The focus areas during the week included

• The S&P 500 Equity Index ended the week down 0.5% in a holiday-shortened week (Memorial Day was observed). It is difficult to flag a specific catalyst for the decline given that most of this week’s relatively light economic calendar is roughly in line with expectations, most notably the US core PCE inflation data. Year-to-date the S&P 500 is up 10.6%.
  
  
• The yield on the US 10-year government bond ended the week relatively unchanged at 4.51%, compared with 4.46% at the end of the previous week. Interestingly, US Treasury Department’s midweek auctions of five- and seven-year bonds were met with relatively subdued demand (the yield on the 10-year bond rose to 4.61%) highlighting growing concerns that the funding of the increasing US fiscal deficit will keep bond yields relatively elevated despite the looming reduction in policy interest rates.
  
  
• The SA All Share Index declined by a substantial 3.1% in the week, with most of the decline occurring once the results of SA National Election results started to get released. The weekly decline has pushed the year-to-date performance negative at -0.2% versus a year-to-date gain of 4.1% as recently as 20 May 2024.
  
  
• The rand lost a significant 4% of its value against the US dollar during in the past nine trading days, as investors became much more concerned about the likely outcome of the National Election as well as President Ramaphosa’s decision to sign the highly contested NHI legislation on 15 May. While the rand ended the month largely unchanged against the dollar (having strengthened in first three weeks of the month) it meaningfully underperformed the emerging market basket of currencies, which was up 1.0% against the dollar in the month. In general, emerging market currencies have benefited from an increase in global risk appetite over the past 6 weeks, with the dollar weakening by 1.5% against the euro during May. Year-to-date the rand is down by -2.7% against the dollar, while the emerging market currency index is down 3.4%. Unfortunately, the risk for the rand is firmly to the downside over the coming weeks given the extreme uncertainty surrounding the likely political coalition that will govern South Africa for the next five years.
  
  

• The South African Reserve Bank decided to keep the Repo rate unchanged at 8.25% at its MPC meeting during the week. The decision was unanimous and in-line with market expectations. The SA Repo rate has been unchanged at 8.25% since May 2023. The MPC highlighting that while the outlook for inflation has improved, “the task of achieving our inflation objective is not yet done”. Overall, the MPC appears less concerned about the upside risks to SA inflation and appear a little more comfortable with the outlook for global inflation and global interest rates. In fact, the MPC indicated that the risks to SA inflation are now “balanced”. Nevertheless, the MPC is flagging the still elevated level of inflation expectations as a key reason to prolong the current restrictive level of rates, suggesting that the Repo rate will remain unchanged for a few more months. Since November 2021, the Repo rate has increased by a total of 475bps, taking the Repo rate to its highest level since April 2009 – effectively the highest interest rates in just over 14 years. At this stage we still expect the MPC to start cutting rates on either 19 September or 21 November, helped by a likely meaningful moderation of SA inflation during the final quarter of 2024 and into 2025. The start of the SA cutting cycle could be boosted by the expectation that the European Central Bank will start cutting rates in June, while the US Federal Open Market Committee is expected to start their cutting cycle in September 2024.
  
  
• During the week, SA’s National Treasury released the April 2024 statement of revenue, expenditure and borrowing. This is the first statement for the current financial year. The data shows that tax revenues amounted to a respectable R108.6 billion in the month, with personal income tax collection remaining especially robust, helped by the finance minister’s decision to not adjust the income tax brackets in the National Budget to allow for the negative impact of fiscal drag. Tax from import duties was also relatively strong. In contrast, collection of tax on corporate income was very disappointing in April, declining by 22.2%y/y, while VAT receipts slumped by 11.2%y/y (hurt by a rise in VAT refunds during the month). Although the tax collection in April 2024 is a promising start for the 2024/25 financial year, most especially the strong growth personal income tax collection, this was not driven by stronger economic activity but rather by the impact of fiscal drag.
  
  
• SA government expenditure rose by a worrying 10.5%y/y in April, suggesting that while government was able to rein in spending at the end of the previous financial year, in an attempt to meet expenditure targets. Spending has since ramped up.
  
  
• In April 2024, SA’s producer price index (PPI) rose by 0.5%m/m, mostly due to higher fuel prices. The increase was marginally above market expectations for a rise of 0.4%m/m (Bloomberg). The monthly increase pushed the annual rate of PPI inflation up to 5.1%y/y from 4.6% in March, which is its highest level since October 2023. Encouragingly, manufactured food price inflation continued to moderate in April 2024, decreasing to 2.8%y/y from 3.6%y/y in March (having peaked at 16.3%y/y in September 2022). Overall, despite the latest reacceleration in PPI and the volatile nature of producer prices in South Africa, producer inflation has remained within the SARB’s target range for the past 11 consecutive months.
  
