Our weekly podcast by Kevin Lings

US economy shows signs of slowdown while SA remains weak

In this podcast, STANLIB’s Chief Economist, Kevin Lings, examines various indicators of a slowdown in the US economy, whether it is experiencing inflationary pressures and the possibility of the US Federal Reserve cutting rates. He also analyses positive and negative data releases in SA last week, including a fall in the Producer Price Index (PPI) but an increase in unemployment.

The focus areas during the week included

• The S&P 500 rallied by a robust 3.4% to reach a new record high, after declining by a total of 0.5% over the preceding two weeks. The index has gained almost 24% since the low on 8 April and is up 5% year-to-date. Last week’s improvement was in response to several positive developments, including de-escalating tensions in the Middle East, dovish comments from Federal Reserve officials, reports that the US and China signed a new trade deal, and comments from several US government officials indicating that more trade deals were close to the finish line (despite President Trump’s comments on Friday that he was ending all trade discussions with Canada). The oil price fell by 12.2% in the week, its biggest decline in two years.

• SA’s All-Share Index also had a good week, gaining 1.2%. Year-to-date the South African equity market is up 14%, although as recently as 12 June the market was up 15.4% year-to-date. A further weakening of the US dollar (which is down 11.6% against the euro in the year to date) helped to boost emerging market currencies. The emerging market currency index gained 2% against the dollar in June and a substantial 7.9% in the year to date. The rand’s performance has been restrained, gaining only 1% in June and 5.3% against the dollar year-to-date. Its performance relative to its peers reflects the re-emergence of SA-specific political risks, including instability in the GNU.

• The US bond market also generated positive returns, as yields generally decreased in response to some of the week’s softer-than-expected economic data and comments from several US Federal Reserve (Fed) officials indicating rate cuts could occur sooner than many have been anticipating. While futures markets were still pricing in a high likelihood that the Fed will keep rates steady in July, the probability of a rate cut rose from 14.5% at the end of the prior week to around 19% by Friday afternoon, according to the CME FedWatch Tool.

• On Friday, President Trump said he was ending all trade discussions with Canada (and threatened additional tariffs), as the country proceeded with its digital services tax on technology companies. (The Digital Service Tax is effectively a 3% levy on certain digital services revenues generated from Canadian users. It came into effect in June 2024, and impacts companies such as Meta, Google, and Amazon.) The first payment for Canada’s digital tax is due on Monday and applies to revenue earned retroactively to 2022. This development adds to the trade policy uncertainty, but negotiations may continue, with Canada possibly looking to offer concessions.

• In terms of the 9 July deadline for reciprocal tariffs, the White House has downplayed the significance of this self-imposed deadline. It calls it “not critical” and has signalled flexibility on timing – although any policy involving President Trump must be regarded as highly uncertain. Encouragingly, in the week both Washington and Beijing confirmed the terms of the new trade agreement that will accelerate rare earth exports from China in exchange for the US rolling back certain countermeasures. US Commerce Secretary Lutnick announced that 10 more trade deals are ready for finalisation, though details remain limited. Separately, it seems the US will withdraw the proposed Section 899 “revenge tax” from its tax bill (OBBB) after securing G7 support to exempt American companies from certain foreign levies. The proposed tax, which was aimed at countries with “discriminatory” regimes, had raised concerns that it would deter foreign investment.

• US core PCE inflation increased by 0.2% m/m in May, slightly ahead of market expectations for an increase of 0.1% m/m. Over the past year, core PCE increased by 2.7%, up from 2.6% in April. While core PCE has moderated over the past year, meaningful upside risks remain, given the recent increase in import tariffs. Many companies have relied on pre-tariff inventory or absorbed cost increases to help avoid higher prices. However, as inventories are depleted and new goods arrive under the higher tariff regime, price increases are likely. Several firms have already announced price hikes starting in June. This is a key reason why the Fed revised its 2025 inflation forecast upwards last week, from 2.8% to 3.1%.

• The third estimate for US first-quarter real GDP growth was released on Thursday and it showed that the US economy slowed more than initially expected. In Q1 2025, real GDP contracted by 0.5% q/q (annualised), down from the prior estimate of -0.2%. The downward revision was primarily driven by weaker-than-expected consumer spending and exports. In the second quarter, the negative impact from trade is expected to reverse, with the Atlanta Fed’s GDPNow tracker projecting real GDP growth of 3.4%.

• US initial jobless claims fell to 236 000 last week, below market expectations of 245 000 and the lowest level in six weeks. (US weekly jobless claims are seasonally adjusted.) Continuing claims, however, rose further to 1.97 million, the highest since November 2021, signalling that unemployed individuals are finding it more difficult to secure new jobs.

• US house prices (as measured by the S&P CoreLogic Case-Shiller 20-City Composite Home Price index) fell by 0.3% month-over-month in April, below market expectations for prices to remain unchanged (Bloomberg). This is the second consecutive monthly decline in US house prices after 24 consecutive months of price increases. The annual rate of change in prices slowed to 3.4% from 4.1% a month earlier. Slower home price increases helped to reduce the shelter component of CPI inflation to 3.9% in May from 5.1% a year ago, and have been a key driver in moderating US inflation. Continued cooling of house prices should help to keep US inflation contained.

• The US Conference Board’s Consumer Confidence Index declined to 93 in June, below forecasts for an improvement to 99. Pessimism about future business conditions and employment prospects were key negatives in the survey. Tariffs and their potential impact on the economy and inflation remained at the top of consumers’ minds as a concern. Inflation expectations for the next 12 months eased to 6% from 6.4% in May and 7% in April. Intentions to purchase homes declined, while plans to buy cars held steady. These trends could start to weigh on consumer spending, although further progress in bringing inflation down and clarity (stability) on tariffs could help to improve consumer sentiment.

