Our weekly podcast by Kevin Lings:

US labour market strengthens, Fitch rerates SA credit

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses US labour market data, where the US created 172 000 jobs in May, way more jobs than anticipated, with the previous two months also revised higher. He also looks at Fitch’s decision to upgrade SA’s credit rating one notch to BB, still two notches below investment grade, with the rerating influenced by improvements in fiscal balances and progress on public-private partnerships in energy and logistics. He discusses what SA will need to do to get upgraded further, such as raising the growth rate up to 3% and beyond, and policy implementation.
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The focus areas during the week included:
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• The S&P 500 equity index declined by 2.6% last week, ending its run of nine consecutive weekly gains. AI optimism faded somewhat during the week, possibly reflecting the return of valuation concerns, a growing pipeline of AI-related equity issuances, and stronger-than-expected May employment data, which helped push US bond yields higher. The May employment report raised concerns that persistent price pressures could encourage the Federal Reserve (Fed) to maintain its restrictive monetary policy for much longer. Year-to-date, the S&P 500 is up 7.9%.

• The STOXX Europe 600 Index declined by 0.5% in the week, hurt by a lack of progress in conflict negotiations between the US and Iran, and by an announcement on Wednesday from the Trump administration that it plans to impose new tariffs of 10% to 12.5% on many countries. Japan’s stock market returns were mixed over the week, with the Nikkei 225 Index gaining 0.4% while the broader TOPIX fell 0.2%. The South African All Share Index declined by a substantial 2.9% in the week and has lost 3.9% of its value since the beginning of the year. During the week, the SA market was hurt by a 7.2% fall-off in the Resource 10 Index, which has declined by 6.5% year-to-date.

• The Japanese yen weakened to around JPY160 against the US dollar from JPY159.2 at the end of the previous week. This is close to the level where authorities have previously intervened. Consequently, Japan’s finance minister Satsuki Katayama warned that decisive action is needed to defend the yen, using the same rhetoric that preceded Japanese authorities’ most recent interventions to support the currency.

• The US economy added 172 000 jobs in May, well above market expectations of 88 000, while the unemployment rate held steady at 4.3%. The unemployment rate has remained in a very narrow range of 4.3% to 4.5% in each of the past 11 months. Revisions to the prior two months were also positive, adding a combined 93 000 jobs. Over the past three months, the US has added an average of 188 000 jobs a month, which is a lot more encouraging than in February 2026, when the 6-month average was -6 000 jobs. Job gains were relatively broad-based, led by leisure and hospitality and healthcare. Encouragingly, there is still no evidence of a wage-price spiral. Average hourly earnings rose by 3.4%y/y in May, in line with expectations and down from the prior month’s increase of 3.6%y/y. Understandably, the latest (three-month) labour market data will discourage the Fed from cutting interest rates any time soon, especially since the risk to core inflation is (firmly) to the upside. Instead, the recent employment data raises the risk that higher-rate inflation could become further embedded in the US economy and fuel higher inflation expectations, forcing the Fed to hike rates – despite the obvious pressure on the new Fed chair to cut rates.

• US long-term unemployment (longer than six months) has reached its highest level in almost five years (see chart attached). This would suggest that the recent strength (three months) in the US labour market is still very narrow (dominated by a few industries such as healthcare, AI, construction, etc.), which means if people have become unemployed in other (low growth) economic sectors, they may be struggling to find employment.

• US weekly jobless claims rose to 225 000 last week, above the consensus estimate of 211 000. While the increase bears watching, the reading remains low by historical standards and well below the 20-year average of roughly 365 000. Continuing claims, which reflect the total number of people receiving benefits, declined to 1.78 million, suggesting displaced workers are finding new employment. Taken together, the data remains broadly consistent with other recent indicators pointing to a stable/strong labour market.

• US non-farm business sector productivity, which measures output per hour worked, was revised down to a 0.3% q/q annualised gain for Q1 2026. This compares with expectations for the growth rate to remain unchanged from the preliminary reading of 0.8%q/q. The downward revision corresponds with the recent downward revision to US Q1 2026 GDP growth.

