January 2023 Economic Review

January economic and market update

Following a dreadful 2022, most global markets kicked off 2023 strongly as equity markets rallied, including locally. Investor sentiment was boosted by better-than-expected GDP data, inflation slowing for the third consecutive month, the hope that interest rates are close to their peak and the belief that the US will avoid a recession. Furthermore, optimism around China’s economic recovery was another positive headline during the month.

The Fed seems to have inflation under control

December headline inflation in the US came in at 6.5% year-on-year (y/y), compared to the 7.1% y/y in November. Most significantly is headline inflation which fell by 0.1% month-on-month (m/m), the first monthly contraction since June 2020. According to the US Bureau of Labor Statistics, inflation closed out last year with a 6.25% annual reading, and while it seems to have peaked, the figure still remains more than three times above the US Federal Reserve (Fed)’s 2% target.

The December labour market report showed stronger-than-expected job gains and a fall in the unemployment rate to 3.5%, down from a revised 3.6% in November, matching a 53-year low. US Q4 2022 GDP growth rose at an annualised rate of 2.9%, slightly better than expected but below the 3.2% annualised increase in the Q3 2022. Consumer spending weakened from the previous period but remained positive.

Despite poor consumer sentiment data in the past six months, the University of Michigan Consumer Sentiment Index rose to a revised 64.9 in January, its highest level since April 2022, reflecting easing consumer price pressures.

UK economy provides mixed signals

The UK December inflation eased for the second consecutive month, coming in at 10.5% y/y. Fuel, clothing and recreational costs fell to help ease price pressures. Annual inflation still remains well above the Bank of England (BOE)’s 2% target.

The UK economy expanded by 0.1% m/m in November, beating consensus expectations of a -0.3% monthly decline. Resilience in overall activity was driven solely by the services sector, as the FIFA World Cup may have benefitted businesses in the sector. Production, on the other hand fell by 0.2%, demonstrating persisting growth headwinds.

Eurozone economic activity indicators improving

Eurozone inflation fell to 9.2% y/y in December, its second consecutive fall and lowest point since August 2022.

The Eurozone Composite Purchasing Manufacturing Index (PMI) improved to 50.2, its first month of expansion since June 2022. The result showing significant improvement in sentiment and that the region may avoid a winter recession due to warm weather and government energy support measures. Consumer sentiment echoed this result with the fourth consecutive rise in January, and the highest since February 2022.

The Eurozone economy grew by 0.1% y/y in Q4 2022, beating consensus estimates of a 0.1% y/y contraction but still slowed from Q3 2022’s 0.3% y/y increase.

Asia

China’s factory activity bounced back in January, bolstered by the reopening of the economy following the lifting of the strict zero-Covid policy. China’s official manufacturing PMI rose to 50.1 from 47.0 in December, expanding for the first time since September 2022. The Chinese economy expanded 2.9% y/y in Q4 2022, above market estimates of a 1.8% rise. For the full year of 2022, the economy grew by 3.0%, missing the official target of around 5.5% and marking the second slowest pace since 1976.

Japan’s core annual inflation rate rose to 4.0% in December, the highest since December 1981. Japan’s factory activity contracted for a third straight month in January, its lowest in 26 months. Following the Bank of Japan (BoJ) loosening its yield curve control in December, the BoJ had to intervene massively in bond markets during the month to defend the new wider limit.

South Africa’s inflation may have peaked, but growth is still revised lower due to power outages

In local economic data, December’s headline inflation measured by the consumer price index (CPI) slowed for the second consecutive month to 7.2% y/y from 7.4% y/y the month before. The annual inflation average of 2022 came in at 6.9%, the highest reading since 2009. Despite signs of a peak in local inflation (shown in chart below), food prices remain an issue, as the food and non-alcoholic beverage prices increased by 12.4% y/y.

Source: Stats SA, Anchor Capital.

The South African Reserve Bank (SARB) held its first meeting of 2023, in which the SARB’s Monetary Policy Committee (MPC) hiked rates by 25 basis points to a repo rate of 7.25%. Despite two of the five MPC members and some economists favoring 50 basis points, the less hawkish MPC stance was supported by evidence that core inflation is heading back towards the MPC’s target of 4.5% y/y, with the December core inflation coming in at 4.9% y/y.

SA’s retail trade sales improved by 1.1% m/m and 0.4% y/y in November, driven mainly by Black Friday sales but nonetheless the latest reading follows two straight months of declines.

Finally, blackouts intensified in January as Eskom implemented its worst-ever continuous power outages. The SARB estimated that SA’s electricity crisis is costing the economy as much as R899 million per day. A scary figure considering the country experienced power outages for more than 200 days in 2022.The SARB governor, Lesetja Kganyago highlighted that power outages contribute to downside risk on the economy in 2023, and consequently decreased growth expectations to 0.3% for the year ahead (down from 1.1 %).

Source: SARB, Bloomberg.

Market overview

Global markets

Developed equity markets started the year strongly, the first positive start to the year since 2019. The MSCI World Index returned 7.0% m/m in USD and 9.6% m/m in ZAR. The laggards of 2022 managed to start the year as the best performers, with technology stocks bouncing back after a horrid sell-off in 2023. The tech-heavy Nasdaq rose by around 11.0% m/m. The S&P 500 closed at 6.28% m/m. Despite the poor economic data coming out of the UK, the UK’s blue-chip FTSE (£) rose by 4.5% m/m. The surprising resilience of the Eurozone economy reflected through the latest economic data and prospects of a mild winter helped push the Euro Stoxx 50 (€) 9.93% higher m/m.

Emerging equity markets outperformed their developed counterparts for the third consecutive month, the MSCI Emerging Markets Index closed at 7.85% m/m in USD and 10.47% in ZAR. The result primarily driven by Chinese stocks, which continue to benefit from the optimism around the prospects that the world’s second largest economic activity will normalise as the country emerges from its zero-Covid restrictions. As a result, foreign listed Chinese stocks were the biggest emerging market winners.

Local markets

The South African equity market followed world markets higher, mainly due to renewed optimism around China’s economic growth prospects. The FTSE/JSE All Share Index closed at 8.89% m/m, breaking through the psychological 8000 index level for the first time and reaching new record highs.

All major sectors finished the month in the “green”. Industrials led the pack, closing at 13.37% m/m, with gains from its biggest constituents, Prosus (around 17.00% up m/m) and Naspers (around 18.00% up m/m). Financials returned 10.85% m/m, while Resources lagged closing at 7.10% m/m. SA Listed Property’s three-month winning streak ended, closing 1.00% down. Local bonds continued to gain in the high interest rate environment, with the All Bond Index (ALBI) returning 2.94% m/m. Cash (STeFI) delivered a moderate return of 0.58% m/m. South African growth managers (11.48% m/m) outperformed value managers (5.88% m/m) once again, consistent with what occurred globally.

The ZAR weakened against the USD, despite a generally soft month for the greenback against most currency pairs. The ZAR was one of three major currencies to weaken against the USD, closing -2.10% m/m. Sentiment towards the ZAR was not helped by the impact that one of the most severe bouts of power outages is expected to have on the local economy. The ZAR lost 4.60% and 4.06% m/m against the sterling and euro, but managed to eke out an 1.46% m/m gain against the Japanese yen.