The focus areas during the week included

• During the week the S&P 500 equity index initially rallied by 1.6% after a dovish Federal Open Market Committee (FOMC) statement on Wednesday, but then declined by 1.4% on Thursday (partly hurt by the weak ISM manufacturing data), and by 1.8% on Friday following disappointing US labour market data. The S&P 500 finished the week down 2.1%. This is the third consecutive weekly decline, with the index down 5.7% since 16 July. The fall-off in US equities affected most major equity indices around the world, with the SA All Share Index losing 0.7% of its value in the week, declining by 1.1% on Thursday and 1.6% on Friday.

• Unsurprisingly, the US bond market rallied on weaker-than-expected labour market data, with the 10-year Treasury yield declining nearly 20 points (0.2%) to around 3.8%, while the policy rate-sensitive 2-year yield declined by nearly 30 basis points (0.3%) to 3.88%. The yield curve (2/10) is still inverted, but only a very small margin. According to the CME FedWatch tool, futures markets ended the week pricing in a 73.5% chance of a 50 basis point (0.50 percentage point) rate cut at the next Federal Reserve (Fed) meeting in September, compared to only an 11.5% chance the week before.

• The oil price rose (3.8%) in the immediate aftermath of the killing of Hamas leader Ismail Haniyeh in Iran amid increasing concerns about a broader Middle East war. However, the Brent crude index moved lower later in the week as worries about slowing global economic growth moved back into focus. Haniyeh, who was visiting Tehran for the inauguration of the new Iranian president, was killed on Tuesday in an attack that the Iranian government blamed on Israel. Haniyeh’s death was one of several incidents over the past week that led to increasing worries that the war in Gaza could expand to the broader region. On 27 July, a rocket attack on the Israeli-controlled Golan Heights killed 12 children, and, although Lebanese militia group Hezbollah denied responsibility, Israel responded by killing a Hezbollah commander in Lebanon.

• Bitcoin declined by 9.5% (in dollars) during the week, and has struggled to gain traction since peaking on 13 March 2024. In fact, it has declined by almost 38% since then and remains volatile on a weekly basis.

• In July 2024, the US unemployment rate jumped to 4.3%, up from 4.1% in June, and well above market expectations that it would remain unchanged at 4.1%. The unemployment rate has moved noticeably higher in recent months, rising systematically from 3.7% at the start of 2024. While an unemployment rate of 4.3% is still low by historical standards, the upward trend is now very clear and likely to continue given the still-elevated interest rates. The risk is that a pronounced weakness in the labour market could become self-fulfilling as companies start to worry that their cost base is too high, and that they need to reduce their overall level of employment to protect their earnings. In addition, US non-farm employment rose by a disappointing 114 000 jobs in July 2024, well below market expectations for an increase of 175 000, according to Bloomberg, and well below the 6-month average monthly gain of 194 000 jobs. During July, a lot of the job gains were, once again, in healthcare (55 000), while the government added a further 17 000 jobs. While the latest US employment data will most likely ensure that the Fed starts to cut interest rates in September, many people will start to contemplate the risk of the US going in recession. Historically, once the unemployment rate rises to the extent it has, it continues to increase, resulting in the US economy experiencing a recession.

• The Fed left its policy interest rate unchanged at 5.25% – 5.50%, as expected, but tweaked its policy statement to reflect the increased chance of a September rate cut. While chair Jerome Powell did not commit to an interest rate cut in September, his comments confirmed market expectations that the Fed is now just six weeks away from the start of its interest rate cutting cycle. Powell indicated that the FOMC has become more confident that inflation (including housing inflation) is moving in the right direction, but that it has also become more sensitive to the downside risks in the labour market. Understandably, this triggered a sizeable rally in both equities and bonds.

• Other notable US economic data released during the week included labour productivity for Q2 2024, initial jobless claims, and the ISM Manufacturing PMI. On the productivity front, nonfarm business sector labour productivity increased by 2.3% q/q. This was better than expectations of a rise of 1.8%, and above the first-quarter reading of 0.4%. The strong productivity gains led to an increase in unit labour costs (the cost a business pays its workers to produce one unit of output) of only 0.9% in the second quarter, which was well below expectations of 1.7%, and very encouraging from a competitiveness and inflation perspective. In the labour market, initial jobless claims were measured at 249 000, above expectations of 235 000, and the highest reading this year. The rise in jobless claims to 249 000 is now modestly above pre-pandemic readings and trending higher, although it remains below the 20-year median of over 300 000. An increase to above 300 000 would be a clear signal of pronounced labour market weakness. Lastly, the ISM Manufacturing PMI was well below expectations in July, signaling that higher interest rates continue to weigh on activity in the US industrial sector. It is worth highlighting that the employment subindex of the ISM declined in July to its lowest level since 2020. All of the data supports the idea that the US economy is slowing and that the Fed needs to start cutting rates as soon as possible.

