December 2022 Economic Review
December economic and market update
Investors were seeking a “Santa Claus rally” in the final month of the year, however, December proved to be no different with volatility and losses seen throughout 2022. Most major global markets ended in negative territory, including South Africa. This comes as no surprise as it was driven by global central banks’ aggressive interest rate hikes to curb inflation. Increasing recession fears, Russia’s invasion of Ukraine and increasing concerns over a surge in Covid-19 cases in China further contributed to the volatility.
US inflation continues to trend lower while the Fed watches closely
November inflation in the US fell for the second consecutive month coming in at 7.1% year-on-year (y/y), compared to the 7.7% y/y in October. The result also represented the lowest y/y gain in 11 months.
Despite the relief in inflation, the US Federal Reserve (Fed) remains committed to their 2% inflation target, and thus raised rates by 50 basis points, a smaller increment in past meetings but the country’s fifth hike in a row, bringing US rates to its highest level in 15 years. The Federal Open Market Committee (FOMC) also raised its projection for peak rates by 50 basis points to 5.00-5.25%.
The US third quarter 2022 GDP growth was revised higher than initially estimated, increasing at an annualised rate of 3.2%. The US rebounded from two straight quarters of contraction, keeping the recession debate up in the air. Consumer spending and business investment rose more than anticipated.
Long considered a key pillar of wealth creation, home ownership in the US has been tested as mortgage rates have more than doubled over the past 12 months. In a Goldman Sachs estimate, servicing the costs of owning a home in today’s market has increased by 71% from the year prior and can be shown below:
Source: U.S. Census Bureau, Freddie Mac, and Goldman Sachs Asset Management.
China faces a surge in Covid-19 cases after drop in restrictions
China removed the world’s strictest Covid-19 restrictions early December following weeks of protests. While this provides relief, commentators are concerned about surging cases that could result in temporary labour shortages and increased supply chain issues.
According to Bloomberg (cited from an internal meeting of the country’s National Health Commission held in the week ending 23 December), nearly 37 million people in China may have been infected by Covid-19 in a single day during the month. Furthermore, the report indicated about 18 percent of the country’s population likely to have contracted the virus in the first 20 days of December.
BoE raises rates eight times in 2022
Following a 41-year inflation high of 11.1% y/y in October, UK November inflation came in at 10.7% y/y. A contraction in motor fuels and second-hand motor vehicle prices eased pressure. Food inflation, on the other hand edged higher to its highest level since 1977 (16.5%). As expected, the Bank of England (BoE) raised rates in its December meeting by 50 basis points (same as the US).
The UK Composite PMI edged up to 49 in December (preliminary estimate), up from 48.2 in the previous month. Underlying data showed a further decline in manufacturing production, while activity in the service sector steadied. Despite the improvement, the result still marks the fifth consecutive month of contractions in business activity.
Bank of Japan changing sentiment?
The most significant central bank impact in December, was arguably the action of the Bank of Japan (BOJ), in unexpectedly widening the range it will tolerate for the nation’s 10-year government bond yields, sparking a sell-off in bonds and stocks around the world. The BOJ, an outlier compared with most major central banks stated the move as intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.” This event has led to many investors suggesting it as the beginning of the end for cheap funding rates globally. The prospect of positive lending rates in Japan, the world’s biggest creditor, may result in a major repatriation of funds lent globally in a move that could impact global asset prices and foreign exchange rates.
South African inflation under control?
In local economic data, November’s headline inflation measured by the consumer price index (CPI) slowed to 7.4% y/y from 7.6% y/y in October. However, inflation remains uncomfortably high in certain categories and remains off the SA Reserve Bank (SARB)’s 3-6% target band. The transport, food and non-alcoholic beverages, and hotels and restaurants categorises the biggest contributors to the inflation number.
On the political front, President Cyril Ramaphosa won the ANC elective conference, a second five-year term as ANC president. Earlier in December, an independent panel reported that the theft of US$580 000 from the president’s Phala Phala farm in Limpopo may have broken some of SA’s anti-corruption laws, violated his oath of office, and committed misconduct in the matter. This fueled concerns that the president may resign or be impeached (neither happened), however, the JSE saw outflows of around R4 billion, furthermore around R9 billion flowed out the local bond market.
SA’s retail trade sales declined 0.6% y/y in October, the second consecutive month of contraction in retail activity, further highlighting the negative impact the rise in prices and rates has on demand. Additionally, the impact of load shedding cannot be undermined. On a positive note, the FNB/BER consumer confidence index for SA improved to -8 points in the fourth quarter of 2022, the highest in two years.
The fourth quarter 2022 rally faded into year-end, with developed equity markets losing more ground in December but managed to deliver its first positive quarter of 2022. The MSCI World Index closed -4.34% m/m in USD and -4.25% m/m in ZAR. US tech stocks struggled once again, with the tech-heavy Nasdaq falling around 9% m/m, wiping out all its gains from 2022 and leaving itself comfortably in bear market territory for 2022 (around 32% down y/y). The S&P 500 returned -5.77% m/m. The Euro Stoxx 50 (€) returned -4.04% m/m. The UK’S blue-chip FTSE (£) fared better compared to counterparts, closing at -1.42% m/m.
Emerging equity markets outperformed their developed counterparts in the final month of the year, the MSCI Emerging Markets Index closed at -1.64% m/m in USD and -1.53% m/m in ZAR. China’s major market indices ended mixed, with Hong Kong’s Hang Seng Index rising, while the Shanghai Composite Index fell. This follows the country’s easing on Covid-19 restrictions and the unexpected surge in Covid-19 cases.
The South African equity market followed world markets lower, but ended the year in positive territory. The FTSE/JSE All Share Index closed at -2.26% m/m and 3.58% y/y. On a yearly basis, the country was one of the select few major global stock markets to eke out a gain in 2022. Stocks geared towards the domestic economy were amongst the worst-performing during the month.
All major sectors finished the month in the “red.” Resources took the biggest hit, closing at -3.58% m/m, followed by Financials closing at -1.71% m/m. Industrials fared slightly better, with the help of Naspers and Prosus closing at -0.07% m/m. SA Listed Property advanced for the third consecutive month, closing at 1.13% m/m. Local bonds continued to gain in the high interest rate environment, with the All Bond Index (ALBI) returning 0.62% m/m. Cash (STeFI) delivered a moderate return of 0.56% m/m. South African growth managers ( -1.15% m/m) outperformed value managers (-3.52% m/m), while the opposite occurred globally.
The ZAR remained relatively unchanged against the safe-haven USD, closing at -0.10% m/m. Furthermore, the ZAR lost as much as 5.44%, 3.62% and 1.10% against the Japanese yen, euro, and sterling.