO has doubled the length of the border that NATO shares with Russia and strengthened its eastern flank, which is crucial as the war in Ukraine continues with no signs of resolution. By becoming a member of NATO, Finland can access the resources of the entire alliance in case of an attack, providing a guarantee of protection to the northern European nation.

In China, the private Caixin/S&P Global survey showed that services activity increased to 57.8 in March, up from 55.0 in February. This marks the third consecutive month of expansion since Beijing lifted pandemic restrictions in December. However, the survey’s manufacturing gauge slowed to 50.0 in March from an eight-month high in February due to sluggish global demand. The weaker-than-expected Caixin/S&P manufacturing data corresponds with the official manufacturing Purchasing Managers’ Index released the prior week, which also declined from February’s level but remained in expansion. Index readings above 50 indicate growth compared to the previous month.

Chinese stocks rose during the holiday-shortened week, driven by a rebound in services activity which boosted investor confidence. The Shanghai Stock Exchange Index gained 1.67%. In contrast, Japanese stocks fell, with the Nikkei 225 Index dropping by -1.87%, stocks also fell in Hong Kong, with the Hang Seng declining by -0.85%.

Market Moves of the Week:

In local news, the Absa Purchasing Manager Index (PMI) reported that factory activity in South Africa shrank once again in March. The seasonally-adjusted PMI fell to 48.1 in March, down from 48.8 points in February, which marked the second straight month of remaining below the threshold of 50 points that separates expansion from contraction. This decline was influenced by rotational power cuts (loadshedding) that resulted in the deterioration of local business conditions. Despite this setback, Absa stated that survey participants were more optimistic about business conditions in the future.

According to data released by Statistics South Africa (Stats SA) on Thursday, electricity production in February 2023 decreased by 9.7% year-on-year, following an 8.8% decrease in January. Meanwhile, electricity consumption in February 2023 also declined by 8.7% year-on-year. According to load shedding data, visualised by The Outlier, South Africa has experienced some form of load shedding for all 97 days in 2023 thus far.

This week, the JSE all-share index fell by -2.40%, with the industrial sector leading the losses at -3.04%, followed by financials at -2.77%, and resources at -0.87%. The property sector also contributed to the week’s losses, ending with a weekly loss of -0.27%. The rand also depreciated over the week, ending at R18.19 to the dollar.

Chart of the Week:

Although employers in the U.S. maintained a steady hiring pace last month, there were indications of a cooling labour market. The Labour Department reported that payrolls grew by 236,000 for the month and that the unemployment rate ticked lower to 3.5%, while average hourly earnings rose 0.3%, pushing the 12-month increase to 4.2%, the lowest level since June 2021. Market pricing shifted following Friday’s report, with traders now expecting the Fed to implement one last quarter percentage point hike in May.

Week in Review: Banking Turmoil Rattles Markets

The failure of Silicon Valley Bank (SVB) last Friday set off a wave of investor fears that further collapses in banks would follow. Another large regional bank, New York’s Signature Bank, which had heavy exposure to cryptocurrency markets, then also collapsed last weekend. However, on Sunday, March 12, the Federal Reserve (the Fed), the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department made an announcement that all depositors of SVB would be granted complete access to their funds on Monday morning. Additionally, the Fed made more funding available to banks to protect deposits and prepared for addressing any potential liquidity issues. Nearly $143 billion in additional funds were loaned to the FDIC to backstop the failed SVB and Signature Bank.

The Fed’s additional funding proposed last Sunday came in the form of the Bank Term Funding Program, which was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. Since last Sunday, U.S. banks have borrowed $11.9 billion from the Bank Term Funding Program. Through this program, banks are able to obtain one-year loans with favourable conditions in return for providing collateral of high quality. All the emergency lending resulted in a total of $303 billion being added to the Fed’s balance sheet, which counteracted a significant portion of the quantitative tightening that the Fed had initiated since June.

Later in the week, U.S. bank First Republic, which had a focus on the tech sector similar to SVB, came under pressure after investors saw similarities between First Republic and the failed Silicon Valley Bank. A rescue plan was coordinated and on Thursday morning, First Republic, the 14th-largest bank in the country, received a cash infusion from 11 rivals, including America’s largest lenders. The rescue plan detailed that the group of banks would deposit $30 billion with First Republic for an initial period of 120 days, in an effort to calm fears about its balance sheet. In recent days, regional banks have experienced significant outflows of deposits, as customers have been transferring their funds to the large banks that are involved in the rescue efforts.

