The focus areas during the week included

• The S&P 500 gained a modest 0.6% in the shortened trading week (markets were closed on Wednesday for the Juneteenth holiday). The week’s increase (especially on Monday and Tuesday, despite weaker-than-expected retail sales data) pushed the index to a fresh all-time high on Tuesday, before it closed the week slightly lower. Year-to-date the S&P 500 is up 14.6%, while the Nasdaq is up 17.1%. In comparison, SA’s All-Share Index is up a much more modest 3.7%, but it has gained 4.8% since the post-National Election Government of National Unity (GNU) was announced, suggesting that investors are slightly less anxious about the local political environment.

• Lacklustre US retail sales data (released on Tuesday) appeared to push longer-dated (10-year) Treasury yields a little lower, but Friday’s stronger-than-expected S&P Global PMI readings brought the yield back up, to end the week modestly higher at 4.25%.

• The rand is the best-performing emerging market currency year-to-date and month-to-date, gaining an impressive 4.7% against the US dollar since the end of May 2024. In contrast, the basket of emerging market currencies is down -1.3% since SA’s National Election on 29 May. (The emerging market currency index is being weighed down by Columbia and Mexico, which have fallen by -6.8% and -6.4% respectively, month to date.) This is the first time in 18 months that the rand has moved back in line with the long-term trend of the emerging market currency index, suggesting that SA-specific risks have been priced out of the currency. Investor confidence has returned with the formation of the GNU. Investors will now focus on the upcoming Cabinet announcement and the potential for a stronger economic policy.

• US retail sales rose by a modest 0.1% m/m in May 2024, helped by a rebound in vehicle sales, but they were below market expectations for an increase of 0.3% m/m. Lower gas prices and weakness in building material sales weighed on the month’s performance. Sales at bars and restaurants fell 0.4%, signaling less discretionary spending. The control group, which excludes a range of volatile items, including vehicles, gasoline and building materials, to provide a look at the underlying trend in spending, rose by 0.4% m/m. However, this was also below expectations and was boosted by a particularly weak result in the prior month. Overall, it appears that consumer spending is poised to slow in the second half of 2024 – although from a level of sustained strong growth.

• The S&P Global US Composite PMI rose to 54.6 in June, exceeding expectations for a moderation to 53.4 and up from last month’s reading of 54.5. This is its best level in more than two years. The services index led the composite index higher, coming in at 55.1, also above the consensus estimate of 53.5. Manufacturing was measured at 51.7, compared with expectations for 51. The PMI has been above 50 for 17 consecutive months, reflecting a resilient economy. In addition, US industrial production grew by a robust 0.9% m/m in May, well above consensus expectations and the fastest pace in nearly a year. Capacity utilisation was measured at 78.7% in the month, a little above market expectations and the highest level since November 2023.

• US new housing starts fell sharply to an annualised 1.28 million in May 2024, which is the slowest pace of home construction since June 2020. (Multi-family housing starts are down over 50% from last year). A sharp decline in building permits suggests the sector will come under pressure over the next few months.

• The Citi US Economic Surprise Index hit its lowest level since 2022.

• The US Conference Board LEI declined by -0.5% m/m in May, below market expectations for a decline of -0.3%, but slightly less severe than the prior month’s drop of -0.6% m/m. The drop in May was largely driven by a decline in new orders, weak consumer sentiment and fewer building permits. The Conference Board continues to suggest that the LEI is not signalling an impending recession. The LEI, together with other recently-released economic data (which we will discuss more fully in the upcoming asset allocation meeting next week), reflect an economy that is slowly losing some momentum.

• US airline travel reached a record high on 14 June, when 2.927 million passengers used the US airport system. On 14 June 2019, the US airport system handled a total of 2.728 million passengers.