• South Africa’s National Treasury released its June 2024 statement of revenue and expenditure. The June data is particularly important as most companies pay the bulk of their taxes in June and December. On an annual basis, gross tax revenue was stagnant, increasing by a mere 0.03% y/y, which is much lower than the 6.9% y/y growth recorded in May. While mining profits and tax payments continue to be negatively affected by lower commodity prices, personal income tax remains relatively buoyant, helped by the fact that the Minister of Finance did not compensate individuals for the negative impact of fiscal drag in the February 2024 National Budget.

• In June 2024, the growth in South Africa’s broad money supply (M3) came in at a modest 4.2% y/y, which is down from 4.7% y/y in May and the lowest annual growth rate since October 2021. In contrast, private sector credit extension rose by a significant R67.4bn (1.4% m/m) in June, after increasing by only R9.2bn (0.2% m/m) in May. On an annual basis, private sector credit extension was up 4.3% y/y, which is above the 3.9% y/y recorded in May, but relatively subdued overall, considering that South Africa’s annual rate of inflation remains above 5%. The monthly breakdown of credit extension shows that corporate credit drove almost all the increase, while household credit has been largely stagnant this year.

• According to data released by Eskom for the first week of August, its energy availability factor (EAF) rose further to 71.9%, up from an average of 67.8% in July and 62.8% in June. While some analysts had suggested in 2023 that it was “impossible” or “highly unlikely” that Eskom would be able to meaningfully increase its EAF over the next 12 months, Eskom’s success in bringing five of the six units at Kusile online has been very welcome and highly beneficial to the SA economy.

• Foreign investors have sold South African equities in each of the past 14 months, withdrawing a net total of $10.15bn. During the first six months of 2024, foreign holdings of South African equities declined by $4.3bn and are down an incredible $57.1bn since the beginning of 2016.

• The Bank of England (BoE) cut its key interest rate by 25 basis points to 5.00%. This is the Bank’s first reduction to borrowing costs since the start of the COVID pandemic in March 2020. The decision was not unanimous, with the Monetary Policy Committee voting 5-4 in favour of the cut. Governor Andrew Bailey also signaled that policymakers were not about to embark on a rapid succession of cuts, saying “we need to make sure that inflation stays low and be careful not to cut interest rates too quickly or by too much”. Interestingly, the BoE dropped its references to services inflation in the policy summary, suggesting that more emphasis will probably be placed on the main forecast rather than on measures of underlying inflation. We expect the BoE to cut rates again in November 2024.

• The initial estimate of inflation in the euro area in July 2024 accelerated unexpectedly to 2.6% from 2.5% in June. The consensus estimate had expected inflation to remain unchanged at 2.5%. Critically, services inflation eased for the first time in three months. Core inflation also increased more than expected in July to 2.9%, unchanged from June, but above expectations for it to ease to 2.8%. The European Central Bank has signaled that it has adopted a cautious approach to cutting interest rates further.

• At its July policy meeting, the Bank of Japan (BoJ) decided to increase its key short-term target interest rate to 0.25% from 0.1%. This is the BoJ’s second interest rate hike this year, after exiting its negative interest rate policy in March 2024. The market expected interest rates to remain unchanged. The BoJ also decided on a plan to reduce the amount of its monthly outright bond purchases. In principle, purchases will be reduced by about JPY400bn each calendar quarter. Unlike the rate hike, this tapering of bond purchases was expected, as it was announced by the BoJ in June 2024. During the week the Nikkei 225 fell by a substantial 4.7%, mainly because of the disappointing US economic data, but also as the stronger yen had a dampening impact of investor sentiment.

• China’s official manufacturing Purchasing Managers’ Index (PMI) slipped to 49.4 in July from 49.5 in June. This is the third consecutive monthly contraction as production and new orders declined. In addition, the nonmanufacturing PMI, which measures construction and services activity, also slipped but remained marginally above the 50 index level at 50.2, down from 50.5 in June. Officials attributed the declines to seasonal factors and extreme weather events in some cities in China.