The focus areas during the week included

• The S&P 500 index gained a modest 0.2% but ended the month up an impressive 2.3%. This pushed the year-to-date performance to an incredible +18.4%, despite interest rates remaining elevated for more than a year. The US Q2 2024 earnings season is nearly complete, with over 98% of S&P 500 companies having reported. Earnings growth is on pace for a gain of about 11.3% y/y, which is above the 8.8% growth expected at the end of Q1 2024. About 79% of companies have delivered positive earnings surprises, well above the 10-year average of 74%. In addition, while earnings expectations have been revised lower for the third and the fourth quarters, overall earnings growth for the full year remains on track for over 10%.

• The STOXX Europe 600 index gained 1.3%, rising to a record high, with a year-to-date gain of 9.6%. This is the European equity market’s fourth consecutive weekly gain, helped by a further moderation in inflation, which supports the case for the European Central Bank (ECB) to cut interest rates further in September. In contrast, the Shanghai Composite Index lost 0.4% of its value and is down 4.1% year-to-date, hurt by disappointing economic data.

• SA’s All-Share Index ended the week down a very disappointing 0.7% but is still up 8.9% year-to-date. Despite last week’s pullback, the local equity market has gained a very welcome 9.2% in the three months since the National Election at the end of May 2024 – despite the persistent outperformance of the rand over the same period.

• The yield on the benchmark 10-year US government bond drifted higher during the week, rising from 3.81% to 3.91%, as expectations that the Federal Reserve would cut interest rates by a full 50 basis points at its September Federal Open Market Committee (FOMC) meeting faded. According to the CME Fedwatch tool, futures markets continue to price in a 100% probably of least a 25 basis point interest rate cut by the FOMC, but only a 30% chance that the Fed will cut rates by 50bps.

• US core PCE inflation rose by 0.2% m/m in July, which was in line with expectations, although the annual rate of increase was unchanged from June and a little lower than expected at 2.6%. The market expected core PCE inflation to accelerate to 2.7%. A breakdown of the data reveals that goods inflation was recorded at 0% y/y, up from -0.2% y/y in June, while services inflation eased from 3.8% to 3.7%. The inflation rate for durable goods (which includes vehicles) remained firmly in deflation at -2.5% y/y. While core PCE inflation remains above the Fed’s target rate of 2%, the month-on-month change has been at or below 0.2% in each of the past three months, which is in line with the target inflation rate on an annualised basis.

• US personal incomes grew by an unexpected 0.3% m/m in July, up from growth of 0.2% m/m in June and market expectations for growth to remain unchanged at 0.2%. In addition, personal spending rose by a robust 0.5%, a gain that was in line with consensus, reflecting resilient consumer activity. Despite the strong monthly gain, growth in consumer spending is expected to slow over the coming months.

• The US Bureau of Economic Analysis (BEA) revised up its estimate of US GDP growth for the second quarter of 2024. Initially the BEA estimated that the US economy grew by 2.8% in Q2 2024, but last week revised the estimate up to 3%. The revision was driven largely by a substantial increase in consumer spending in the quarter, from 2.3% to 2.9%. Looking forward to the third quarter, the Atlanta Fed GDPNow forecast points to a US GDP growth rate of about 2%, which represents a moderation in the rate of expansion but not an indication of an economic downturn/recession. While the US economy is expected to slow in 2025, it is hoped that as inflation continues to moderate and the Fed begins to reduce interest rates, this could (perhaps) support a re-acceleration of consumer and corporate spending towards the end of 2025 and into 2026.

• On Thursday, the US National Association of Realtors reported that pending home sales plunged by 5.5% m/m in July. The market had expected an increase of 0.2% m/m. The decline takes the index to its lowest level since it started in 2001. The index of pending home sales is a leading indicator of housing activity, since it measures housing contract activity. Effectively, a sale is listed as pending when the contract has been signed but the transaction has not closed. The amount of time between pending contracts and completed sales is not identical for all home sales. The association’s chief economist attributed the drop to “affordability challenges and some degree of wait-and-see related to the upcoming US presidential election” as well some buyers expecting mortgage rates to drop as the Fed eases policy.