• In May 2024, SA’s headline CPI inflation rate rose by a modest 0.2% m/m, which was in line with market expectations, keeping the annual rate of inflation unchanged at 5.2%. Encouragingly, core inflation rose by only 0.1% in the month, which was also in line with expectations, keeping the annual rate of increase steady at a respectable 4.6%. Core inflation has been inside the target for the past 37 months. For 2024, inflation is forecast to average 5%. While some upside risks to inflation linger, the moderation in food inflation to below the midpoint of the inflation target, despite fears about the impact of El Niño, and the recent outperformance of the rand suggest that the Reserve Bank can consider easing monetary policy in the second half of 2024.

• South African retail sales increased by 0.5% m/m in April 2024, well ahead of market expectations for a decline of 0.8% m/m. It is likely that retail spending was helped by the improvement in electricity output during the month, which was sustained in May 2024. Over the past year retail spending was up 0.6%. Despite this improvement, during the first four months of 2024, retail spending is down 0.3% y/y, reflecting the fact that household income is under pressure and interest rates remain elevated.

• The Bank of England (BoE) left its key interest rate unchanged at a 16-year high of 5.25%. Seven members of the Monetary Policy Committee voted to keep rates steady, while two backed a 25 bps cut to 5%. Some members said the decision was finely balanced, potentially signalling that policymakers are moving closer to reducing interest rates within the next few months. UK consumer inflation eased to 2% in May. This was in line with market expectations and down 2.3% from the month before. Unfortunately, core inflation remains elevated at 3.5%, but is down from 3.9% in April. Critically, services inflation was recorded at 5.7%, above expectations for a rise of 5.5%.

• The Swiss National Bank cut its policy interest rates by 25 bps for the second consecutive meeting, taking the official interest rates to 1.25%. The accompanying statement noted that inflation pressure has decreased since the previous quarter. Meanwhile, Norway’s central bank, Norges Bank, kept its interest rate unchanged at 4.5%. The bank indicated that, given its current assessment of the economic outlook and the balance of risks, the policy rate is likely to be kept at this level for the rest of the year before gradually being reduced in 2025.

• The euro area’s HCOB Composite Purchasing Managers’ Index (PMI), which combines activity in the manufacturing and services sectors, fell a lot more than expected in June 2024 to 50.8 from 52.2 in May. The manufacturing component of the index was especially weak at a reading of 45.6.

• According to a statement issued by NATO in the week, a record 23 of the 32 member nations are on track to achieve the alliance’s 2% of GDP defence spending target this year, up from only 10 countries in 2023 and seven in 2022. The 2% guideline was agreed upon a decade ago, in the wake of Russia’s annexation of Crimea, when only three allies, namely the US, Britain and Greece, met the target. However, Russia’s invasion of Ukraine in 2022 has shifted global priorities and boosted military spending. It has also helped to shift voter sentiment to the right (together with concerns about immigration). NATO’s data reveals that defence expenditure is estimated to have increased more than 9% in 2023 and is likely to rise by a further 18% in 2024 – in real terms. (In 2024, US spending on defence is expected to reach a colossal $968 billion, which equates to roughly 65% of NATO’s total defence spending). Interestingly, Poland has the largest military budget within NATO (when measured as a percentage of GDP), encouraged by its 225km border with Russia.

• China’s monthly economic data for May continued to signal relatively modest growth. This includes industrial production, which rose by a weaker-than-expected 5.6% y/y, down from 6.7% y/y in April; retail sales which increased by a moderate 3.7% y/y in May, although up from growth of 2.3% y/y in April; and a further decline in new home prices of 0.7% m/m in May 2024 – which is the 11^th consecutive monthly decline.

• Japan’s nationwide core consumer inflation rate rose to 2.5% y/y in May from 2.2% in April, but was below market expectations for an increase to 2.6%. Bank of Japan Governor Kazuo Ueda reiterated that a July rate hike remains a possibility, depending on data. In Japan’s currency market, the yen weakened to around JPY 158.8 against the dollar from the prior week’s close of 157.4. This is close to a new 34-year low. Japanese authorities again expressed their readiness to intervene if there was heightened speculative trading and excessive market volatility. This followed their interventions in April and May 2024, when they bought yen and sold dollars in an (vain) effort to strengthen the Japanese currency.