The focus areas during the week included

• The S&P 500 index lost a substantial 2% of its value during the week, declining by 2.9% since reaching another record high on Tuesday. An interesting range of factors appear to be impacting US equity markets, most of which are unrelated to the latest economic data. First, microchip stocks were hurt by news that the US administration had told allies it was considering severe export curbs if companies such as Tokyo Electron and the Netherlands’ ASML Holding continued providing China with access to advanced semiconductor technology. Second, there has been some rotation away from tech, growth, and large-cap stocks and towards cyclical sectors, value, and small-cap stocks, as the US Federal Reserve gets closer to the start of its interest rate cutting cycle. This is partly reflected in the fact that the Russell 2000 equity index (a proxy for small-cap stocks) has outperformed other indices in the past two weeks, gaining 7.8%. In contrast, the S&P 500 is down -1.1% over the same period – although the Russell 2000 index also lost some value in the second half of the week. Third, it can be argued that the increased likelihood of a Republican victory in the November election appears to be supporting value stocks. (In recent days, the betting markets have pointed to an increased probability of a Trump presidential victory – which is now up to about 64%, according to Predictit.) This is partly because a Trump victory would suggest lighter banking regulation and a greater likelihood of higher import tariffs. Fourth, the widespread global disruption to computer systems on Friday – which was due to an error by CrowdStrike – might have added to the negative market sentiment in some sectors (CrowdStrike’s share price declined by 18.5% over the week.)

• The rand declined by -1.6% against the US dollar, although it is still up a substantial 3.7% since the formation of the GNU. Over the same period, the dollar has been largely unchanged against the euro, while the emerging market currency index is down -0.5%, confirming that all the recent rand strength is attributable to SA-specific factors. Year to date, the rand is the second-best-performing emerging market currency. It has gained 0.04% against the dollar, while the emerging market currency index is down -3.9%.

• The South African Reserve Bank (SARB) decided to keep the repo rate (repurchase rate) unchanged at 8.25% at its Monetary Policy Committee (MPC) meeting during the week. The decision was in line with market expectations, although two MPC members voted for a 25 bps cut in rates. The repo rate has been unchanged at 8.25% since May 2023. The MPC highlighted that inflation expectations remain elevated relative to the midpoint of the inflation target. The governor repeated that “while the forecast (for inflation) has improved, the balance of risks is assessed to the upside”. Overall, the MPC statements contained no surprises, although the fact that two MPC members preferred a rate cut of 25 bps is instructive. This would suggest that a rate cut in September remains a possibility, especially if inflation continues to slow to below 5%. It would also be helpful if the US Federal Reserve also commenced its own interest rate cutting cycle. The US Federal Open Market Committee (FOMC) meeting takes place on 17/18 September, while the SARB will announce its next interest rate decision on 19 September.

• South African retail sales declined by -0.7% m/m in May, after growing by 0.5% m/m in April. Over the past year, retail spending has increased by a modest 0.6% (in real terms) and is struggling to gain momentum despite an improvement in electricity production. Consumers are facing a range of constraints, including declining disposable incomes – aggravated by high inflation and a weak labour market – sustained high interest rates and low confidence. The SARB is expected to start cutting interest rates in September 2024. This, together with a further moderation in inflation, should help to ease some of the pressures the household sector is currently experiencing.

• US Federal Reserve Chair Jerome Powell discussed the bank’s dual mandate (inflation and employment) in a speech on Monday. In particular, he said that “now that inflation has come down and the labor market has indeed cooled off, we’re going to be looking at both mandates. They’re in much better balance”. This would suggest that the Fed is more comfortable with starting its interest rate cutting cycle relatively soon – most likely in September 2024. The market is currently assuming a 95.9% chance of interest rates remaining unchanged in July, but a 98.1% chance of the Fed cutting rates in September.