  
• During April 2024, South Africa’s trade balance recorded a surplus of R10.47 billion, up from a surplus of R9.16 billion in March and market expectations for a surplus of R8.1 billion. During the first four months of the year SA’s trade balance was measured at +R26.6 billion, which is up almost 300% compared with the first four months of 2023. The main reason for this improvement is that imports have fallen faster than exports. Unfortunately, the decline in SA imports largely relates to the ongoing weakness in the domestic economy. This could change if there is an increasing focus on renewing SA’s infrastructure (especially energy, port and rail capacity), which would (ironically) weaken the trade balance for a while, until the industry is in a position to benefit from the renewal.
  
  
• In April 2024, SA’s broad money supply (M3) grew by 8%y/y. This is down from growth of 6.9%y/y in March. Overall, the growth in SA money supply remains on a downward trend having been above 10% during the first half of 2023.
  
  
• SA private sector credit extension fell by a significant R65.8 billion (-1.4%m/m) in April, after increasing by a substantial R9.4 billion (+2.1%m/m) in March. Over the past year, private sector credit has risen by a modest 3.9%y/y, which is down from 5.2%y/y in March and below market expectations for credit to grow by 4.6%y/y (Bloomberg). The monthly breakdown of credit extension shows that corporate credit explains most of the decline during the month, falling by R65.9 billion (-2.5%m/m). In contrast, consumer credit barely increased, rising by a mere R0.16 billion (+0.01%m/m) in April. Household credit continues to lose momentum as we enter the second quarter of the year, with the growth in household credit remaining below its long-term average for the past nine months.
  
  
• In April 2024, US core PCE inflation remained unchanged at 2.8%y/y. This was in-line with expectations. Headline PCE inflation was measured at 2.7%y/y, which was also unchanged from May 2024. While core PCE remains above the Fed’s target of 2%, the CPI inflation data has improved in April, which together with an ongoing moderation in US economic activity should keep the Fed on track for one or two rate cuts later this year, which would be favourable for the economy and markets broadly.
  
  
• The second estimate of US GDP growth for Q1 2024 was revised lower from 1.6%q/q (annualised) to 1.3%. The downward revision was primarily driven by lower consumer spending, which was revised from growth of 2.5% to 2%. The main reason for the downward revision to consumer spending was lower spending on goods (revised from -0.4% to -1.9%q/q), whereas spending on services expanded at a still robust 3.9% (revised down modestly from an initial estimate of 4.0%q/q).
  
  
• On Tuesday, Minneapolis Fed President Neel Kashkari said “I don’t think anybody has totally taken rate increases off the table. I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.”
  
  
• Within the euro-area, the annual rate of increase in headline inflation during May 2024 accelerated for the first time in five months, rising to 2.6%y/y up from 2.4% in each of the previous two months. This was above market expectations for an increase of 2.5%. Services inflation accelerated to 4.1% from 3.7% in April, while core inflation rose to 2.9% from 2.7%. This is not expected to derail a cut in euro-area interest rates in June but could impact the pace of interest rate cuts during the second half of the year.
  
  
• European Central Bank (ECB) Chief Economist, Philip Lane, signaled that interest rates would probably be lowered at the ECB meeting on 6 June. He told the Financial Times newspaper: “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction.” However, Lane said the pace at which the central bank eases borrowing costs this year would depend on incoming economic data. “The best way to frame the debate this year is that we still need to be restrictive all year long. But within the zone of restrictiveness we can move down somewhat.”
  
  
• China’s official manufacturing purchasing managers’ index (PMI) fell to a below-consensus 49.5 in May 2024 from 50.4 in April. This is the first monthly contraction since February, with the PMI subindexes for new orders and exports declining. China’s non-manufacturing PMI, which measures construction and services activity, slipped to a weaker-than-expected 51.1 in May, down from 51.2 in April. The index was hurt by a slowdown in construction activity. Importantly, the employment sub-components for both the manufacturing and non-manufacturing PMIs remained firmly in contractionary territory for the 14^th consecutive month, indicating that labour market conditions remain weak and an area of concern for China. Nevertheless, although both the manufacturing and services PMI readings highlighted pockets of weakness in China’s economy, most economists believe that China will meet its growth target this year of around 5%, helped by base effects. Earlier in the week, the International Monetary Fund upgraded its 2024 economic growth forecast for China to 5%, up from its April projection of 4.6%.
  
  
• The UK Nationwide Building Society’s house price index rose by 0.4%m/m in May 2024, after falling in the previous two months. The index is up a modest 1.3% year-on-year.
  
  
• The Tokyo-area core consumer price index, (a leading indicator of nationwide trends), accelerated in May to 1.9%y/y. This was in-line with market expectations and follows an increase of 1.6%y/y in April. The increase in the annual rate of inflation is largely due to rising electricity costs. The Bank of Japan has a long-standing inflation target of 2%.