The focus areas during the week included:

US equity markets led the rebound, with the S&P 500 gaining an impressive 8.9% in the month – its second-best November since 1980. Year-to-date the S&P 500 is up 19.7%. While SA’s All-Share Index rose by an equally impressive 8.4% in the month, it has gained only 3.6% year-to-date – see attached discussion.

US government bonds also recorded one of the best monthly performances on record, with the yield on the benchmark 10-year government bond falling to a nearly three-month low of 4.21% in intraday trading on Friday. (The 10-year government bond yield has fallen more than 70 basis points since the October peak).

The US two-year bond yield rallied further during the week, dropping below 4.6% on Friday after trading above 5.15% for most of October. This reflects a high level of confidence that the Fed’s next policy move in 2024 will be to cut interest rates. This view was bolstered by Fed Governor Waller suggesting that he would not necessarily see a case for the policy interest rate to remain at its current level if inflation continued to subside. In November, the US aggregate bond index rose by 5%, its biggest monthly gain since 1985.

US core PCE inflation rose by a modest 0.2% m/m in October, down from 0.3% m/m in September. This pulled the annual rate of core PCE inflation down to 3.5% from 3.7% in September. While 3.5% is still meaningfully above the Fed’s 2% target, it is the lowest level since April 2021. Over the past six months, core PCE has risen by only 2.5% on an annualised basis, suggesting that the Fed’s monetary policy measures are systematically delivering the desired outcome. Relative to a year ago, headline PCE inflation was recorded at 3% y/y in October, down from 3.4% in September.

The US ISM manufacturing index was unchanged in November at 46.7, suggesting that manufacturing activity continues to struggle. The index has been in contraction territory for the past 13 months.

US initial jobless claims were recorded slightly higher than expected at 218 000, up from 211 000 in the prior week. Continuing jobless claims rose to 1 927 000 for the week ending 17 November. This was above market expectations and the highest reading since November 2021. The increase in continuing claims could suggest that the imbalance between the demand for and supply of labour is beginning to move more into balance.

The S&P/Case-Shiller 20-City Home Price Index rose by 0.7% m/m in September, slightly below expectations for an increase of 0.8% m/m. Over the past year, US house prices have risen by 3.9%. This is above the prior month’s reading of 2.1% y/y, and the highest annual rate of increase since December 2022. US house prices have risen in each of the past eight months, despite the exceptionally high mortgage interest rate. We still expect shelter inflation will continue to trend lower over the coming months, as sustained high interest rates weigh on housing market activity.

The Fed’s Beige Book reinforced the “Goldilocks” scenario, with six of the 12 Fed districts reporting solid growth, while the other six reported a contraction in economic activity.

Euro area consumer inflation slowed significantly in November to 2.4% y/y from 2.9% y/y in October. This was well below market expectations for inflation to moderate to 2.7% y/y. Core inflation also dropped more than expected to 3.6% y/y, its lowest level in over two years (core inflation was measured at 4.2% in October). The lower core inflation rate was helped by a contraction in service prices. We expected the European Central Bank would start cutting interest rates in June 2024. However, Thursday’s data significantly increases the chances of rate cuts from April 2024.

On Tuesday, Fed Governor Christopher Waller, who is generally considered a hawkish member of the Federal Open Market Committee (FOMC), told a Washington Conference that “inflation rates are moving along pretty much like I thought”, and that “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%”. He also acknowledged that “we have seen the most rapid decline in inflation on record” and that if inflation continued to moderate over the next three to five months, “we could start lowering the policy rate.” Markets are expecting US rate cuts to begin as soon as March 2024.

In a speech on Friday, Fed Chair Jerome Powell acknowledged that interest rates were “well into restrictive territory.” He also warned that the Fed would raise rates again, however, if dictated by the data.

European Central Bank (ECB) President Christine Lagarde told a committee of the European Parliament that strong wage growth and an uncertain outlook meant that “this was not the time to start declaring victory” in the fight to curb inflation. Germany’s Bundesbank President Joachim Nagel and Spain’s Pablo Hernandez de Cos reiterated that it was too early to start talking about rate cuts.

Bank of England (BoE) Governor Andrew Bailey continued to push back against market expectations for interest rate cuts. He told Daily Focus that the BoE “will do what it takes” to reduce inflation to its 2% target, but he added that “we are not in a place now where we can discuss cutting interest rates – that is not happening”.

Bank of Japan (BoJ) board members tempered investor expectations that the central bank was getting close to pivoting away from its dovish policy stance. In particular, Toyoaki Nakamura stressed the need to maintain ultra-loose monetary policy for the time being. Seiji Adachi echoed these views, stating that it was appropriate to patiently continue with monetary easing.

SA’s Department of Mineral Resources and Energy announced that the petrol price will decline by 65c/l on Wednesday, 6 December. The decline is due to a lower oil price as well as a stronger R/$ exchange rate. The reduction in the petrol price was estimated at 99c/l, but this was offset by an increase in the retail margin (39c/l), an increase in the wholesale margin (13c/l), and a rise in the cost of secondary storage (8c/l). Fortunately, there was a 26c/l decline in the slate levy. The diesel price (0.005% sulphur) will decline by 241c/l. Over the past two months, the petrol price has fallen by R2.43/l, helping to offset the price increase (R3.22/l) in the prior three months.

The South African government issued Transnet with a R47 billion guarantee facility, effective immediately. National Treasury indicated that Transnet will draw down an initial amount of R22.8 billion to deal with immediate liquidity matters, such as settling matured debt. Any further drawdowns of the guarantee will be subject to Transnet meeting strict conditions. Transnet’s longer-term challenges remain significant, and the appointment of a credible CEO would be helpful.

SA’s headline producer inflation accelerated further to 5.8% in October, hurt by an additional increase in the fuel price and sharply higher agricultural prices. (Agricultural inflation has risen from a low of 2.2% y/y in May 2023 to 12.3% y/y in October). Producer inflation has worsened noticeably over the past three months but has remained within the SARB’s target band for the fifth consecutive month.

SA’s trade balance recorded a deficit of -R13 billion in October compared with a surplus of R12 billion in September. The deterioration was largely due to a massive increase in oil imports (+R14.45 billion) and a decline in exports of base metals and precious metals. Fortunately, coal exports increased by R2 billion in the month, although this was more than offset by a R4.1 billion increase in machinery and equipment imports, which can include solar panels and batteries.

SA’s private sector credit rose by only 3.9% y/y in October, down from 4.6% y/y in September. Both household and corporate credit growth slowed further during the month, although key components of household credit (especially the use of credit cards) remain relatively buoyant.

Germany’s Federal Labour Office reported that the unemployment rate rose to 5.9% in November, the highest level since 2021, and up from 5.8% in October.

Economic data for October provided a mixed snapshot of China’s economic performance. The value of new home sales by China’s top 100 property developers fell by a substantial 29.6% y/y in November, which was worse than October’s decline of 27.5% y/y. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction. The non-manufacturing PMI also slipped to a lower-than-expected 50.2 in November, compared with 50.6 in October. In contrast, the private sector Caixin/S&P Global survey of manufacturing activity rose to an above-forecast 50.7 in November from October’s 49.5, as new order growth rose to the highest level since June.