• On Monday, S&P Global reported that US business activity expanded in June, although at a moderately slower rate than in May. The services PMI fell to 53.1 in June from 53.7 in May, although this was largely in line with market expectations. In the services index, exports contracted steeply, possibly negatively impacted by increased trade tensions. In contrast, the manufacturing PMI held steady at 52, ahead of estimates calling for a decline to 51. According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, “the June flash PMI data indicated that the US economy continued to grow at the end of the second quarter, but that the outlook remains uncertain while inflationary pressures have risen sharply in the past two months”.

• On Thursday, the US Commerce Department reported that orders for durable goods surged by 16.4% m/m in May, the fastest rate of increase in 11 years. This compares with a decline of 6.6% m/m in April. The 16.4% increase in May was mostly driven by a sharp rise in commercial aircraft orders. (In May Boeing received an impressive 303 orders for planes, including a very large order from Qatar Airways.) Durable goods orders, excluding defence and aircraft, which are a proxy for business investment, grew by a much more modest 1.7% m/m, up from April’s decline of 1.4% m/m.

• The US National Association of Realtors (NAR) reported that existing home sales rose by 0.8% m/m in May to a seasonally-adjusted rate of 4.03 million. While this was ahead of market expectations, US existing home sales have remained extremely low in recent years, “largely due to persistently high mortgage rates”, according to NAR Chief Economist Lawrence Yun. In addition, the US Census Bureau reported that new home sales dropped sharply in May, falling 13.7% m/m to a seasonally-adjusted rate of 623 000, the lowest level since October.

• US disposable income declined by 0.4% m/m in May, well below market expectations for disposable income to grow by 0.3%. The decline was largely due to a $122.4 billion contraction in social security payments. This decline relates to the Social Security Fairness Act, which was signed by President Biden in early January 2025. The Act included back payments to around 3.2 million people, which ended in April 2025, resulting in the decline in May.

• South African consumer confidence improved in Q2 2025 to -10 from -20 in Q1 2025. Despite the improvement, the level of consumer confidence remains weak, and has been under pressure for many years. A range of factors undermine consumer confidence, including high levels of unemployment, weak economic growth, elevated interest rates and political uncertainty.

• SA’s formal sector employment declined by 74 000 jobs in Q1 2025, taking total formal sector employment down to 10.579 million, its lowest level since Q3 2023. Since Q3 2023, formal sector employment has declined by a total of 318 000 jobs. In Q2 2025, most of the job losses occurred in retail trade, although the data is not seasonally adjusted. Retail sector employment normally declines each Q1 due to seasonal factors. Overall, formal sector employment remains extremely disappointing, but this is unsurprising given the ongoing weakness in SA’s overall economic performance.

• South African PPI inflation declined by 0.3% m/m in May, which pulled the annual rate of PPI inflation down to a mere 0.1% compared with 0.5% in April. The decline was well below market expectations for PPI to rise by 0.2% m/m. The lower-than-expected PPI index was due to a range of factors, including a decline in food prices, lower cement prices, and a fall-off in the producer cost of clothing. The latest PPI data is very encouraging from a CPI perspective, given the Reserve Bank’s desire to anchor inflation at around 3%.

• In the Eurozone, the Composite PMI for June, which combines the output of the manufacturing and services sectors, was reported unchanged at 50.2. Services activity rose slightly from 49.7 to 50, while manufacturing remained unchanged at 49.4. Encouragingly, in Germany the ifo Institute for Economic Research said business confidence rose for the sixth consecutive month to the highest level in a year, amid hopes of increased government spending.

• Bank of England (BoE) Governor Andrew Bailey told a parliamentary committee that domestic factors were more important for UK monetary policy than international factors. He noted that the labour market was “softening” and that slack was “opening up” in the economy. “That’s why my view is that the path of rates is still downward, but it is going to be very gradual and very careful,” he said.

• The Tokyo area core consumer inflation rate, which is considered a leading indicator of nationwide trends in inflation, fell to 3.1% y/y in June from 3.6% in May. This was below market expectations for inflation to slow to 3.3%. The slight easing of consumer inflation was due primarily to the renewal of some government subsidies. The rate of inflation remains well above the Bank of Japan’s (BoJ) 2% inflation target, supporting the case for further interest rate hikes by the central bank.

• The Summary of Opinions at the BoJ’s June monetary policy meeting reiterated that the bank will continue to raise its policy rate if its economic activity and inflation forecasts are achieved. It also emphasised that it was appropriate to maintain the current interest rate, given downside risks to economic activity stemming from US tariff policy and the situation in the Middle East. The summary showed that a hawkish board member had opposed the plan to slow the pace at which the BoJ tapers its purchases of Japanese Government Bonds (JGBs), which the central bank announced it will do starting in April 2026. The rationale behind his dissenting vote was that the BoJ’s holdings of JGBs should be normalised as soon as possible to allow the market to fully determine the level of long-term rates.

• The People’s Bank of China (PBoC) noted that the economy was showing positive signs, including an improved level of confidence, but insufficient domestic demand and deflation continued to weigh on activity. The PBoC said in its post-quarterly policy committee meeting statement that it would adopt a flexible approach to policymaking, taking domestic and international conditions into account. It said monetary policy would remain “moderately loose” with the aim of maintaining stable economic growth and prices within a reasonable range.

• Mexico’s central bank lowered its benchmark interest rate by 50 bps to 8%, in line with consensus expectations. This is the eighth consecutive rate cut in this easing cycle, which started in March 2024. In the accompanying statement, policymakers indicated that they would “assess further adjustments to the reference rate” but dropped the previous statement that future rate cuts would be of “similar magnitude”. Mexico’s headline inflation rate was last recorded at 4.5% in June.