Week in Review: Agreement in Principle

President Joe Biden, House Speaker Kevin McCarthy and their negotiators reached a tentative agreement to raise the debt ceiling on Saturday evening, ending a months-long stalemate. President Joe Biden described the agreement as a “compromise”, while House Speaker Kevin McCarthy said it “has historic reductions in spending”. Republicans have been seeking spending cuts in areas such as education and other social programs in exchange for raising the $31.4tn (£25tn) debt limit, a law that caps how much debt the US government can accrue. Recent U.S. market performance has been closely linked to the development of the talks, with signs of renewed momentum in the talks spurring a market rally on Friday.

The core personal consumption expenditures price index, the U.S. Federal Reserve’s (the Fed) preferred inflation measure, rose 4.7% y/y in April, up from March’s 4.6% y/y reading. The print signals that inflation remains sticky and that insufficient progress has been made in bringing down core inflation. Personal income experienced a strong increase of 0.8%, while personal spending surpassed expectations with a rise of 0.5%. These figures indicate that the U.S. economy still remains resilient. Markets are currently pricing in one more interest rate hike from the Fed over the next two meetings and less than one rate cut by year end.

The Fed’s May meeting’s minutes were released during the week, revealing that Federal Reserve officials were divided over whether further rate hikes would be necessary to lower inflation, given the high uncertainty surrounding the impact of banking-sector stresses on the economy. Some participants commented that “based on their expectations that progress in returning inflation to 2% could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.”

April’s inflation figure in the United Kingdom came in above expectations, with a year-over-year rate of 8.7% compared to the previous month’s 10.1% y/y rise. Consensus had anticipated a decrease to 8.2% in the Consumer Price Index (CPI). Meanwhile, core inflation rose to 6.8% y/y, reaching a new peak within the current cycle. Following the release of this data, investors adjusted their expectations and priced in an additional half-point increase in rates by the Bank of England.

According to a survey conducted by S&P Global, business output in the eurozone continued to grow for the fifth consecutive month in May. However, the rate of growth moderated slightly due to manufacturing weakness, which offset another robust month of activity in the services sector.

On the market front, global indices ended the week mixed. The S&P 500 Index climbed +0.32%, while the Dow Jones slipped -1.00%. The technology-heavy Nasdaq Composite outperformed and ended the week up +2.51% as a rush for artificial intelligence–focused stocks sparked a U.S. rally late in the week. Notably, shares of chipmaker NVIDIA surged +24% on Thursday after the company beat consensus first-quarter earnings expectations by a wide margin and raised its profit outlook. Shares in Europe fell -1.32% (Euro Stoxx 50) over the week while the FTSE 100 declined -1.67%.

Chinese equities fell over the week following a series of discouraging indicators in recent weeks that indicated a slowdown in their economic recovery. The Shanghai index ended the week down -2.16% as a result. In Japan, the Nikkei 225 gained +0.35%. Gold dipped -1.58% while Brent Oil rose +1.74% over the week.

Market Moves of the Week:

Inflation in South Africa cooled in April, with headline inflation easing to 6.8% y/y (expectations: 7% y/y) from 7.1% y/y in March. This was the lowest headline inflation print since May last year. Core inflation edged higher (from 5.2% y/y to 5.3%) in April. Despite a slight decrease in food prices, which slowed to 13.9% in April, the food and non-alcoholic beverages category continued to be the primary contributor to inflation for the month. Transport experienced its ninth consecutive month of disinflation (7.6% y/y), with fuel prices easing to 5% – the lowest reading since March 2021. Although consensus is for inflation growth to start declining going forward, the weakening rand as well as load shedding may keep inflation risks elevated.

Following Wednesday’s inflation print, the South African Reserve Bank (SARB) rose rates to the highest level since 2009 on Thursday, saying the restrictive policy is necessary to curb inflation. The repo rate rose to 8.25% after a 50 basis point hike was declared by governor Lesetja Kganyago. The decision will further burden an economy already facing unprecedented electricity shortages, with growth projected to be a mere 0.3% this year. Markets are suggesting that the SARB’s hiking cycle is now complete, however, risks continue to be tilted toward further tightening on account of continued rand depreciation.

The rand sank to a record low against the U.S. dollar ($/R 19.51) on Thursday after the hawkish statement by the SARB’s Monetary Policy Committee and subsequent comments by the Governor painted a gloomy outlook for the currency. The rand fell sharply by over 2% in response to the decision. The local currency is significantly oversold at these levels, but negative sentiment might keep it that way for some time.

