Written version
- Markets were heading to end August marginally higher until US Federal Reserve (Fed) Chair Jerome Powell spoke at the Jackson Hole Symposium. He reiterated that the Fed would continue to hike rates aggressively until they have fought off the threat of inflation. This led markets to re-evaluate rate cuts that were priced in for the next year and caused a major selloff in risk assets. Consequently, the Morgan Stanley Capital International (MSCI) All Country World Index is currently down 3.9% for August. Developed markets were most affected, with the MSCI World Index falling -4.3% as compared with 0.03% for the MSCI Emerging Markets Index.
- The US economy continues to show cracks with the Institute of Supply Management’s Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) falling for the third consecutive month to 52.8 in July. Adding to worries is the fact that the National Association of Home Builders (NAHB) Housing Market Index (HMI) fell to 49 in August. With anything below 50 being a contraction, and with the state of the housing market seen as a leading economic indicator, this could indicate deteriorating conditions to come.
- A glimmer of hope came after the US ISM Services PMI unexpectedly increased to 56.7 in July, beating forecasts for another decline to 53.5. Despite the positive print, weak spots are still emerging as accommodation and food service businesses are reporting a contraction in sales and retailers continue to reduce inventory levels to match lower demand.
- US inflation data came in softer-than-expected after falling to 8.5% (year-on-year) in July; more importantly, is the fact that prices did not rise on a monthly basis. The big drivers behind the slowdown were energy and other commodity prices; however, considering that the supply chain for these items hasn’t improved, the deceleration is likely due to a slowdown in aggregate demand.
- The Chinese economy continues to slow, with both manufacturing and industrial production missing expectations in July. Retail sales also missed forecasts of 5.0% growth in July (year-on-year) after advancing a meagre 2.7%. The drop-off in activity highlights the weak underlying demand in China and caused The People’s Bank of China to cut its key policy rate to stimulate the economy. China is also battling an energy shortage due to the ongoing drought, which is likely to further hinder growth going forward.
- The UK economy remains fragile, with GDP (quarter-on-quarter) contracting 0.1% in Q2. On top of the ongoing slowdown, UK inflation hit a new 40-year high of 10.1% in July, above market expectations of 9.8% and up from 9.4% in June. The Bank of England has hiked rates at six consecutive meetings in an attempt to fight inflation, and with them expecting it to hit 13.3% in October, more rate hikes are likely. Rising rates and inflation are continuing to put pressure on UK consumers and economic growth. Consequently, it is projected that the UK will enter a prolonged recession by the end of the year.
- The eurozone is also likely heading for a recession as surging energy prices hit business activity and sap consumer demand. The S&P Global Composite PMI pointed to two consecutive months of contraction after falling to 49.2 in August, down from 49.9 in July. The price of German power for the next year, Europe’s benchmark power price, broke through €1 000 for the first time in August as the energy crisis shows no signs of easing and will continue to hinder economic growth.
- Local data highlighted the devastating effects that load shedding has had on the economy as mining and manufacturing production fell by 8.0% and 3.5% in June, respectively. With major parts of the economy slowing, South Africa’s GDP growth is likely to disappoint going forward.
- Adding to the woes was the jump in annual inflation to 7.8% in July, as compared to 7.4% in June and market expectations for a 7.7% rise. Core CPI, which excludes volatile items such as food and energy, also increased to 4.6% in July, up from 4.4% in June. Many economists were expecting a high figure for July; however, the outlook seems better going forward due to the recent decline in key food and fuel prices. Despite this, upside risks to prices are still elevated, which will likely force continued rate hikes from the South African Reserve Bank.
- South African equities remained resilient until a late selloff near the end of the month. Consequently, the JSE All Share Index ended August down 2.4%. The biggest drag was the resource sector with -6.1%, followed by -2.6% and -0.7% for the financial and industrial sectors respectively.
- One-month index movements:
- JSE All Share Index: -2.43%
- S&P 500 Index (US): -4.24%
- FTSE 100 Index (UK): -1.88%
- Hang Seng Index: -1.87%