The focus areas during the week included

• The S&P 500 index ended the week down a modest 0.1% in a relatively light news week after rising significantly in the preceding three weeks. In June the S&P 500 was up a very welcome 3.5% and has gained 14.5% year-to-date. The gain over the past six months is among the top-seven best starts to the US equity market in the last 35 years. Interestingly, in the 11 years in which US equities were up 10% or more in the first half of the year, the average full-year return went on to gain 29%.

• SA’s All-Share Index also declined by 0.1% in the week but gained a robust 3.9% in the month, encouraged by the announcement of the Government of National Unity (GNU) and is up 3.7% year-to-date. Although the performance of SA’s equity market has been mostly disappointing in 2024, an improved political and economic policy outlook should encourage domestic investors to revisit some of SA’s relatively “cheap” equities.

• The rand gained an impressive 3.1% against the dollar in June 2024, helped by increased optimism regarding the formation of the GNU. The rand was the second-best performing emerging market currency in the month after Russia – which was up 4.9%. During the first half of the year the rand gained 0.3% against the dollar. In contrast, during the same period, the emerging market currency index lost 4.7%. The rand’s performance is a good reflection of improved investor confidence in SA relative to peers, despite the political uncertainty surrounding the specifics of the GNU over the past week.

• SA’s private sector credit grew by 4.3% y/y in May 2024 from 3.9% y/y in April. The increase was a little below market expectations for an increase of 4.5% y/y. A breakdown of the credit data reveals that the growth in household credit slowed to a mere 3.4% y/y from 3.5% y/y in April. This weakness is relatively broad-based. In contrast, corporate credit surged to 6.3% y/y in May from a mere 2.7% y/y in April – although the monthly data has been relatively volatile in recent months.

• In the first two months of the tax year, the South African government collected 11.97% of its annual budget revenue. This compares with 11.86% in the first two months of last year’s tax year. Equally, government expenditure is also a little ahead of budget, recording 14.42% of budgeted expenditure in the first two months of the tax year, up from 14.04% in the first two months of last year. It is notable that personal income tax, which is supported by fiscal drag, remained resilient in May, while company income tax continues to recover. In contrast, net VAT receipts declined more than expected, and were negatively impacted by the resilience of VAT refunds. While the improvement in tax revenues is encouraging, the rise in expenditure remains a key area of concern. Overall, the fiscal data is neutral for the bond market, especially since investors are much more concerned about the stability of the GNU.

• South African consumer confidence improved to -12 in Q2 2024 from -15 in Q1 2024 and a recent low of -25 in Q2 2023. The relative improvement in confidence was helped by the recent scaling-back of electricity outages. Nevertheless, at -12 consumer confidence remains subdued and is not indicative of vibrant consumer activity.

• SA’s formal sector employment declined by 67 000 jobs in Q1 2024 after declining by 168 000 jobs in the final quarter of 2023. In total, formal sector employment was recorded at 10.664 million in Q1 2024, which is meaningfully below the peak of 10.899 million recorded in Q3 2023. The figure is very disappointing, given that SA’s total population has increased to over 62 million. The situation is aggravated by the fact that SA has only 9.484 million full-time employees, highlighting the relatively small tax base and the extreme reliance by many households on government social payments.

• South African PPI inflation rose by a modest 0.1% m/m in May, well below market expectations for an increase of 0.5% m/m. This pulled the annual rate of PPI inflation (final manufactured goods) down convincingly from 5.1% y/y to 4.6% y/y. The market expected an annual increase of 4.9%. Although manufactured food inflation rose by a substantial 1.3% in the month, most other categories recorded modest increases, while the cost of transport equipment declined by 4.5% m/m, cement -0.9% m/m, and paper and printed products -0.3% m/m.

