Written version
- Markets have started the new year on the front foot following the selloff in December. Investor sentiment has been boosted by positive developments including the China reopening, a mild winter in Europe, and signs of a slowdown in inflation in the US. With inflation in other parts of the world, such as Europe and Asia, lagging that of the US, it is likely that similar developments will begin to emerge in these regions in the months ahead. Consequently, investors are beginning to see light at the end of the hiking cycle that sent markets into turmoil in 2022. The risk-on environment has pushed the Morgan Stanley Capital International (MSCI) All Country World index up 6.4% in January, with emerging (MSCI Emerging Markets index) and developed (MSCI World index) markets returning 9.2% and 6.0%, respectively. While encouraging, uncertainty regarding how long rates will remain elevated and the clear signs of a global slowdown are likely to keep market volatility elevated for the months ahead.
- The Institute of Supply Management’s Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) contracted for the second consecutive month in December after falling to 48.4. While this highlights the ongoing trend of consumers shifting their spending from goods to services, the services sector also contracted for the first time since May 2020. The ISM Services PMI fell to 49.6 in December as new orders fell sharply, pointing to a clear slowdown in consumer demand.
- The reduction in spending is showing up in US inflation data, as the latest report showed that headline and core CPI fell to 6.5% and 5.7%, respectively. More importantly, monthly headline inflation decelerated by 0.1%, marking the first contraction since June 2020. Easing inflationary pressures, coupled with signs of a slowdown in economic activity, have further reinforced market expectations that the Federal Reserve will slow the pace of rate hikes to 25 basis points at their meeting in February.
- The Chinese economy, which has struggled over the past year due to ongoing lockdowns and the over-indebted property market, has shown signs of a moderate rebound. Data for January showed that factory and service sector activity expanded, with both the manufacturing and service PMIs jumping to 50.1 and 54.4, respectively. The improvement in economic activity can largely be attributed to the reopening from Covid zero and will continue to provide a much-needed tailwind for global demand.
- The UK economy continues to contract and looks set to enter a prolonged recession, if it is not already in it. Preliminary estimates showed that the services PMI fell to 48 in January, the lowest level in two years. Factory activity also contracted for the sixth consecutive month as the manufacturing PMI came in at 46.7. Respondents continue to cite elevated interest rates and low consumer confidence as reasons for the depressed business activity.
- UK inflation remains sticky, with the monthly headline CPI remaining at 0.4% in December. More worrisome is the fact that the monthly core CPI, which excludes the effects of volatile items like food and energy, advanced to 0.5% from 0.3% in November. With annual inflation still well above the Bank of England’s target of 2.0%, it is expected that they will raise rates by another 50 basis points at their February meeting, despite the additional strain it will put on the economy.
- Locally, inflation data for December showed a moderation in pricing pressure, with the annual headline CPI falling to 7.2% from 7.4%. This concluded the results for 2022, which saw annual inflation average 6.9% for the year, the highest reading since 2009. Despite signs of a peak in inflation, food prices remain an issue, as food and non-alcoholic beverage prices increased by 12.4% year-over-year. Elevated food inflation and ongoing load shedding will continue to put pressure on consumers’ pockets and ultimately undermine economic growth.
- Unsurprisingly, the South African Reserve Bank hiked interest rates by 25 basis points in January, raising the repo and prime lending rates to 7.25% and 10.75%, respectively. Three members voted for the 25 basis point hike, while two were in favour of a hike of 50 basis points. Sarb Governor Lesetja Kganyago highlighted that load shedding is adding downside risk to the economy in 2023 and consequently slashed growth expectations to 0.3% for 2023 (down from 1%), 0.7% for 2024 (down from 1.4%), and 1.0% for 2025 (down from 1.5%).
- South African equities continue to perform well due to the risk-on environment. The JSE All Share index gained 8.8% in January, with all sectors contributing to the outperformance. The biggest winner was industrials with 13.3%, followed by resources and financials with 7.1% and 4.0% respectively. South African listed property broke its three-month winning streak after losing 1.2%.
- One-month index movements:
- JSE All Share Index: 8.80%
- S&P 500 Index (U.S.): 6.18%
- FTSE 100 Index (UK): 4.29%
- Hang Seng Index (Hong Kong): 10.42%
Source: Investing.com and Trading Economics