The focus areas during the week included

• The S&P 500 gained 1.5%, reaching a record high on Wednesday, after the release of slightly better-than-expected inflation data for April as well as subdued retail sales data. Year-to-date the S&P 500 is up 11.2%. Wednesday’s economic data also helped to drive the yield on the benchmark 10-year government bond down to 4.36%, its lowest level in over a month. In general, the ongoing moderation in US inflation (although very slow) and subdued retail activity has bolstered market expectations that the US Federal Reserve (Fed) will be able to start its interest rate cutting cycle in the second half of 2024. The latest economic data also validated the Fed’s decision not to consider further rate hikes.

• The STOXX Europe 600 Index rose by 0.4% (reaching a record high on Wednesday), but softened towards the end of the week, partly because of cautious comments from European Central Bank (ECB) members on the extent to which monetary policy might ease in the second half of the year. Japanese equities also had a positive week, gaining 1.5% (Nikkei 225). This was despite a backdrop of weaker-than-expected economic data (GDP growth in Q1 2024 declined unexpectedly by 2% q/q). Year-to-date the Nikkei 225 is up 15.9%.

• SA’s All-Share Index gained a very welcome 1.4% in the week. It has strengthened by a substantial 8.9% since the middle of April 2024, despite sustained high interest rates, a weak economic performance in Q1 2024, and a very uncertain election outcome on 29 May 2024. Year-to-date the equity market is up 3.4%. It appears that investors are slightly less anxious about the chances of an ANC/EFF/MK coalition after the election and are encouraged by the improvement in electricity output as well as relatively attractive equity valuations.

• Year to date, the rand has appreciated by 0.7%, while emerging market currencies, in aggregate, are down 2.5%. Emerging market currencies (including the rand) have benefited from an increase in global risk appetite over the past month, but the relative outperformance of the rand can be ascribed to a range of factors. These include some improvement in China’s economic performance (which tends to benefit commodity-exporting countries), increased foreign buying into SA’s bond market, attracted by the relatively high yield, the prolonged reduction in electricity outages, which is partly based on a fundamental improvement in energy supply, and the results of the most recent Ipsos poll, indicating a possible market-friendly outcome to the national election. The rand was significantly oversold in the second and third weeks of April, presenting an attractive opportunity for foreign investors to enter the emerging market space.

• In April 2024, US consumer inflation rose by 0.3% m/m, which was slightly below market expectations for a gain of 0.4%, after surprising on the upside in each of the past three months. Importantly, the monthly increase in CPI was in line with the monthly average over the preceding six months, which has resulted in inflation remaining sticky in a narrow range around 3.25%. Is essence the US continues to struggle to make meaningful progress in getting inflation within reach of the 2% target, forcing the Fed to keep rates on hold far longer than envisaged at the start of 2024. Core consumer inflation increased by 0.3% m/m in April 2024, which was in line with market expectations. This resulted in the annual rate of core inflation easing to 3.6% from 3.8%, which is its lowest level since April 2021. While core inflation has moderated meaningfully in recent months, dropping from 5.6% as recently as March 2023, it is not yet low enough to justify the start of the rate cutting cycle. A portion of the elevated inflation rate can still be ascribed to the sharply high cost of vehicle insurance (up at 22.4% y/y in April), but the main obstacle remains the relatively high level of shelter inflation – although it continues to moderate.

• US retail sales were unchanged month-on-month in April, which was well below market expectations for a gain of 0.4% m/m. The control group of retail sales, which excludes spending on volatile components such as gasoline, building materials and auto dealers, contracted by 0.3% m/m versus expectations for a gain of 0.4%. March headline retail sales were revised lower from 0.7% m/m to 0.6% m/m. The April retail data suggest that US consumers are showing signs of fatigue, but are not necessarily heading into recession conditions, given the ongoing strength of the labour market.

• US headline PPI inflation rose more than expected in April, gaining 0.5% m/m against market expectations for an increase of 0.3%. Core PPI inflation also surprised on the upside, gaining 0.5% m/m compared with expectations for a rise of only 0.2%. On an annual basis, headline PPI rose by 2.2% in April, slightly below expectations, while core PPI gained 2.4%, slightly above expectations. Importantly, both headline and core PPI for March 2024 were revised down from an initial estimate of 0.2% m/m to a decline of 0.1% m/m. This means that the upside surprise in PPI for April was largely driven by prior revisions.

• SA’s unemployment rate remained dismal at 32.9% in Q1 2024, although over the past year the level of employment has recovered from the impact of Covid. The unemployment rate ranges from a low of 21.4% in the Western Cape to a high of 42.4% in the Eastern Cape. The expanded level of unemployment (including discouraged workers) increased to 41.9% in Q1 2024.

• SA’s retail sales surprised on the upside in March, gaining 1.4% in the month after rising by 1% m/m in February. Unfortunately, retail activity declined by massive 3.3% in January 2024, which means that, despite the improvement in February and March, retail sales declined by 0.9% q/q in Q1 2024. In general, consumer activity remains under pressure, given sustained high interest rates and declining real incomes.

• Standard and Poor’s Ratings Services (S&P) decided to leave SA’s international credit rating unchanged at BB- (BB- is three notches below investment grade), and kept the rating outlook unchanged at “stable”. The latest ratings decision by S&P was in line with market expectations. According to S&P, the stable outlook balances SA’s credit strengths – particularly the credibility of the Reserve Bank, a flexible exchange rate, an actively traded currency, and deep capital markets – against infrastructure-related pressures on growth, and downside risks to the fiscal and debt position.

• The People’s Bank of China (PBoC) lowered the minimum down payment ratio for first-time buyers of residential property by 5% to 15% and to 25% for second home purchases. This was an attempt to boost demand. The PBoC also said that it would scrap the nationwide floor level of mortgage rates and allow cities to make their own decisions on what mortgage rates to charge. Under a “re-lending programme”, the central bank said it would extend $42 billion in low-cost funds to help local governments to buy unsold homes from developers. These properties will be converted into affordable housing. The measures aim to help reduce high inventory levels, restore consumer confidence, and ease the pressure on developers. Restoring confidence in the property sector might take a while. (Home prices in April recorded the steepest monthly decline in 10 years and were down 6.8% from a year ago.)

• China’s consumer price index rose by 0.3% y/y in April, up from 0.1% y/y in March. This is the third consecutive month that China’s inflation has been positive. The rate was in deflation from October 2023 to January 2024. In contrast, China’s producer price index declined by 2.5% y/y compared with a decline of 2.8% y/y in March. Overall, China’s inflation rate remains extremely subdued and the economy risks slipping into sustained deflation.

• In April 2024, China’s industrial production accelerated to 6.7% y/y from growth of 4.5% y/y in March. This was above market expectations for growth of 5.5% y/y (Bloomberg). The improvement was helped by an increase in exports. In particular, the production of automobiles reaccelerated by 16.3% y/y in April 2024.

• Japan’s GDP declined by a substantial 2% in Q1 2024, against market expectations for a decline of 1.2% q/q. The economy was hurt by the negative impact of the earthquake that hit the Noto peninsula in January, as well as the suspension of some auto production activity. Other areas of weakness included capital expenditure and external demand.