• US retail sales were unchanged month-on-month in June 2024, exceeding market expectations for a decline of 0.2% m/m. May retail sales were revised higher to a gain of 0.3% from an initial estimate of 0.1% m/m. Retail sales, excluding fuel and vehicles, jumped 0.8% in June, well above consensus and the largest increase since January 2023. The data indicates a high degree of resilience in the household sector, although the underlying trend suggests a further moderation in consumer spending in the second half of 2024.

• US weekly jobless claims rose more than expected to 243 000, their highest level since early June 2024, up 9% week-on-week and 4% above the four-week average. Continuing jobless claims rose by 20 000 to 1 867 000, their highest level since November 2021. The data suggests that the US labour market is softening.

• In June, US housing starts were recorded at a seasonally-adjusted annual rate of 1.35 million, up from the prior reading of 1.31 million and ahead of expectations for 1.3 million. In addition, building permits, which serve as a leading indicator for future construction activity, were at a seasonally-adjusted annual rate of 1.45 million, above the May reading of 1.4 million and better than consensus expectations for 1.39 million. Despite the improvement from May to June, both housing starts and building permits were lower on a year-over-year basis, as higher interest rates weigh on housing market activity. A systematic reduction in US interest rates over the next 18 months could prompt a more meaningful pick-up in residential construction activity.

• The European Central Bank (ECB) kept its key interest rates unchanged at 3.75%, as expected, and highlighted that it would not pre-commit to any rate path. The bank emphasised that policy decisions would be “data dependent”. ECB President Christine Lagarde said a cut in September was “wide open,” adding that risks to economic growth were “tilted to the downside”. She added that inflation would fluctuate at current levels for the rest of the year before declining in the second half of 2025. The ECB is likely to adopt a cautious approach to further rate cuts, although the start of the rate cutting cycle in the US is likely to encourage the ECB to continue easing monetary policy.

• Industrial production in the Eurozone declined by 0.6% m/m in May 2024 versus market expectations for a decline of -0.7% m/m. This is the first monthly decline since January 2024. Over the past year production has dropped by 2.9% m/m, with steep falls in Germany, Italy, and France. The Eurozone is forecast to grow by a mere 0.7% in 2024, before improving to around 1.4% in 2025, helped by lower interest rates.

• Chinese economic growth was lower than expected in the second quarter of 2024, indicating that the economy is struggling to maintain momentum. GDP growth increased by 4.7% y/y, the slowest growth in five quarters, as efforts to boost consumption activity have been disappointing amid ongoing weak consumer confidence. This was lower than the previous quarter’s growth of 5.3% y/y, and below market expectations for a deceleration in growth to 5.1% y/y (Bloomberg).  A basic breakdown of the 4.7% y/y growth rate indicates that the tertiary sector (wholesale and retail trades; transport, storage and post; financial intermediation; real estate; hotel and catering services; and others) drove most of the deceleration. In addition, the real estate sector continued to struggle.

• China’s retail sales were disappointing in June, suggesting that the slowdown in Q2 2024 was aggravated by distressed consumers. Sales grew by only 2% y/y, down from 3.7% y/y in May, and well below market expectations for growth of 3.4% y/y. On a monthly basis, retail sales fell by 0.1% m/m, which is the first decline since July 2023.

• China’s new home prices fell by 0.7% m/m in June, after declining by 0.7% m/m in May. This is the 12th consecutive monthly decline in house prices. The data suggest that the property rescue package unveiled by Beijing in May has done little to turn around the property market slump, which has emerged as a major growth headwind and left the economy highly dependent on exports for growth.

• Headline annual inflation in the UK held steady at 2% in June, partly due to a meaningful decline in energy costs compared with last year. This was slightly higher than market expectations for inflation to slow to 1.9%. Core inflation remained unchanged at 3.5%, which was also slightly above expectations for core inflation to slow moderately to 3.4%. Services inflation remained elevated and unchanged at 5.7%.

• The Japanese government reduced its forecast for GDP growth for the current fiscal year ending March 2025 to 0.9% from the 1.3% projected in January 2024. The downgrade was mostly due to sluggish domestic consumption and rising import costs because of currency weakness, which erodes the household sector’s purchasing power.