Hopes that the Fed might adjust its monetary policy in response to the banking sector events seemed to drive a rally during the week. By the end of the week, futures markets were pricing in zero likelihood of a 50 basis point hike by the Fed in March compared with a 40% chance of one the week before. Markets were also placing a nearly 99% probability that the federal funds target rate would end the year lower than its current range of 4.50% to 4.75%. In other news, U.S. inflation moderated in February, rising 6% y/y, in-line with expectations, down from 6.4% y/y in January, while core inflation declined to 5.5% from 5.6% in the month before.

Shares of Credit Suisse, the Switzerland-based financial giant, sold off after the chair of Saudi National Bank, its largest shareholder, announced that it would not invest further capital in the company. This event occurred shortly after Credit Suisse postponed the publication of its annual report due to the presence of “material weaknesses” in its controls for financial reporting. Following a steep drop in the value of Credit Suisse’s shares, the Swiss National Bank (SNB) offered a credit line of CHF 50 billion ($54 billion) to the bank on Wednesday evening, which provided temporary support to the stock price. Multiple sources have reported that UBS is currently in talks to acquire either all or a portion of Credit Suisse. The boards of the two largest banks in Switzerland are expected to convene separately over the weekend to examine what could potentially be the most significant banking merger in Europe since the financial crisis.

On Thursday, the European Central Bank (ECB) raised its benchmark rate by 50 basis points, to 3% from 2.5%. The ECB reiterated that future decisions would be data dependent but offered no forward guidance, while stating that “the euro area banking sector is resilient, with strong capital and liquidity positions.”

In an effort to enhance liquidity and stimulate the economy, the People’s Bank of China (PBOC) announced its decision to lower the reserve requirement ratio (RRR) for most banks by 25 basis points. This was the first such reduction made by the central bank this year.

On the market front, U.S. stocks closed mixed for the week on the back of turmoil in the banking sector, concerns over a steeper slowdown in the economy and hopes that the Fed would now be forced to pause its rate-hiking cycle. The S&P 500 gained +1.34% over the week, with cash-flush, mega-cap tech stocks recording robust gains while energy and financial shares slumped. As a result, the Nasdaq rallied +4.41% while the Dow Jones ended the week -0.15% lower.

Shares in Europe (Euro Stoxx 50) declined -3.89%, while the FTSE 100 sunk -5.33%. Chinese stocks (Shanghai +0.63%) managed a slight gain while, in Japan, the Nikkei 225 fell -2.88%. Gold (+6.50%) rallied, benefiting from risk-off sentiment, while Brent Oil fell -12.29% over the week.

Market Moves of the Week:

In South Africa (SA) this week, fresh economic data prints surprised to the upside, although still painted a gloomy picture for the SA economy. Data released on Thursday showed that SA retail sales dropped by -0.8% y/y in January, compared to  a -0.5% y/y decline in December. A look into the data shows that households cut their spending on essential food and beverages (-7.3% y/y) due to heightened living costs, but increased spending on clothing and footwear (+2.3% y/y).

Mining and manufacturing production was also released for January. Mining production shrank by -1.9% y/y , following December’s -3.6% y/y drop. The print was however stronger than the market expected (-2.8% y/y). On the manufacturing front, January production slipped -3.7% y/y (consensus -5.2% y/y) from -4.5% y/y in December. Persistent, heightened load shedding continues to remain a key downside risk to the energy intensive manufacturing sector. In January, there was an -8.0% y/y decrease in electricity production and a -7.3% y/y decrease in electricity consumption, with Eskom’s Energy Availability Factor (EAF) below 55.

Shares of Transaction Capital tumbled this week (-59.86% w/w) following a gloomy trading update that was released on Monday. The company posted a trading update reporting it expects core earnings per share from continuing operations in the half-year to end-March to fall between 20% and 50%. The group said on Monday that some of its operations were being badly impacted by macroeconomic headwinds.

On the mining front, Gold Fields (+23.46% w/w) and AngloGold Ashanti (17.90% w/w) announced on Thursday that they have agreed on the key terms of a proposed joint venture in Ghana, which would create the largest gold mine in Africa.

The JSE All-Share index fell -5.14% over the week, with Financials taking the biggest hit, down -6.91% w/w. The rand depreciated against the U.S dollar this week to end at $/R 18.47.

Chart of the Week:

Last week Powell signalled the central bank might accelerate its interest-rate-hike campaign in the face of persistent inflation. Traders moved to price in a half-point hike in the benchmark interest rate at the Fed’s March meeting, and further rate hikes beyond. Traders now see next week’s Fed meeting as a tossup between a smaller quarter-point hike and a pause, with rate cuts seen likely in following months. Source: Reuters