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The Weekly Focus – 18 September 2023

This week, we give you a comprehensive economic overview with more information on SA’s mining output, manufacturing production, US retail sales and inflation, market currencies and other data.
STANLIB Weekly Focus
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Kevin Lings

Chief Economist

Our weekly podcast by Kevin Lings

Our Chief Economist, Kevin Lings, adds to the conversation with his weekly podcast. He delves deeper into the latest US inflation data and its potential impact on interest rates. He also touches on the European Central Bank’s recent interest rate increase, China and SA’s economic activity data, which gives an insight into these two economies’ performance. 

The focus areas during the week included:


The S&P 500 Index ended the week down 0.2%,  hurt by a decline of 1.2% on Friday. The weakness could reflect the ongoing uncertainty about the peak of US interest rates, but Friday’s performance was probably undermined by the start of the United Auto Workers (UAW) strike at three major vehicle manufacturing factories as the deadline for a new contract passed. While the economic impact of the strike is likely to be modest (at this stage) the strike is unhelpful from a market sentiment perspective.


US government bond yields trended slightly higher in the week, with the 10-year yield ending the week up at around 4.33%, in line with its high for the year, while the two-year moved back above 5%. New and used car prices have helped to ease inflation in recent months, but an extended strike in vehicle supply may reverse some of these trends.


The STOXX Europe 600 Index ended the week up 1.6% (+8.7% year-to-date) despite the ECB increasing interest rates by a further 25 bps. Instead, the market focused on the ECB signalling that interest rates may have reached a peak. China’s improved economic data also appears to have boosted sentiment. (During the week Germany’s DAX added 0.9%, France’s CAC 40 Index gained 1.9%, and Italy’s FTSE MIB improved by 2.3%).


Year-to-date Emerging Market currencies are down -2.4% compared with the dollar, while the rand has lost -10.9% of its value. SA’s fiscal risks have been in the headlines recently and continue to deter capital flows to SA, keeping the risk premium elevated relative to emerging market currency peers. Ultimately, fundamentals need to show signs of improvement for the rand to improve meaningfully.


US consumer inflation was mostly in line with expectations in August, rising from 3.2% to 3.7%, mainly because of higher energy prices. In contrast, core inflation moderated further from 4.7% to 4.3%. The US Federal Reserve is still expected to keep rates on hold when it meets next week but is likely to warn that inflation is still not fully under control, especially given the recent increase in the oil price. Encouragingly, US inflation expectations appear to be trending lower, including long-term expectations. This is reflected in the latest University of Michigan survey of household inflation expectations as well as the New York Fed inflation expectations survey.


US PPI inflation rose more than expected in August to 1.6% y/y. The market anticipated PPI inflation would increase to a more modest 1.3% y/y. This larger-than-expected increase was largely due to higher energy costs. This is reflected in the fact that core PPI inflation rose by only 0.2% m/m in August whereas the headline PPI index jumped by 0.7% m/m.


US retail sales rose by 0.6% m/m in August, well above market expectations for an increase of 0.1%. This was largely due to an increase in gasoline sales. Taking out gasoline, retail sales rose by a more modest 0.2% m/m. Consumer spending remains fairly robust but is losing some momentum, as the excess savings accumulated over the past three years have been largely drawn down. This, together with the moderation in wage hikes, softening labour market conditions and higher borrowing costs, is likely to dampen consumer activity over the coming months.


The oil price (Brent) reached a 10-month high last week of about $94 a barrel, up 9.5% year-to-date. This is largely due to production cuts from Saudi Arabia and Russia, as both countries announced earlier this month that they will maintain the current lowered production until the end of the year. In most countries, higher energy prices generally act as a tax on the consumer. As households spend more on fuel, they have less money available to spend on other things. In terms of the outlook for the oil price during the remainder of 2023 and into 2024, it can be argued that sluggish growth in China, coupled with a slowdown in European activity, could prevent the price increasing above $100/bl.


The US NFIB small business optimism index fell by 0.6 index points in August to 91.3, reversing most of the gain from the previous month. Overall, small business confidence remains depressed, and is well below the long-term average, signalling recession conditions in many sectors.


The US economy is facing a potential government shutdown at the beginning of October 2023 , which is a little tricky to explain. In June, President Biden signed into law the Fiscal Responsibility Act, which effectively ended the debt-limit crisis at the time and established limits on federal discretionary spending for the next two years. However, for this to become a lasting reality, US Congress needed to approve 12 annual spending bills (which effectively fund all US federal government activities). While the US Senate has passed all 12 annual spending bills, the House of Representatives has passed only one of them. This is because a small group of Republicans brought legislative action to halt the process. Now the House of Representatives has only three weeks left to pass the remaining 11 spending bills and avoid a government shutdown. At this stage it seems likely that government funding will expire at the end of September, leading to a two-week shutdown starting on 1 October 2023.


On Thursday, the ECB increased its main refinancing interest rates by 25 bps to 4.75% (the deposit rate increased to 4%), which was above market expectations for interest rates to remain unchanged. That expectation was odd, given the stubbornness of inflation. This is the 10th consecutive increase in rates. Importantly, in the press conference following the decision, the ECB hinted that it could be nearing the end of its interest rate hiking cycle. ECB President Christine Lagarde said a “solid majority” of policymakers had backed the quarter-point hike. The ECB said that the move meant “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” We expect euro area interest rates will remain unchanged into 2024.


Euro area industrial production declined more than expected in July, falling by 1.1% m/m versus market expectations for a decline of -0.9%. Over the past year, production has declined by a substantial -2.2%, reflecting the current softening of euro area economic activity. The decline in July was largely driven by a sharp drop in the output of durable consumer and capital goods.


During the week, the European Commission (EC) cut its forecast for euro area GDP in 2023 to 0.8% from 1.1% previously and projected that the German economy would decline by 0.4%. Previously, the EC forecast the German economy would expand by 0.2% in 2023.


South African manufacturing production declined sharply in July 2023, falling by -1.6% m/m after outperforming in Q2 2023. Manufacturing has grown by an annual average of only 0.2% over the past 12 months, suggesting ongoing stagnation.


South African mining output fell in July by -1.7% m/m, and decreased by a significant -3.6% y/y. The decline was driven by a fall in PGM and coal production. In contrast, gold and iron ore production rose, preventing a bigger fall in overall production. Mining output continues to be plagued by a combination of factors, including electricity outages as well as rail and port capacity constraints.


China’s retail sales surged surprisingly in August, growing by 4.6% y/y – an indication that consumer demand might be stabilising. Despite the improvement, household consumption continues to be undermined by high youth unemployment and weak consumer confidence.


China’s industrial production improved noticeably in August, growing by 4.5% y/y compared with an annual average of 3.5% in the preceding seven months. In contrast, fixed asset investment decelerated further, growing by 3.2% y/y In August.


The People’s Bank of China (PBoC) cut its reserve ratio requirement by 25 bps (effective 15 September) for most banks for the second time this year to help inject more liquidity into the financial system. We expect the PBoC will ease monetary policy further this year as the government tries to boost China’s post-pandemic recover, which has lost momentum in recent months.

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