• The US Institute for Supply Management’s (ISM) manufacturing index rose 1.3 points to 54.0 in May, ahead of consensus expectations for an increase to 53.0, and the highest reading in four years. New orders expanded for the fifth consecutive month, while the prices index eased modestly, but still indicated rising prices for the 20th month in a row. The ISM services PMI also beat expectations, rising to 54.5 from 53.6, with new orders strengthening and the prices index climbing to its highest level since August 2022. In both surveys, employment remained in contraction territory.

• Fitch Ratings upgraded SA’s international credit rating one notch from BB- to BB, although the ratings outlook is “stable”. The upgrade primarily reflects SA’s improved fiscal management and progress on fiscal consolidation, despite weak economic growth and domestic and external shocks. Fitch had downgraded SA to BB- on 21 November 2020. In making the decision to upgrade SA’s credit rating, Fitch highlighted the following key points.
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  • SA has achieved a primary budget surplus of 1% of GDP on average over the last four years, which highlights its recent record of fiscal discipline, particularly in the context of low real GDP growth.
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  • Supply-side constraints on economic activity, particularly in the energy and logistics sectors that have dragged on growth in recent years, have eased with the implementation of structural reforms, which should enable growth to increase moderately in the coming years.
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  • Government debt/GDP should stabilise over the next two years at around 80% of GDP (including local government debt), although this is well above the 2027 BB median of 53%.
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  • Fitch anticipates continued strong revenue collection and contained expenditure, resulting in a primary fiscal surplus of 1.7% of GDP in 2027.
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  • SA’s fiscal deficit is projected at 3.8% of GDP in 2027, although this is above the BB median of 3.1%.
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  • The implementation of the wage agreement, which caps 2026 wage increases at 4% (even if actual inflation is higher) and a public sector early retirement scheme, should restrain the wage bill.
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  • Fitch expects SA GDP to remain low but increase slightly from an average of 0.7% in 2023-2024 and 1.1% in 2025 to 1.4% in 2027, against a BB median of 4%.
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  • Economic activity is hampered by a slowly recovering logistics sector, still weak investment, and deeply entrenched structural factors, particularly high inequality and low labour participation.
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  • SA’s interest/revenue ratio remains high at 19% in 2027 against a BB median of 11%.
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  • SA’s domestic financial sector maintains robust capital, liquidity and profitability ratios. The non-bank financial institutions sector is the largest among G20 emerging economies, with assets of about 183% of GDP.
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  • Fitch expects that President Cyril Ramaphosa will remain in office, despite an impeachment committee set up in May 2026, and that the ANC will remain supportive of the President. Tensions within the ANC and the Government of National Unity (GNU) are likely to increase, with November 2026 municipal elections being a pressure point, but Fitch expects the GNU to hold together for its full term.
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  • Fitch forecasts SA headline inflation to end 2026 at 4.5% but return to the target range in 2027. It expects the Reserve Bank to increase interest rates by a further 25bps later this year.

• According to Eurostat, the euro-area economy declined by a revised 0.2%q/q in the first quarter of 2026. This compares with an initial GDP growth estimate of 0.1%y/y. The sharpest decline was in Ireland, where the economy contracted by 12.1%q/q.

• Bank of Japan (BoJ) governor Kazuo Ueda’s latest comments were interpreted as increasing the likelihood of a 16 June rate hike, as they suggested that responding to inflation should take priority. In a speech on 3 June, Ueda spoke about the central bank’s thinking on the future conduct of monetary policy, including the policy response to recent supply shocks stemming from the situation in the Middle East. He asserted that while the bank should be attentive to downside risks to economic activity, it should be more vigilant about the risk of a significant upward move in inflation. “Even if the Middle East situation remains unclear, should the bank judge that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate”, Ueda said.

• China's official manufacturing PMI eased to 50.0 in May from 50.3 in April, indicating that factory activity lost momentum and remained at the threshold between expansion and contraction. However, the softer official survey contrasted with the private sector RatingDog China General Manufacturing PMI, compiled by S&P Global, which remained in expansion territory at 51.8, highlighting greater resilience among smaller and privately-owned firms. The divergence may reflect differences in the composition of the two surveys, with the official PMI more heavily weighted toward larger and state-owned enterprises, while the RatingDog survey captures a greater share of smaller private sector companies. The mixed readings supported the view that policymakers could continue to rely on targeted measures to support domestic demand rather than broad-based stimulus.

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