Week in Review: US Economic Growth Accelerates

Third-quarter economic growth in the US expanded faster than expected, highlighted by a better-than-expected gross domestic product report, which showed that the U.S. economy grew at an annualized pace of 4.9% in the third quarter, led by strong consumer spending. This preliminary growth reading marked a substantial increase from the second quarter’s 2.1% pace and was the most robust figure since the fourth quarter of 2021, surpassing economists’ average prediction of 4.3%.

On the inflation front, the core personal consumption expenditures (PCE) price index, a measure of inflation closely watched by the Federal Reserve, presented mixed signals. The year-over-year measure slightly decreased to 3.7% in September from the previous 3.8%. Despite remaining above the Fed’s 2% long-term inflation target, it is widely expected that the central bank will maintain rates steady at its upcoming October 31-November 1 policy meeting.

It was a busy week for quarterly earnings reports, with just under half of the constituents of the S&P 500 Index having reported for Q3 2023. Investor attention was notably focused on Amazon, Alphabet (Google’s parent company), Meta Platforms (owner of Facebook), and Microsoft, members of the mega-cap technology-focused group of stocks known as the Magnificent Seven. Amazon’s report, released after market close on Thursday, appeared to receive the most positive reaction, with shares of the company rallying strongly on Friday.

U.S. equities ended the week lower for a second straight week, as market sentiment was dented by mixed corporate earnings reports and concerns about higher interest rates. The Dow dropped by 2.1%, the S&P 500 by 2.5%, and the Nasdaq ended the week 2.6% lower.

On Wednesday, the Bank of Canada held rates steady at 5% while retaining a tightening bias, the central bank acknowledged the lagged effects of monetary policy in holding back economic activity and moderating price pressures.

In Europe, the pan-European STOXX 50 Index edged 0.26% lower due to uncertainties regarding interest rates, the economy, and conflicts in the Middle East. The UK’s FTSE 100 Index lost 1.50%.

The European Central Bank (ECB) left short-term interest rates unchanged this week, raising expectations that rates may have peaked in the eurozone. After ten consecutive rate increases, the ECB kept its key deposit rate at 4.0%. ECB President Christine Lagarde highlighted the expectation of ongoing weakness in the eurozone economy for the remainder of the year.

Japanese equities were also down by 0.86% for the week, influenced by rising bond yields and geopolitical tensions. Japan’s core inflation rate accelerated to 2.7% in October, surpassing expectations, while the consumer price index rose to 3.3% from 2.8% in September.

In China, equity markets ended the week stronger with the benchmark Shanghai Composite Index advancing 1.16% driven by increased government economic stimulus.

Amid rising concerns about escalating military action in the Middle East, the price of gold broke through the $2,000 per ounce threshold as investors sought refuge in safe-haven assets.

Market Moves of the Week:

South African Finance Minister Enoch Godongwana issued a grave warning about the country’s deteriorating public finances in a keynote address this week. The upcoming Medium-Term Budget Policy Statement is anticipated to reveal measures aimed at curbing excessive spending, as the minister stressed the urgency of maintaining some current expenditure levels. Expressing deep concern over the mounting debt, Godongwana highlighted the alarming annual debt servicing costs of approximately R366 billion, surpassing the annual allocation to the Department of Police.

In a positive development, power utility Eskom reported significant progress in its battle against load shedding this week, with the recovery of unit one at the Kusile power station after a year of downtime. Last October, three units at the power plant went offline due to a mechanical fault. Electricity Minister Kgosientsho Ramokgopa indicated that four units at the Kusile power station would return to service by the end of this year. The recent suspension and reduction of load shedding have led to a noticeable improvement in the long-term outage trend data in the country.

The JSE All Share Index was lower on the week, following the global trend, with the benchmark index ending 1.06% lower for the week. The resource and financial sectors were the primary contributors to the local equity market’s weakness.

The rand firmed on Friday to end the week at R18.86 against the dollar, marking a 0.6% increase from the previous week’s closing rate. Investors are gearing up for the mid-term budget announcement on November 1.

In sports news, the Springboks retained the Webb Ellis Cup after a thrilling 12-11 win over the All Blacks in the final at the Stade de France in Paris on Saturday night.

