The focus areas during the week included:

The S&P 500 gained a further 2.2%, moving above the 4 500 index level for the first time since September. The market has gained almost 10% since the low in October and is up 17.6% year-to-date despite significant volatility in recent months. In general, the US equity market continues to benefit from a combination of slowing inflation and solid economic growth – although there are signs of an unfolding cyclical economic slowdown. The local equity market was up a very welcome 3.5% in the week but has gained only 1.2% year-to-date, given the persistent weakness of the domestic economy.

The ongoing moderation in US CPI and PPI inflation encouraged a further rally in the US bond market. The benchmark 10-year government bond yield touched an intraday low of around 4.4% on Friday, its lowest level since mid-September. In addition, the two-year yield fell convincingly to below 5%, signalling less concern about further interest rate hikes.

The US headline consumer price index remained unchanged month-on-month in October, driven in part by a sharp drop in energy costs. The market was expecting the index to rise by 0.1% m/m. This resulted in the annual rate of inflation slowing convincingly to 3.2%, down from 3.7% in September. Core prices rose 0.2%, bringing the year-on-year increase in core inflation to 4%, the slowest pace in two years. Shelter inflation also moderated, rising by 6.7% year-on-year versus the prior month reading of 7.2%. Shelter inflation has been one of the stickier components of core inflation, remaining above 7% y/y during the first nine months of the year.

US producer inflation slowed more than expected in October to 1.3% from 2.2% in September. The market had expected PPI inflation to slow to only 1.9%. The latest PPI data reinforces the disinflation trend and increases the probability that the Fed has already reached the top of the current interest rate cycle. Unsurprisingly, the data bolstered the US bond market.

US retail sales (which are not adjusted for inflation) fell by 0.1% m/m in October. This was less than expected, while the prior month growth estimates were revised higher. The decline in October was partly due to a drop in gasoline and auto sales. While home-related spending on furniture and building materials declined further, consumers continued to increase spending at bars and restaurants as well as online. Importantly, the control group of retail sales (which excludes gasoline, autos, building materials and food services) rose 0.2% m/m, following a revised gain of 0.7% in September. The consumer has been the strongest component of the US economy in recent quarters, supported by the ongoing strength in the labour market. Although the rate of growth in consumer activity is expected to slow over the next few quarters, a recession in consumer activity appears unlikely unless the labour market weakens significantly.

US housing starts rose by a robust 1.9% m/m in October (the market expected a decline of -0.6% m/m), led by a strong increase in multi-family units, but also a noticeable rise in the construction of single-family units. In addition, housing permits, which offer a more forward-looking signal of upcoming construction, rose more than expected, gaining 1.1% in the month.

US initial jobless claims increased to 231 000 in the week from 218 000 in the prior week. This is the highest reading since mid-August and a 12% increase from a month ago. Continuing claims also moved up, hitting their highest level in two years. It seems reasonable to argue that the rise in initial claims might be signalling some emerging weakness in the US employment market, with companies either cutting costs or anticipating some drop in demand. In addition, the higher continuing claims indicates that it is becoming slightly more difficult for idle workers to find a new job, which is corroborated by recent surveys showing a decline in the quit rate and fewer job openings. However, this softening in the labour market is off a strong base. In other words, despite some signs of weakness, employment conditions continue to support a solid economic performance.

US President Biden signed a short-term government funding bill on Thursday, 16 November to ensure that the US government avoided a partial shutdown that could have started on 17 November. The short-term funding initiative adopts a two-step approach. Some services receive funds until 19 January 2024, while other government agencies will be funded until 2 February 2024. The spending plan does not include additional aid for Israel or Ukraine. While the bill removes a source of short-term anxiety for the markets, it simply delays the problem until early next year. Hopefully, the US Congress will find a longer-term budget solution in January 2024, but that seems unlikely based on recent events. Historically, US government shutdowns have had little lasting impact on the economy and markets.

In Q3 2023, SA’s unemployment rate improved to 31.9% from 32.6% in Q2 2023 and a peak of 35.3% in the final quarter of 2021. The market expected SA’s unemployment rate to improve fractionally to 32.5%. The improvement was largely due to a surprise 399 000 increase in employment during the quarter, mostly in the formal sector (especially in the broader business services sector). The increase means that (officially) SA’s level of employment has finally fully recovered from Covid, reaching a record high of 16.745 million. The surprise improvement in the labour market is reflected in the resilience of the retail sector and the above-budget increase in personal income tax collection. Nevertheless, the household sector remains under pressure overall, hurt by sustained high interest rates and slowing real income growth.

SA’s retail sales rose by 0.8% q/q in Q3 2023, helping to offset the decline in mining and manufacturing during the third quarter. Retail sales remain surprisingly resilient, although household savings have turned negative as consumers increase their use of short-term debt (mainly credit cards) to sustain purchases.

S&P affirmed SA’s international credit rating at BB- and kept the rating outlook as ‘stable’. It indicated that the country’s credit rating could be cut if the ongoing implementation of economic and governance reforms did not progress as planned. S&P argues that private-sector investment in power generation is picking up and will support the economy. However, GDP growth is forecast to average only 1.6% from 2024 to 2026. In addition, S&P expects SA’s government debt to increase to 83% of GDP by March 2027 and that interest costs will rise to 20% of government revenue, higher than its previous estimates of 79% and 19%. Contingent liabilities arising from financially weak SOEs, such as Transnet, are likely to remain a risk to the economy and the government’s fiscal position.

European Central Bank (ECB) President Christine Lagarde said at a Financial Times event that policymakers expected inflation to pick up at the start of next year as base effects drop out of the annual comparison. Lagarde hinted, however, that even if inflation accelerates again, another interest rate increase may not be required: “We are at a level where we believe that, if kept long enough – and this long enough is not trivial – will take us to the 2% medium-term target.” She added that there will probably be no change in the rate over the “next couple of quarters”.

China’s official data for October offered a mixed picture of economic performance. Industrial production and retail sales grew more than forecast from a year earlier, but growth in fixed asset investment missed estimates, due to a dip in both infrastructure spend and real estate investment. China’s total retail sales surged surprisingly in October, with growth at 7.6% y/y, mostly driven by base effects. Nevertheless, consumption continues to face pressure from high youth unemployment and weak consumer confidence. China’s industrial production improved in October, growing by 4.6%vy/y, however the monthly growth estimates indicate that the recovery is fading. Fixed asset investment continued to decelerate, growing by 2.9% y/y.

The People’s Bank of China (PBoC) injected RMB 1.45 trillion into the banking system via its medium-term lending facility. This compares with RMB 850 billion in maturing loans, signalling the Bank’s largest net injection of liquidity since December 2016. Liquidity injections are a part of the central bank’s ongoing efforts to bolster the economy, given weak consumer confidence and ongoing difficulties in the property market.

Japan’s third-quarter estimate of GDP growth showed that the economy shrunk by a worse-than-expected 0.5% q/q (-2.1% on an annualised basis). The market forecast was for GDP to shrink by only -0.1% q/q. Japan’s economic performance was undermined by a decline in private inventories, while higher inflation and yen weakness continued to weigh on private consumption spending. In addition, sluggish global demand hurt the country’s export performance. Although the contraction in GDP follows two straight quarters of positive growth, the data suggests that Japan’s economic recovery remains fragile.