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February 2022 economic review

February Economic Review Graviton 2022
| Market Forces


Following a difficult start to the year for global markets, the month of February did no favours in easing such difficulty. Most nations ended the month in negative territory, but once again South African markets showed resilience and advanced. The prospects of tightening monetary policy continue to weigh on investor sentiment, with expectations on the number of interest rate hikes increasing significantly in the US and Europe in their efforts to get inflation under control. Furthermore, global markets declined initially because of Russia’s troop buildup along the Ukraine border and then the eventual invasion of Ukraine, delivering a further hit to growth expectations.

US consumer sentiment improves while inflation persists

Heading into February, concerns over US consumer sentiment were beginning to increase but both the flash February PMIs and January retail sales data provided some relief. The IHS Markit US Manufacturing and Services Purchasing Managers Index (PMIs) both increased significantly. Retail sales managed to beat expectations, rising 3.8% in January (-2.5% in December), suggesting US consumers delayed spending due to the Omicron variant presence. This marked the largest rise in retail sales in ten months.

US consumer inflation rose to its highest level in 40 years at 7.5% year-on-year (y/y) in January, the fourth consecutive month above 6%. Core CPI, excluding food and energy prices came in at 6% y/y in January, its sharpest rise since 1982.

At its February meeting, the Federal Reserve (Fed) Chair Jerome Powell reiterated the committee is not afraid to raise rates faster than initially planned in order to combat inflation. According to JP Morgan, the market now expects up to six rate hikes by the end of the year.


UK 4Q21 GDP expanded by 1% y/y, slightly below forecasts but indicated the spread of the Omicron variant in the latter part of 2021 was not as severe as initially expected. The IHS Markit Composite PMI came in at 59.9 in February, well above the previous month (54.2) and the latest reading was the fastest rate of private sector growth in eight months. The easing of the Omicron wave allowed for faster growth in travel and leisure spending.

Headline annual inflation in the UK advanced for the fourth consecutive month in January, 5.5% y/y and the highest level in 30 years. The number remains well above the Bank of England (BOE)’s 2% target and continues to place pressure on rate hikes.

Eurozone inflation hits highest level in 25 years

January headline inflation rose to 5.1% y/y, its highest level since recordkeeping started in 1997, with energy prices (28.6% y/y) playing the most significant role in the jump. Natural gas prices in Europe have surged because of depleted winter reserves. The European Union (EU) imports around a quarter of its crude oil and 40% of its natural gas from Russia, thus any disruptions may place more pressure on energy prices.

Russia invades Ukraine

The major headline of the month was the Russian invasion of Ukraine, declared by many as the largest warfare operation in Europe since World War II. The outcome of the conflict remains uncertain. At this stage the economic impact on developed markets is via food and energy prices. Russia is a significant exporter of commodities, responsible for 13% of global crude oil production, 17% of global natural gas production and nearly a tenth of global wheat supplies. Higher energy prices could fuel more persistent inflation, hurting household incomes.

In the aftermath of the invasion, the US and its allies adopted various sanctions against Russia, including freezing the assets of Russian President Vladimir Putin and his foreign minister, Sergei Lavrov. In addition, sanctions were also placed on the Russian central bank and a “select” number of lenders were removed from the Swift interbank global payments system. Many other countries have adopted the same sanctions against the Putin regime.

According to Bloomberg, Russia’s ruble lost a third of its value in offshore markets and hit an all-time low of 109 per dollar as the stress of Western sanctions shook the country’s economy. Russian markets were paralyzed, and traders struggled to price the country’s currency. In response the Bank of Russia raised interest rates from 9.5% to 20%, and imposed some capital controls.

In the sporting world, UEFA and FIFA suspended Russia’s national and club teams until further notice.

China’s growth outlook dimming

Growth in China was revised lower by the International Monetary Fund from 5.7% to 4.8% for 2022, stating “imbalances in the Chinese economy have worsened and delayed China’s transition to consumption-led growth”. The indebted property market, government crackdowns and a zero-COVID policy and lockdowns have all contributed to the concerns over the world’s second-largest economy.

South African inflation eases

In local economic data, January annual headline inflation measured by the consumer price index (CPI) appears to have passed its peak coming in at 5.7% y/y, compared to 5.9% in December. According to Statistics SA, the key drivers were once again food, energy, and transportation costs.

The national budget speech during the month delivered no material surprises. The unexpected revenue from higher commodity prices is being used to reduce debt and fund temporary social relief grants, while fiscal consolidation remains intact.

On a positive note, retail sales rose for the fourth consecutive month, advancing 3.1% y/y in December. Such result was primarily driven by the relaxation of lockdown restrictions despite the Omicron presence, which allowed consumers to shop during the festive season and contribute to local tourism.

Global markets

Global equity markets were relatively flat during the first half of the month but retreated as soon as the Russian invasion of Ukraine took hold. Headlines suggesting, Vladimir Putin placed his nuclear deterrent forces on high alert, raising fears of the conflict escalating beyond Ukraine and leaving investors exiting risky assets. Developed equity markets experienced its second consecutive month in negative territory, as the MSCI World Index returned -2.65% m/m in USD and -2.76% in ZAR. Despite most S&P 500 companies reporting strong earnings in 4Q21, the S&P 500 (US$) closed the month at -3.00%, as the new developments of Russia’s invasion of Ukraine weighed on US stocks. European equities were hurt even more during the month, with the Euro Stoxx 50 (€) returning -5.89% m/m.

As expected, the current environment hurt emerging markets more than developed market peers, the MSCI Emerging Market Index returned -3.06% m/m in USD and -3.17% in ZAR. Russian assets bore the brunt of the sell-off, with the MSCI Russia Index down around 53% m/m. Some emerging markets fared better, particularly those with significant commodity exports such as Brazil and South Africa, which ended the month higher.

Local markets

The South African equity market continued its strong start to the year, as the FTSE/JSE All Share Index closed the month at 2.95%. The local bourse was amongst only a few major global markets to end the month in positive territory and year-to-date is second only to the Brazilian stock market. Mining shares once again pushed the JSE higher, as well as financial counters.

On a sector basis, Resources led the pack by some distance, returning 16.07% m/m, with gold and platinum miners the best performers in the sector. Financials lagged at -4.66% m/m, but banks released better-than-expected trading updates, showing strong earnings momentum (Nedbank, Standard Bank and FirstRand delivered strong returns). Industrials returned -7.73% m/m, noticeably Naspers (around -22% m/m) and Prosus (around -26% m/m) weighing on the sector. Bonds continued to gain slightly, as the All Bond Index (ALBI) closed at 0.54% m/m. SA listed property lost more ground for the second month, returning -3.26% m/m. Cash (STeFI) delivered a moderate return of 0.32% m/m. South African value managers (8.40% m/m) outperformed growth managers (0.54% m/m), consistent with what occurred globally.

The ZAR managed to end the month relatively unchanged m/m against major currencies. The ZAR won as much as 0.11% against the USD and sterling, losing as much as 0.04% and 0.08% against the Japanese yen and euro respectively.

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