President Cyril Ramaphosa insisted this week that South Africa (SA) will remain non-aligned towards Russia or Ukraine. The country has faced pressures from some of its main trading partners to change course, however, the president remains persistent that SA won’t be taking sides in the conflict. 

The JSE (-2.03%) fell over the week as negative sentiment took hold. All sectors ended in the red, with Resources (-2.79%) and Industrials (-1.96%) taking the biggest hits. The rand depreciated against the U.S. dollar over the week, rising to R19.64/$ from last week’s R19.42/$ level.

Chart of the Week:

Google parent Alphabet Inc. on May 10 unveiled a slew of AI-related projects and touched on $122 billion in a few trading hours. The AI phenomenon, which executives around the world have variously likened to the emergence of the internet and the iPhone, has administered what now looks like a historic shock to markets that even rivals the scenes when the pandemic hit three years ago.

Source: Bloomberg

The Living Relay

In looking back at photos of my life it quickly dawns on me that life is not a picture, it’s a movie. We get bigger, older, wiser, richer (or poorer!). We lose loved ones, and we gain friends. We have kids and grandkids, and our kids and grandkids lose parents and grandparents. This happens to everyone all over the world all the time. We live in constant momentum.

In the financial universe, there are two interesting sets of momentum. One is pretty obvious and in theory easy to manage; the other is less obvious and as a result, more difficult to get right.

Finding Financial Independence

The first is our own personal financial growth. Most people aspire to reach financial independence. That means having enough to enable us to work because we want to, not because we have to. To reach this point we undertake a journey of labour and savings illustrated by the graph below. The money we need to see us through our life at any given point in time is depicted by line A. The savings we have accumulated at any point in time to match that need is typically depicted by line B.

Becoming financially independent is determined by our aggregate spending throughout our life rather than our earnings. Both are needed, but it is the spending side that determines how hard we need to work and for how long. The higher our standard of living, the longer it takes to be financially independent and the more we need to reach that point. Wealth, therefore, is an entirely bespoke concept. The fact that we are living longer also means that we will have to either work for longer, work harder or spend less. Any of the three will do the trick, not much else.

This is pure maths and maths is not a guessing game. It just needs honest soul searching and a calculator.

Generational Momentum

The second is less obvious and concerns the interdependent nature of succeeding generations on each other. This is life’s relay. It’s a relay where the older generation runs towards the younger generation in a never-ending race. The baton refers to the assets each generation accumulates. Understanding the rules that govern this relay is crucial if one wants to hand over the baton successfully and maintain the momentum already generated. Here are the four simple rules:

Rule No. 1: It’s a Relay

The participants must understand they are in a relay. This means a high degree of communication and mutual acceptance that at some point in time the baton will pass on. This is especially important for family businesses – the sooner one addresses succession the better.

Rule no 2: let go and take

The giver must be willing to let go, and the receiver must be willing to accept. Clinging onto the baton or having a clenched fist does not make for a smooth handover. A control-obsessed person, for instance, can cause a scarcity mentality among heirs. This typically results in squandering through overindulgence or stubbornness – insistence that they don’t need anything and can do it on their own. Don’t live like you are poor when you are not. Wealth does not spoil kids; a lack of insight and understanding of wealth and the virtue of labour does. Accepting a baton means accepting the responsibility for the momentum as well.

Rule no 3: mentoring

The receiver must be trained to be in motion, ready for the handover to happen efficiently. The baton will either be dropped or the runner will overrun the receiver if the receiver stands still or is unprepared. To be able to carry inherited wealth, coaching and participation are needed. Simple things like having your children understand your monthly expenses and income and understanding the wealth that has been accumulated are steps in the right direction. Don’t dump wealth on people who do not have insight into it and don’t ever skip generations. Take responsibility for one generation at a time. Prepare them well and allow them to sort the next generation out.

Rule no 4: Don’t look back

The receiver must run forward and look towards the next generation. Issues of neglect or distant relationships can cause heirs to look back, which can negatively affect the passing of the baton. The sins of the father will last two generations, won’t they? You can’t change the past, but you can learn from it to create a better future.

In Summary…

We all constantly move along this financial continuum. One journey is mostly on our own and the other within the sphere of succeeding generations, but both are of equal importance. Understanding the rules of each journey will create a harmonious relationship with wealth within our own lifetime and a positive momentum for future generations.

Keep in mind that the baton contains much more than worldly goods and money. The rules governing generational momentum is true for everything we pass on to our heirs. Of all things, kindness is most probably the most valuable asset in that baton. Imagine a world where that happens as a rule rather than an exception.

Written by Louis Venter, Fiduciary Specialist at Carrick Consult.