Chart of the Week:

The Federal Reserve’s preferred measure of underlying inflation accelerated to a four-month high in September as consumer spending picked up. The core personal consumption expenditures price index, which strips out the volatile food and energy components, rose 0.3% in September, while inflation-adjusted consumer spending jumped 0.4% last month. Still, the Fed is expected to keep its finger on the pause button when it meets to mull interest rates next week.

Week in Review: Middle East Crisis Introduces Fresh Risks

In the past year, concerns about inflation, rising interest rates, and political instability have persisted, even as markets have shown improvement. However, recent tragic events in the Middle East have introduced new worries for investors, as they evaluate how military conflicts might impact financial markets. While acknowledging the human tragedy, the market’s primary focus has shifted to potential effects on oil prices, interest rates, and the strength of the dollar, as these factors have a more direct influence on market performance.

Major indexes concluded the week with mixed results as investors weighed up inflation data against dovish signals from Federal Reserve officials. Leading banks such as Citigroup, Wells Fargo, and JPMorgan Chase initiated the unofficial start of the third-quarter earnings reporting season on a positive note, benefiting from higher interest rates.

The release of minutes from the Fed’s September policy meeting on Wednesday suggested that policymakers agree that they need to maintain restrictive interest rates for some time, while being mindful of balancing the risk of overtightening with the goal of curbing inflation towards the 2% target. In September, CPI rose by 0.4% month-on-month, surpassing market expectations, signalling ongoing inflationary pressures. The Fed’s core CPI, which excludes food and energy costs, also increased by 0.3% in September.

In Europe, the ECB’s minutes revealed that the majority of policymakers voted to raise the key deposit rate to a record high of 4.0%. Meanwhile, the German government lowered its 2023 economic growth outlook from 0.4% growth to a 0.4% contraction due to higher energy costs and reduced demand from major markets like China.

UK retail sales growth slowed to 2.7% year-on-year in September, marking the second weakest month of the year, while GDP rose by 0.2% month-on-month in August, after contracting 0.6% in July.

In China, inflation remained subdued with CPI for September remaining unchanged from a year earlier. Meanwhile, producer prices fell by a higher-than-expected 2.5% compared to the previous year. At the same time, Chinese developer Country Garden Holdings faces its first-ever potential default and restructuring due to difficulties in meeting offshore payment obligations on U.S. dollar bonds, highlighting China’s property debt crisis.

Global equity markets concluded the week with mixed results. In the U.S., the Dow Jones (+0.79%) and S&P 500 (+0.45%) were positive whilst the Nasdaq (-0.18%) was mildly negative. Similarly, European and Asian markets, including the Euro Stoxx 50 (-0.20%), FTSE 100 (+1.40%), Nikkei 225 (+4.26%), Hang Seng (+1.65%) and Shanghai Composite Index (-0.70%) were mixed.

Market Moves of the Week:

South Africa’s latest census data reveals a substantial population growth, with the country’s population reaching 62 million in 2022, up from 51.8 million in 2011. The census also highlights the presence of over 2.4 million migrants, primarily from neighbouring countries like Zimbabwe, Mozambique, and Lesotho. Notably, this census is only the fourth since 1994 and the first in over a decade.

On the economic front, South Africa is expected to experience a slight growth upturn in the coming year, primarily due to improved energy supply – this according to a Reuters poll. GDP is anticipated to expand by 1.2% in 2024, exceeding previous estimates and surpassing 2023 projections. Additionally, a decline in inflation is expected to offer some relief to consumers, with inflation projected to decrease to 4.8% in 2024, down from the estimated 5.8% in 2023.

The JSE All-Share Index (+1.76%) was positive this week, driven higher by the resource (+8.42%) sector. Weaker performances came from industrial (-1.38%), and financial (-0.35%) sectors. By Friday close, the rand was trading at R18.98 to the U.S. Dollar.

Chart of the Week:

China’s consumer inflation rate unexpectedly flatlined in September while factory-gate deflation persisted, suggesting the economy’s path to growth is still fragile and in need of additional support. According to the National Bureau of Statistics, the consumer price index for the past month remained unchanged from the previous year, falling short of expectations for a slight increase, and approaching the deflationary level observed in July.

Source: Bloomberg