• SA recorded an impressive trade surplus of R20.1 billion in May, well ahead of expectations for a surplus of R15 billion. The improvement was mainly due to stronger-than-expected exports, which increased by 5.7% m/m (R9.5 billion), although imports declined by 0.5% (-R773 million). In May exports were boosted by a wide range of categories, including vegetables (R2.3 billion), precious metals (R2 billion) and coal (R1.9 billion). Year-to-date SA has recorded a trade surplus of R45.2 billion, up from R18.2 billion in the same period in 2023. The surplus is larger than expected at the start of the year, helped by sluggish import demand, given the ongoing weakness in the domestic economy.

• US core PCE inflation rose by a modest 0.1% m/m in May, in line with market expectations and down from an increase of 0.3% m/m in April. This pulled the annual rate of increase in core PCE inflation down to a mere 2.6% compared with 2.8% in April. The latest PCE inflation data increases the probability that the Federal Reserve will start its interest rate cutting cycle in September 2024.

• US initial jobless claims were recorded at 233 000, below market expectations for claims of 235 000 and below the prior week’s reading of 239 000. The four-week moving average of weekly jobless claims has risen by 236,000, which is still low by historical standards but the highest reading since September 2023. The modest uptick in jobless claims is consistent with our expectation that US labour market conditions will continue to soften in the months ahead. This does not imply a substantial surge in the rate of unemployment (which rose to 4% in June), but rather a moderation in the number of jobs added each month.

• US new home sales were recorded at a seasonally-adjusted annualised rate of 619 000 in May, modestly below expectations for sales of 648 000. (The median sales price of new homes in May was $417 400, which was below the April reading of $433 500). The May reading of 619 000 home sales is moderately below the 10-year average of about 640 000. However, existing home sales (released last Friday) were recorded at 4.1 million (annualised) in May, well below the 10-year average of roughly 5.3 million. Once again, the divergence between new and existing home sales indicates a reluctance by existing homeowners to put their homes on the market and thereby forfeit their current lower mortgage rate.

• The S&P/Case-Shiller house price index recorded a solid increase of 7.2% y/y (down from 7.4% y/y last month), helped by a month-on-month increase of 0.4%, which is up from 0.3% m/m in the prior month. Home prices are still rising at a pace that makes it challenging to get shelter inflation fully under control, aggravated by the lack of housing supply, with existing homeowners reluctant to give up their low-rate mortgages.

• The US Federal Reserve announced that all 31 of the large US banks that the central bank assessed in its latest round of stress testing remained above their minimum capital levels, potentially allowing them to return capital to shareholders in the form of dividends and buybacks.

• Confidence data in the euro area were mixed in June. The European Commission’s economic sentiment indicator slowed to 95.9, which was below the 96.2 forecast by analysts. Confidence among service providers, industrial companies, retailers, and constructors all weakened in the month, hurt by a slowdown in intermediate demand. In contrast, consumers were marginally less pessimistic. A final reading of the consumer confidence indicator remained negative at -14, although this is the highest reading since February 2022.

• It is worth highlighting that economic activity in Germany is under increased pressure. In particular, the unemployment rate rose to 6% in June, the highest level in just over three years, from 5.9% in May. In addition, the IFO business confidence indicator weakened to 88.6 in June from 89.3 in May as expectations in manufacturing and trade worsened. Although the country is holding the European Championship (soccer) this month, consumers have become more cautious overall, expressing more willingness to save and less willingness to spend. This is reflected in GFK’s Consumer Climate Indicator, which dropped to -21.8 for July from a revised -21 in June.

• The Tokyo area core consumer price index rose to 2.1% y/y in June from 1.9% in May and above market expectations for a rise to 2% y/y. The increase was driven primarily by services inflation and it fuelled expectations of a further rate hike by the Bank of Japan (BoJ) – especially since retail sales and industrial production grew by more than anticipated in May. Understandably, the yield on the 10-year Japanese government bond rose to end the week at 1.06%, from 0.97% at the end of the prior week. The BoJ is due to announce plans to taper its massive bond buying program at its July policy meeting.