The focus areas during the week included

• Although the S&P 500 equity index was essentially unchanged for the week, this does not adequately reflect the underlying dynamics in the US equity market. In particular, the Dow Jones Industrial Average recorded its biggest weekly loss (-2.3%) since early April, while the technology-heavy Nasdaq Composite Index continued its recent strong performance. It reached another record high on Friday and gained 1.4% for the week.

• A key factor driving the US equity market’s divergence was the performance of Nvidia, which is now the third-largest company in the S&P 500 by market capitalization. The company reported its first-quarter earnings (which beat market expectations) after the close of trading on Wednesday, and its share price rose by 9.3% on Thursday. In contrast, on the same day, almost 90% of the stocks in the S&P 500 closed lower, hurt by stronger-than-expected economic data (PMI data), raising speculation that the Federal Reserve would wait longer to cut interest rates.

• SA’s All-Share Index ended the week down a disappointing 0.5%, after gaining 1.4% in the previous week. Year-to-date the local equity market is up a modest 2.9%, after being up 4.1% year-to-date on 20 May 2024.

• The stronger- than-expected S&P Global data appeared to drive a modest rise in US longer-term bond yields (the US 10-year bond yield ended the week at 4.46%, up from 4.42% at the end of the previous week). Futures markets began to price in only a 39.9% chance of more than one rate cut this year, down from 57.3% last week.

• Year-to-date the rand is down -0.7% against the dollar, while emerging market currencies, in aggregate, are down -2.8%. In general, emerging market currencies have benefited from an increase in global risk appetite over the past month – and the rand has outperformed the emerging market currency basket by some margin. Interestingly, the outperformance of the rand relative to the basket of emerging markets currencies dissipated a little during the week, as market expectations for the start of the US interest rate cutting cycle were pushed further out.

• In April 2024, SA’s headline CPI inflation rate rose by a modest 0.3% m/m, which was below market expectations for an increase of 0.4%, pulling the annual rate of inflation down from 5.3% to 5.2%. Encouragingly, core inflation rose by only 0.2% in the month, also below expectations for a rise of 0.3%, dragging the annual rate of increase down to a respectable 4.6% compared with 4.9% in March and a worrying 5% in February 2024. Core inflation has been inside the target for the past 36 months but has not been able to move consistently below the midpoint of the inflation target on a sustained basis, despite persistent high interest rates. A core inflation rate of around 4.5% would argue strongly in favour of interest rate cuts.

• SA’s composite leading business cycle indicator declined by -1.9% m/m in March 2024, which compares with a rise of 1.3% m/m in February. Unfortunately, over the past year the leading indicator is down 1.3%, and this is the 24^th consecutive month that the leading indicator has declined year-on-year, signalling continued economic weakness. The largest negative contributors during the month were a decrease in the number of residential building plans approved and a deceleration in the number of new passenger vehicles sold.

• In the Federal Open Market Committee (FOMC) minutes, the committee indicated that, while inflation has eased over the past year, there has been no further progress towards the 2% inflation target. Some FOMC members remain concerned that current high interest rates may not be sufficiently restrictive. These participants said it could be that high interest rates may be having smaller effects than in the past, longer-run equilibrium interest rates may be higher than previously thought, or the level of potential output may be lower than estimated. Importantly, these statements were made before the release of the April CPI report, which was more ‘benign’ than the market had feared. US Federal Reserve Governor Waller said he needs to see several more good inflation numbers to begin rate cuts. This is consistent with a wait-and-see stance on easing policy, which was also reflected in the FOMC minutes. One to two rate cuts are still possible this year, but they are unlikely to start before September 2024.

• S&P Global reported that its US composite index of business activity jumped unexpectedly to 54.4 in May, its highest level in just over two years. While manufacturing activity picked up, the acceleration was particularly notable in the services sector.

• The US Commerce Department reported that orders for durable goods, excluding aircraft and defence orders – normally a good indicator of private sector fixed investment – rose by a more-than-expected 0.3% in April, after remaining roughly flat during the first three months of the year. Conversely, sales of both existing and new homes, reported on Wednesday and Thursday, respectively, were below expectations in April.

• The euro area Composite Purchasing Managers’ Index (PMI) for May was recorded at a 12-month high of 52.3 from 51.7 in April. Services activity remained firmly in expansionary territory, while the manufacturing PMI improved but remained below the 50 index level for the 14th consecutive month.

• European Central Bank (ECB) President Christine Lagarde said in an interview with Irish television channel RTE that there was a “strong likelihood” that the central bank would reduce interest rates in June. Asked if people should expect a rate cut at the next ECB meeting, she replied: “No predicament, no prescription, no commitment, but it is a case that if the data that we receive reinforce the confidence level that we have—that we will deliver 2% inflation in the medium term, which is our objective, our mission, our duty—there is a strong likelihood.”

• UK consumer inflation slowed to 2.3% in April, the lowest level in almost three years, down from 3.2% in March. However, this was above market expectations for headline inflation to slow to 2.1%, and it dampened hopes that the Bank of England (BoE) would start cutting rates in the middle of the year. Core inflation slowed from 4.2% to 3.9%, but this was also above market expectations for core inflation to moderate to 3.6%. Markets appear to be pricing in only one 25 bps rate cut this year instead of two.

• Chinese banks left their one- and five-year loan prime rates unchanged at 3.45% and 3.95% respectively, as expected, after the People’s Bank of China (PBoC) kept its medium-term lending rate on hold. Some analysts still expect the central bank to ease interest rates further this year and potentially reduce its reserve requirement ratio again, after a surprise interest rate cut in January.

• On Tuesday, the National Bank of Hungary (NBH) cut its main policy rate, the base rate, by 50 bps from 7.75% to 7.25%. This was in line with market expectations. In terms of the currency business cycle, the NBH started cutting its base rate in October 2023 by 75 bps from 13% to 12.25%. Remarkably, since then the NBH has cut rates a further seven times, yet Hungary’s exchange rate has strengthened by 2.7% against the dollar since October 2023 (the currency is down a modest 2.4% over the past year). At the same time, the inflation rate has moderated to 3.7% in April 2024, which is consistent with the bank’s inflation target of 3% (+ or – 1%). According to the central bank’s post-meeting statement, it believes growth “is likely to accelerate further in the second half of the year” and core inflation will stay in a range of 4.5% to 5% (currently 4.1%) for the remainder of the year.