The Weekly Focus – 04 September 2023
Introducing a weekly podcast by Kevin Lings
To provide you with more in-depth analysis on key economic issues, we’re introducing a new weekly podcast by our Chief Economist, Kevin Lings. In this week’s podcast, he delves into detail regarding US Employment data, SA’s PPI numbers, and the South African government finance data from July, which suggest that numbers will need to be restated at the next Medium-Term Budget Speech.
The focus areas during the week included:
The S&P 500 Index gained an impressive 2.5% during the week, although the month of August reflected a decline of -1.8%, which was the first negative month since February. This week’s US equity market performance appeared to be positively influenced by softer economic news (a modest weakening of US labour market conditions), given the interest rate implications. For example, on Tuesday, the S&P 500 Index recorded its best one-day gain since June. This came following news that job openings unexpectedly fell by 338 000 in July and hit their lowest level since March 2001. In addition, job quits, considered to be a very reliable indicator of the strength of the labour market, also fell considerably.
The US 2-year bond yield fell considerably over the week from 5.03% to 4.87%, helped by a moderation in the US labour market conditions. The yield on the benchmark 10-year treasury bond increased noticeably on Friday, leaving it largely unchanged for the week. The 2/10-year yield gap remains substantially inverted at -0.69%.
The rand has weakened by a substantial -9.4% against the US dollar year-to-date, while the basket of emerging market currencies has declined by a much more modest -1.4%. The rand was also one of the worst performing emerging market currencies in August, reflecting a further deterioration in SA’s economic fundamentals, including a larger than expected fiscal deficit.
US Atlanta Federal Reserve Bank President, Raphael Bostic spoke at the SA Reserve Bank biennial conference in Cape Town at the end of last week and provided useful insights. He highlighted that he believes the current level of interest rates was “appropriately restrictive” and on track to bring inflation down to the target of 2.0%. Along with this week’s inflation and employment data, Bostic’s seemed to support hopes that the Federal Reserve (Fed) will leave rates unchanged this month. The probability that the Fed will put interest rate hikeson hold for the rest of the year rose considerably during the week to almost 60%.
The US labour department reported that the economy added 187 000 jobs in August, slightly above market expectations, but employment gains for the previous two months were revised lower by a combined 110 000. Most notably, the unemployment rate rose from 3.5% to 3.8%, reaching its highest point since February 2022. This was largely because 736 000 more people re-entered the job market, pushing the labour force participation rate up to 62.8%. This isthe highest level since the start of the pandemic in February 2020.
A couple of weeks ago, in his speech at Jackson Hole, Jerome Powell warned, “evidence that the tightness in the labour market is no longer easing could also call for a monetary policy response.” However, this week, a broad range of labour market data helped to reduce the probability that the Fed will raise the target range for the fed funds rate in its September meeting.
In particular, the Job Opening and Labor Turnover Survey for July revealed that both job vacancies and quits are steadily declining. Job openings fell to 8.827 million in July, the lowest level since March 2021, when the economy started to reopen. In addition, June’s data was revised substantially lower from 9.582 million to 9.165 million. Consequently, the gap between labour demand (the sum of job openings and employment) and labour supply (the labour force) continues to decline and is nearing that threshold that would be consistent with the Fed’s 2% inflation target.
The reduction in the labour market’s demand-supply imbalance is also evident in the ratio of job openings to unemployed people. There are 1.5 job vacancies per jobless person, down from the record high of two job openings that was set in early 2022. More importantly, the balance between labour demand and supply is gradually being restored without any meaningful increase in unemployment. Critically the quit rate, which is one of the best predictors of wage growth, has slowed further. The quit rate fell to 2.3% in July from 2.4% in June, which is in line with its annual averages for 2018 and 2019.
On Thursday, the US Commerce Department reported that personal spending jumped 0.8% in July. This is above expectations and well above a 0.2% increase in consumer prices during the month.
On Friday, the Institute for Supply Management (ISM) reported that its gauge of manufacturing activity – although still indicating a contraction in the sector – rose unexpectedly to its best level since February.
US house prices rose by a further 0.9%m/m in June 2023, above expectations for an increase of 0.8%m/m. This is the fourth consecutive monthly rise in house prices despite the 30-year mortgage rate remaining above 7%. The recent pick-up in house prices largely reflects a shortage of homes available for purchase. Although prices are down 1.2%y/y, they remain extremely high by historical standards. This presents an increased risk that the recent re-acceleration in prices could undermine the expected moderation in shelter inflation.
SA trade balance moved back into surplus during July 2023. It recorded a positive balance of R15.96 billion, up from a deficit of -R4.75 billion in June 2023. The improvement was largely due to a 7.6%m/m decline in imports across a broad range of categories. Year-to-date SA’s trade balance has diminished substantially compared with the same period in 2022, recording a cumulative surplus of R19.5 billion in the first seven months of 2023 compared with R154.6 billion during the same period in 2022, as commodity export revenue subsides.
SA government’s fiscal balance recorded a substantial deficit of -R143.8 billion in June compared with a surplus of R36.7 billion in June. The deficit was significantly worse than expected, which was a deficit of -R115.5 billion. During the month tax revenue declined by 3.2%y/y, while expenditure surged by 9.0%y/y. Revenue collection is being negatively impacted by weaker export revenue as well as sluggish domestic economic activity. National Treasury is expected to revise their fiscal parameters to be noticeably weaker in the MTBPS during October 2023.
SA PPI inflation was recorded at a modest 2.7%y/y in July 2023, below market expectations for PPI to moderate to 3.0%. Producer inflation has slowed meaningfully from a high of 18%y/y in July 2022, helped substantially by a high base in energy and food inflation. This is despite electricity inflation being recorded at 19.1%y/y in July 2023 and vehicle prices rising by 14.4%y/y.
Eskom’s Energy Availability Factor (EAF) has deteriorated in recent weeks, falling to 55% in the final week of August, its lowest level since the third week of May 2023. The deterioration in the EAF reflects a rise in planned outages due to increased maintenance. In fact, at the start of September, planned outages explain 14.5% of the loss of electricity production compared with 9.5% in August and 7.6% in July.
SA’s PMI manufacturing index improved in August, rising by 2.4 index points to 49.7 from 47.3 in July. Despite the improvement, the index has been below the neutral 50-point level since February, highlighting the ongoing weakness in SA’s industrial sector.
China’s central bank cut the amount of foreign currency deposits that domestic banks must hold as reserves. The reduction in the foreign exchange reserve requirement ratio from 6.0% to 4.0% effectively frees up more foreign currency in the local market. The central bank’s move follows an announcement by China’s financial regulator that said it would reduce minimum down payments for homebuyers nationwide and encouraged lenders to lower rates on existing mortgages. Effectively, these policy announcements signal that Beijing is becoming more concerned about the lack of vibrant economic growth, including evidence of deflationary pressures, record youth unemployment, and a deepening slump in the debt-laden property sector.
The annual inflation rate in the Euro-area was recorded unchanged at 5.3% in August, which was slightly higher than the 5.1% expected by economists. In contrast, the core inflation rate, slowed in line with expectations, coming in at 5.3%.
The weakness in the German economy is becoming more visible. In particular, the number of people unemployed rose by 18 000 in August, while real retail sales fell by 0.8%m/m in July. Crucially, the recovery in consumer confidence that unfolded earlier this year has now stalled and current business conditions are reported to be the weakest in nine months.