The focus areas during the week included:

The S&P 500 Index declined by a further 0.7% in the week. This is the market’s fourth consecutive weekly decline. It was hurt by expectations that interest rates are likely to remain high for an extended period. The S&P 500 has lost a substantial 4.9% of its value in September 2023, but is still up 11.7% year-to-date. SA’s All Share Index fell by 1.4% in the week, declining by 3.4% in the month. Year-to-date the South African equity market is down a very disappointing -0.9%.

The US 10-year bond yield peaked slightly above 4.6% on Wednesday, hurt by the higher oil price. However, yields moved modestly lower during the remainder of the week, helped by the release of encouraging inflation data in the euro area as well as better-than-expected US Personal Consumption Expenditure (PCE) inflation data. The likelihood of a US government shutdown has receded following a deal on Saturday to fund the government for a further 45 days. The deal needs to be approved by the Senate.

Oil prices have risen $12 per barrel over the last month and $20 over the past three months. West Texas Intermediate crude oil was trading above $92 per barrel towards the end of the week, and Brent was above $96. The resurgence in crude oil prices has been driven by production cuts from OPEC+, especially Saudi Arabia. The lack of increase in the rig count suggests US producers remain reluctant to significantly invest in new wells. OPEC+ countries have largely stuck to the commitments they have made to limit oil production since the cartel was expanded in 2016. OPEC+ output had fully recovered from Covid-19 in early 2022, but since October 2022 the cartel has agreed to lower crude oil production by 2.5 million bpd to boost prices. Saudi Arabia has voluntarily withheld an additional one million bpd since July 2023, bringing total OPEC+ production firmly below its pre-pandemic level.

US PCE inflation increased to 3.5% y/y in August, in line with expectations, up from last month’s reading of 3.3%. In contrast, core PCE inflation eased to 3.9% y/y (the lowest annual rate in almost two years), down from a revised 4.3% in August. Higher oil and energy prices contributed significantly to the increase in headline PCE inflation. Core inflation, however, has benefited from falling used and new car prices, as well as some moderation in wage growth.

US new home sales fell by 8.7% in August to 675 000 annualised units. Despite the slowdown, the pace of new home sales in August is still at a level similar to before Covid-19. It appears that potential home buyers are increasingly looking to purchase new homes, given the reduced supply of existing homes for sale. New homes now represent a larger-than-normal share of total home sales.

US durable goods orders increased by 0.2% in August, better than market expectations for a decline of -0.5%. Excluding transportation, durable goods orders increased by 0.4%, while orders excluding defence equipment and aircraft rose 0.7%, compared to expectations for an unchanged outcome. The increase in “underlying” durable goods orders is encouraging from a growth perspective, but it also suggests that sustained high interest rates have not had a significant dampening effect.

The US Conference Board’s estimate of consumer confidence fell to 103 in September, below market expectations for the index to moderate to 105.5. The September outcome was well down on August’s revised reading of 108.7. Much of this weakness stemmed from the survey’s expectations component, which declined by 9.6 points to 73.7. In particular, the percentage of respondents who thought a recession was “somewhat” or “very likely” increased.

In the first five months of the tax year, most areas of South African SA’s tax collection are behind budget, including corporate tax and VAT. VAT collection has risen by only 5.6% year-to-date, against a budget estimate of 11.6% (largely because of an unexpected increase in VAT refunds). Equally, corporate tax collection is down a substantial -15.1% year-to-date versus a budget estimate of -2.5%. Company tax has been partly hurt by a fall-off in mining tax revenue, which partly reflects the decline in the international price of platinum group metals. In contrast, personal income tax has risen by 8% year-to-date (despite some misguided speculation of a looming crisis in personal income tax collection) versus a budget estimate of 6.7%.

South African private sector credit growth continued to moderate in August 2023, as corporate and consumer credit slowed. Notably, the growth in mortgage lending continued to slow, given sustained high interest rates.

SA’s headline producer inflation rate accelerated to 4.3% in August, up from 2.7% in July and above market expectations for an increase to 3.7%. The acceleration in PPI inflation was largely due to a spike in fuel prices.

Euro area consumer inflation moderated to 4.3% y/y in September, below market expectations and the slowest pace of inflation in about two years. The September inflation outcome was well down on the 5.2% recorded in August and below market expectations for inflation to slow to 4.5%. In addition, core inflation slowed to 4.5% from 5.3% in August, which was below expectations that it would moderate to 4.8%. Despite the larger-than-expected moderation in inflation, the ECB is expected to keep interest rates elevated well into 2024.

Some of the European Central Bank (ECB) officials (including ECB President Christine Lagarde and Chief Economist Philip Lane) reaffirmed their commitment to maintaining a restrictive monetary policy for an extended period to bring inflation back to the 2% target. In addition, ECB Executive Board member Frank Elderson said in an interview with Market News International that rates have not necessarily peaked and that future monetary policy decisions would depend on incoming data. Austrian Central Bank Governor Robert Holzmann went a step further, suggesting in an interview with Bloomberg that persistent inflationary pressures may yet lead to further rate hikes.

Euro area business and consumer sentiment readings weakened further for September. In particular, the euro area’s estimate of economic sentiment declined to 93.3 in September from 93.6 in August. This is the lowest reading since November 2020, with persistent weakness in most subcomponents. Sentiment is expected to remain subdued, given sustained high interest rates and weak economic activity.

Japan Prime Minister Fumio Kishida outlined a new economic stimulus plan, which will be funded by a supplementary budget. The plan is aimed at bringing about a virtuous cycle of capital investment, wage growth, and investment in people. A key focal point is the support of long-term investment in semiconductors, batteries and biotechnology. Also under consideration is the extension of the subsidy to mitigate soaring energy prices.

On Saturday, China’s manufacturing and services Purchasing Managers’ Index (PMI) data surprised on the upside. In particular, the manufacturing PMI for September 2023 rose back above 50 index points to 50.2, suggesting some stability has returned to China’s industrial production. In addition, the services PMI increased to 51.7, up from 51 in August. The consensus forecast for China’s GDP growth in 2023 has been moderated to 5%, but it could be revised slightly higher over the coming months as the government’s various stimulus measures have a more noticeable positive impact.