• US durable goods orders surged by 9.9% m/m in July, driven by a 34.8% m/m increase in orders for transport equipment – mainly aircraft. However, excluding transportation, durable goods orders declined by -0.2% m/m, which is more indicative of the underlying trend.

• US house prices rose by a further 0.4% m/m in June. This is the 16^th consecutive monthly increase in prices, despite elevated mortgage rates. Over the past year, prices are up 6.5% and at a record high. Incredibly, US house prices have risen by 50% since the end of 2019. 

• The US Conference Board’s consumer confidence index improved more than expected in August 2024 to 103.3 from a revised 101.9 in July. The improvement was helped by an improved perception about “business conditions”, but households have become significantly less confident about the labour market. Overall, consumer confidence has remained within a relatively narrow range over the past two years.

• SA’s PPI inflation slowed more than expected in July 2024 to 4.2% y/y from 4.6% y/y in June and below market expectations for producer inflation to moderate to 4.5% y/y. In the month PPI contracted by -0.2% mm/m, its second consecutive monthly contraction, helped by lower prices for food, petroleum, transport equipment and communication equipment.

• In July 2024, South African government tax revenue totalled R109.88 billion, up 3.7% from R105.96 billion in July 2023. The increase was helped by strong gains in individual income taxes (+16.2% y/y), customs duties (+5.4% y/y), and the skills development levy (+5.6% y/y). In contrast, corporate tax contracted by 14.9% y/y, while net VAT receipts fell by 10.3% y/y. Overall, tax revenue has remained resilient in the first four months of the fiscal year, despite the weak economic performance. This is mainly attributable to the lack of relief for the impact of fiscal drag on individuals in the February 2024 National Budget.

• SA recorded a trade surplus of R17.6 billion in July 2024, down from R24.2 billion in June and below market expectations for a surplus of R21.5 billion. Despite the moderation in the trade balance during July, SA recorded a surplus of R85.3 billion in the first seven months of the year, up substantially from a surplus of R30.3 billion in the corresponding period in 2023. In the month, exports rose by a modest 1.8% m/m, while imports increased by 6.6% – although imports declined by a meaningful 5.4% y/y in the first seven months of year, suggesting a moderation in domestic economic activity.

• Eurozone consumer inflation decelerated to 2.2% in August 2024, in line with expectations and down from 2.6% in July. This is the lowest level of inflation in the region in the past three years and is within sight of the ECB’s 2% target. The sharp slowdown in the annual rate of increase was helped by a relatively high base effect in energy costs a year ago. Core inflation slowed modestly to 2.8% in July from 2.9% in June – although services inflation accelerated to 4.2% from 4%.

• The Ifo Institute’s business climate index for Germany dropped more than expected to 86.6 in August, the lowest level since February 2024, as companies grew more pessimistic. Ifo President Clemens Fuest said: “The German economy is increasingly falling into crisis.”

• The Tokyo area core consumer price index (CPI), a leading indicator of nationwide trends in inflation, rose by 2.4% y/y in August, versus expectations for inflation to remain unchanged at 2.2%. This is the highest level of Tokyo area inflation since March 2024. Bank of Japan (BoJ) Governor Kazuo Ueda recently reiterated that the central bank would continue to normalise its monetary policy as it gains confidence in the economy achieving the 2% inflation target on a sustainable basis.

• Several Chinese economists reduced their 2024 growth forecasts as the country continues to struggle with a prolonged slump in the property sector and weak domestic demand. A breakdown of the forecasts suggests that retail sales are now expected to grow by 4% in 2024, down from an estimate of 4.5% in July. Fixed asset investment is expected to grow by 4.2%, down from July’s projection of 4.4%. Economists also trimmed their 2024 consumer inflation forecast to 0.5% from 0.6%. The weaker outlook for the Chinese economy suggests that the country may miss its official growth target of about 5% this year. It also raised expectations that the central bank may ease monetary policy further in the near term, with moves including additional interest rate cuts and a reduction of the reserve requirement ratio for domestic lenders.