Our weekly podcast by Kevin Lings:

Retail sales tempered as inflation bites into consumer pockets

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses Moody’s encouraging review of SA from stable to positive, although GDP growth is necessary to get a full upgrade. April inflation, which is up at 4%, reflects a sizeable increase in food prices and an adjustment to medical aid inflation, while retail sales increased modestly as consumer income came under pressure.

The focus areas during the week included:

• The USS&P 500 equity index rose for the eighth consecutive week last week, its longest winning streak since 2023, gaining a further 0.9%. The market is up an incredible 17.8% from the low on 30 March and has risen by 9.2% year-to-date. After a volatile start to the week, sentiment improved as enthusiasm for AI stocks – supported in part by chipmaker NVIDIA’s stronger-than-expected earnings – helped offset uncertainty surrounding the Middle East conflict. Additionally, while headlines about a possible deal between the US and Iran remained fluid and sometimes conflicting, investors generally appeared to see negotiations as more likely than escalating military action.
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• ‍US government bonds generated a small but positive return in the second half of last week, as yields declined on Wednesday after US President Donald Trump said that the US was in the “final stages” of talks with Iran. After ending the prior week at about 4.6%, the yield on the benchmark 10-year US government bond hit a midweek high of 4.69% before retreating to end the week at 4.56%.
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• ‍The STOXX Europe 600 Index ended the week up 3.0%, supported by heightened expectations that the Middle East conflict was nearing a resolution. Japan's equity markets also rebounded strongly during the week, with the Nikkei 225 Index rising 3.1% and the broader TOPIX Index gaining 0.7%. Unfortunately, the SA All Share Index declined by a further 1.2% in the week, hurt by 4.6% decline in the Resources 10 index, which was only partially offset by a 1.8% gain in the Financial 15 Index. Year-to-date the SA equity market is down 2.3%, having gained 10.9% in the first two months of the year.
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• ‍Currency markets continue to trade cautiously with elevated geopolitical risk resulting in a stronger US dollar (during the first three weeks of May, the dollar gained 1.1% against the euro). The dollar has been supported by increased demand for safe-haven assets, solid US economic data (especially labour market data), and a relatively hawkish Fed, which has tended to constrain most EM currency performances.
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• On 22 May, Moody’s revised SA’s credit rating outlook from stable to positive and affirmed the government’s foreign-currency credit rating at Ba2. According to Moody’s, the positive outlook reflects SA’s gradually strengthening fiscal performance and sustained commitment to structural reforms, with prospects of increasingly tangible results. While SA's improved fiscal outlook is still at an early stage, Moody’s highlighted that continued improvements could support a clear downward trajectory in debt and debt-service costs. It also expects stronger fixed investment, supported by ongoing policy reforms, to gradually raise real GDP growth to around 2% by 2028 and underpin the current fiscal improvements. While the Middle East conflict poses a risk to near-term growth, Moody’s expects the policy response to remain measured and macroeconomic stability to be preserved. Moreover, the risk of a reversal in policy from the forthcoming electoral cycle appears limited, although the proximity of the election could test SA’s reform momentum.
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• In April 2026, SA’s headline CPI inflation increased by a substantial 1.1% month-on-month, which was in line with market expectations. Consequently, the annual rate of inflation jumped from 3.1% to 4.0%, the highest level since August 2024. Core inflation rose by a higher-than-expected 0.5% in April which pushed the annual rate of change in core inflation up from 3.2% to 3.6%. The market was expecting an increase of 3.5%. Unfortunately, the large increase in SA’s fuel price in May, coupled with the need to ‘normalise’ the fuel levy over the next two months, will likely push SA’s inflation rate up to around 5%. This is expected to prompt the Reserve Bank to raise interest rates by 25bps when it meets on 28 May. While there is an argument that higher interest rates will simply aggravate the downward pressure on SA economic activity and do nothing to control fuel inflation, the Bank will focus on the risk of pronounced “secondary” inflationary effects as companies endeavour to pass on some of the fuel price increase to their customers, as well as the need to control inflation expectations.
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• ‍Minutes from the Federal Reserve’s April FOMC monetary policy meeting highlighted increased concerns about inflation, with a majority of participants indicating that further policy tightening could be appropriate if inflation remained persistently above the central bank’s 2% target. In the initial FOMC statement that accompanied that April monetary policy decision, three FOMC members dissented, arguing against the monetary policy “easing bias” that was outlined in the FOMC statement, preferring instead to signal that the next move in interest rates could be higher or lower. This might sound like a technicality, but forward guidance on policy direction is seen as an important part of the Fed's toolkit. Minutes from the April meeting showed that “many” members supported the views of the dissenters, raising the likelihood that guidance around policy direction might change at the upcoming June FOMC meeting – depending on the influence of the new chair Kevin Warsh. Markets have already priced out the prospect of rate cuts and are increasingly concerned about the possibility of hikes in the face of higher inflation and an improving labour market. The minutes showed that most FOMC members thought that the federal funds rate should remain on hold for longer, given the inflation backdrop, and warned that if above-target inflation were to become entrenched, higher interest rates would be needed.
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• The US S&P Global Purchasing Managers’ Index (PMI) for May was released on Thursday and suggested modest but uneven growth. The composite index held steady at 51.7 during the month, while manufacturing activity strengthened and services activity softened (the manufacturing PMI rose to 55.3, its highest level in four years, while the services activity index slipped to a two-month low of 50.9). Importantly, the inflation components of the survey are more concerning as input costs rose at their fastest pace since late 2022 while selling price inflation reached its highest level since August 2022, reinforcing concerns around persistent inflation pressures. The report also noted that employment fell overall, with job losses largely attributed to concerns about rising costs and worsening demand conditions.
