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- Markets have erased some of the gains made in January as investor sentiment continues to shift with the release of new economic data. Recent releases have shown that the US economy is holding up better than expected and that inflation may take longer to come down, thereby forcing investors to raise expectations of more rate hikes by the Federal Reserve. This coupled with the lacklustre rebound in China following their reopening, has investors repositioning more defensively. Consequently, risk assets have pulled back, with the Morgan Stanley Capital International (MSCI) All Country World index losing 3.0% in February. Emerging markets have underperformed against their developed counterparts, with the MSCI Emerging Markets index falling 6.5% as compared to -2.5% for the MSCI World index.
- The US manufacturing sector remains weak, with the Institute of Supply Management’s Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) falling to 47.4 in January, marking the third consecutive contraction in factory activity. The big surprise was the unexpected jump in the ISM services PMI to 55.2, rebounding from the two-year low of 49.2 seen in December. Considering that the services sector accounts for around 77% of GDP, the pick-up highlights the resilience of the US economy.
- On the inflation front, the latest report showed an acceleration in inflationary pressures, with both headline and core CPI coming in at 6.4% and 5.6%, respectively. Of more concern was the jump in the personal consumption expenditures (PCE) price index to 5.4%, which is the Federal Reserve’s preferred measure of inflation. With the US economy holding up and inflationary pressures lingering, investors are pricing in rates going higher for longer. The Fed Funds Futures Market now anticipates another three 25 basis point hikes, bringing the terminal rate to 5.375% (the midpoint) by June.
- Many believed that the Chinese reopening would provide an immediate tailwind for both local and global growth; however, it appears that it is not this simple. With consumers excited about having the freedom to largely do as they please again, it is unsurprising that the reopening has propped up the services sector. The manufacturing sector, on the other hand, is lagging and continues to contract. With many of the disruptions caused by the lockdowns still having effects on the economy, the reopening will most likely only feed into factory activity with a delay.
- The UK has shown signs of a modest recovery, with data pointing to an improvement in both the manufacturing and service sectors. According to preliminary projections, the manufacturing PMI is seen reaching a seven-month high of 49.2 in February, while the services PMI is expected to move into expansionary territory and increase to 53.3. Respondents have cited reduced political uncertainty and an improvement in the global economic outlook as reasons for the recovery in business activity. However, with inflation still running hot at 10.1% and the Bank of England having to raise interest rates as a consequence, any recovery may be short-lived as consumers continue to feel the pinch.
- Locally, manufacturing and mining production contracted by 4.7% and 3.5% (year-over-year) in December, respectively. This marks the 11th consecutive drop in mining activity and the second in industrial activity, highlighting the negative effects that the rolling blackouts are having on the power-intensive parts of the economy. Retail sales also fell by 0.6% month-over-month in December, as consumers continue to feel the effects of rising interest rates and prices.
- On a better note, South African inflation showed some signs of abating, with monthly headline CPI contracting for the first time since 2020. This brings annual inflation to 6.9%, just outside of the South African Reserve Bank’s (Sarb) 3% to 6% target. With the rand on the back foot and the US Federal Reserve expected to continue raising rates, the Sarb will likely follow course and continue to lift the repo rate.
- South African equities have followed their global peers lower, with the JSE All Share index losing 2.2% in February. The biggest drag on performance came from the resources sector, which lost 13.2%, while financials and industrials ended the month up 2.5% and 1.7%, respectively. South African listed property also ended February down 0.7%.
- One-month index movements:
- JSE All Share Index: -2.19%
- S&P 500 Index (US): -2.61%
- FTSE 100 Index (UK): 1.35%
- Hang Seng Index (Hong Kong): -9.41%
Source: Investing.com and Trading Economics