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• ‍The US National Association of Home Builders (NAHB) reported that its Housing Market Index rose three index points to 37 in May. The index has now been below the neutral level of 50 for the 25th consecutive month, “as higher mortgage rates, rising gas prices, and economic uncertainty related to the war in Iran continue to dampen buyer demand,” according to NAHB chairman Bill Owens.
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• ‍The University of Michigan’s US consumer sentiment index for May was revised down to 44.8, its lowest reading on record. Cost of living remains a key concern, with most respondents citing high prices as a negative factor. Lower-income consumers posted particularly sharp declines in confidence, as they are generally more sensitive to increases in gasoline and food prices. Importantly, US consumer spending has remained resilient despite weak sentiment, supported by a stable labour market, tax rebates and a healthy household sector balance sheet.
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• ‍The US Conference Board’s Leading Economic Index (LEI) rose 0.1% m/m to 100.5 in April, in line with market expectations. The index is designed to provide an early signal of potential turning points in the business cycle and the economy's near-term direction. April’s improvement was driven primarily by the stronger equity market performance, higher building permits and a steeper yield curve. While the six-month rate of change in the LEI remains negative, the pace of deterioration has moderated and is not currently signalling recession risk. Overall, the data points to a resilient economy, with strength in financial markets, housing and labour markets offsetting pressure from weak consumer expectations and fewer new orders in manufacturing.
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• ‍Russian President Vladimir Putin visited Beijing on 19 and 20 May, shortly after Chinese President Xi Jinping hosted Trump for bilateral talks earlier in the month aimed at stabilising US/China relations. During Putin’s visit, China and Russia signed more than 40 agreements covering trade, energy, technology, and media cooperation while reaffirming their longstanding strategic partnership. The meetings highlighted Beijing’s efforts to maintain close ties with Moscow even as it seeks to stabilise relations with Washington. Putin invited Xi to visit Russia next year.
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• ‍The People’s Bank of China kept the benchmark lending interest rates unchanged in May for the 12th consecutive month. The one-year loan prime rate (LPR) was maintained at 3.00%, while the five-year LPR was kept unchanged at 3.50%, in line with market expectations. The LPR serves as China’s benchmark lending reference rate for corporate and household borrowing, while the five-year rate is the primary benchmark for mortgage pricing. The decision reinforced expectations that Beijing may continue to rely more on targeted fiscal and sector-specific support measures than broad-based monetary policy easing.
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• ‍China’s retail sales grew by only 0.2% y/y in April 2026, the slowest rate of growth since December 2022 when the economy was still recovering from the government’s zero-COVID policy. This was significantly below market expectations that growth would accelerate to 2.0% y/y (Bloomberg). On a monthly basis, retail sales fell for the second consecutive month, decreasing by 0.5% m/m, as momentum in consumption activity remains weak. Unfortunately, the pullback in activity was broad-based, negatively impacted by moderation in the use of government subsidies aimed at encouraging the purchase of household appliances.
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• ‍China’s industrial production lost momentum in April 2026, with growth slowing more than expected to 4.1% y/y, down from 5.7% y/y in March, and the slowest rate of growth since July2023. The April reading was also below market expectations for growth to accelerate to6.0%y/y (Bloomberg). On a monthly basis, industrial production continued to underperform, increasing by only 0.05%m/m (seasonally adjusted). Although China’s export performance remained solid in April, it was unable to offset weak domestic demand conditions and spill overs from the Iran war. Unfortunately, the government’s traditional playbook of using infrastructure to support growth is losing its potency. Looking forward, the unresolved conflict in Iran and constrained traffic through the Strait of Hormuz are likely to weigh on global growth expectations, impacting external demand for Chinese goods. As a result, additional government fiscal support is likely in the coming months to support growth in the short term.
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• ‍The European Commission reduced its 2026 economic growth forecast for the euro-area to 0.9%, down from the previous estimate of 1.2% and below the 2025 growth rate of 1.4%. It said the main reasons for the downward revision were the “major energy shock” and an “already volatile geopolitical and trade environment.” The commission also increased its 2026 inflation forecast to 3% from 1.9% in the prior estimate.
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• ‍Japan’s Q1 2026 GDP grew by 2.1% q/q (annualised), well above market expectations for growth of 1.7%, and up sharply from growth of 0.8% in the prior quarter. The improved growth performance was driven by solid private consumption and a robust contribution from net exports. However, the figures do not yet fully capture the impact of elevated energy prices stemming from the Middle East conflict on corporate earnings and household income.
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• ‍The Central Bank of Indonesia unexpectedly ncreased its policy interest rate by 50 basis points to 5.25%, its first rate increase since 2024 and the most aggressive move since 2022. The move was framed by policymakers as a pre-emptive step to stabilise the rupiah and keep inflation expectations anchored. The rupiah had fallen to record lows before the decision, hurt by higher energy prices and concerns over Indonesia’s weakening fiscal position. The currency firmed modestly after the hike, but markets remained cautious given Indonesia’s expensive fuel subsidies, higher borrowing costs, and uncertainty around new export controls on key commodities such as palm oil and coal.