July 2022 Economic Review

Following the devastating first half of the year, most major global markets rebounded in July, including South Africa. Global markets jumped in the final week, as investors anticipated that a US second quarter GDP contraction may foreshadow an end to the Fed’s aggressive hiking cycle. Market sentiment also improved due to the recent decline in commodity prices, easing the inflation “problem”. However, inflation is at multi-decade highs across the globe and the question remains: have markets reached the bottom or was it just a bear market rally?

US economy “technically” in recession

US consumer inflation rose by a worse-than-expected 9.1% y/y in June, compared to the 8.6% y/y acceleration in May. The result is a new four-decade high, with gas prices being the biggest contributor. The soaring inflation led to the US Federal Reserve (Fed) raising rates by 75 basis points again in line with expectations. Jerome Powell, Fed chair, highlighted that 3.25% – 3.50% was probably the right place to stop.

Shortly after the US Fed’s monthly meeting, the US second quarter 2022 GDP disappointed for the second consecutive month declining by 0.9% quarter-on-quarter (q/q). While two quarters of negative growth is considered a “technical” recession, the strength of labour market means that the National Bureau of Economic Research is unlikely to formally declare one at this stage.

As shown below, history tells us that monetary policy-induced recessions have seen peak-to-trough S&P 500 drawdowns of -21.6%, on median.

Source: Goldman Sachs Global Investment Research, Bloomberg, NBER

In terms of US macroeconomic data, the University of Michigan consumer sentiment bounced back from a record low in June, rising to 51.5 in July. The ISM Manufacturing Purchasing Managers Index (PMI) fell to 53 in June, the result marking the 25th straight month of expanding factory activity but was the weakest reading since June 2020, as new order rates continue to contract.

UK inflation reaches another new high

June UK inflation came in at another high of 9.4% y/y (9.1% y/y in May), its highest level since February 1982. While the GfK consumer confidence indicator in the UK remained unchanged at -41 in July, it is still at a record low for two months as runaway inflation and economic uncertainties continue to dampen sentiment. On a positive note, the UK economy expanded 0.5% month-on-month (m/m) in May, recovering from the contraction in April.

Prime minister Boris Johnson resigned after he lost the support of his parliament party. More than 50 ministers had quit prior to his resignation, and many members of parliament pushed for Johnson to step down following a string of scandals. The Conservative leadership race quickly narrowed the field down to two candidates, Rishi Sunak; the former chancellor, and Liz Truss; the current foreign secretary. The next prime minister will be announced on 5 September 2022, following the final vote by roughly 200 000 Conservative Party members.

European Central Bank delivers first interest rate hike in over a decade

June eurozone inflation reached a new record high of 8.6% y/y. This was the 12th consecutive rise in inflation for the region. France and Spain experienced new inflation records. Soaring inflation saw the European Central Bank (ECB) hiking rates in July by 50 basis points for the first time in 11 years. This rate hike ends 8 years of negative rates, while a hike in September will take rates above zero for the first time in a decade.

The eurozone economy grew 0.7% in the second quarter of 2022 despite the soaring inflation and gas crisis. The economy proving relatively resilient to the geopolitical headwinds so far.

Chinese economy shrinks for the first time since the COVID-19 outbreak

China’s GDP lost 2.6% q/q in the second quarter of 2022, ending an eight consecutive quarter winning streak. Persistent lockdowns brought by the country’s zero-COVID policy was the biggest contributor to the decline in economic activity. China’s statistics agency highlighted that the downward pressure on the economy increased significantly stating, “the foundation of sustained economic recovery is not stable amid rising inflation risks, tightening monetary policy and the impact of domestic COVID-19 outbreaks”.

In other economic data, China’s official manufacturing PMI contracted to 49.0 in July, its lowest reading in three months. The 50-point mark separates expansion from contraction.

Interesting headlines over the month

The euro reached parity with the dollar for the first time in two decades during the month. Tesla sold 75% of its stake in Bitcoin, with CEO Elon Musk stating that the company sold the tokens to maximise its cash positions because of uncertainty related to COVID-19 shutdowns, further stating that it should not be seen as “some verdict on Bitcoin.” Ukraine and Russia reached a grain deal to avert food crisis, unlocking millions of tons of grain stranded by war.

South Africa

The impacts of the frequent loadshedding this year are beginning to show in the data with manufacturing production falling 2.3% y/y in May, the third consecutive month of contraction. A mid-month agreement on Eskom’s wage negotiations helped with the suspension of loadshedding, and an announcement by the government to introduce significant measures aimed at alleviating the energy crisis relieved the local sentiment. However, it’s too early to tell if the government will be able to effectively implement the much-needed reforms.

In local economic data, June’s annual headline inflation measured by the consumer price index (CPI) accelerated to 7.4% y/y, compared to 6.5% y/y in May. The main contributors to the annual inflation rate rise were once again all the usual suspects. SA is now comfortably outside the SA Reserve Bank’s (SARB) 3-6% target band.

The SARB surprised markets somewhat following its latest Monetary Policy Committee (MPC) in July, increasing the repo rate by 75 basis points to 5.5%. This was the biggest rate hike in around 20 years and ahead of market expectations of a 50 basis point increase. The SARB remained on the front foot against global inflationary forces, following global central banks trends.

Market Overview

Global Markets

Developed equity markets recorded their best month since November 2020, when markets rallied following the news of successful COVID-19 vaccine trials. However, due to the extent of declines experienced in the first half of the year, it remains meaningfully down YTD. The MSCI World Index closed 7.86% m/m in USD and 9.69% m/m in ZAR. US earnings results were a key catalyst for the July rally as 55% of the S&P 500 companies reported earnings ahead of consensus estimates. The S&P 500 returned 9.22% m/m, with the tech-heavy Nasdaq rising around 12% m/m. The UK’s blue-chip FTSE (£) ended July 4.36% in the green. The Euro Stoxx 50 (€) returned 7.46% m/m.

Emerging equity markets underperformed their developed counterparts for the first time in three months, unable to capitalise on the improved investor sentiment, and weighed down by Chinese equities. The MSCI Emerging Markets Index closed -0.69% m/m in USD and 0.99% m/m in ZAR. China’s equity market struggled as regulatory penalties for Alibaba and Tencent raised concerns regulatory headwinds remain. Furthermore, lockdowns in Macau and reports of a new COVID-19 variant in Shanghai prompted investors of the hovering threat of the country’s zero-COVID policy.

Local Markets

The South African equity market followed developed equity markets higher, rebounding from a horrid June and edging back towards break-even YTD. The FTSE/JSE All Share Index closing 4.22% m/m, with companies geared to the domestic economy amongst the best performers.

All major sectors managed to finish the month in positive territory and Industrials led the pack closing 5.93% m/m, as market heavyweights Prosus and Richemont recorded good monthly gains, although Naspers disappointed. Financials and Resources lagged, closing 5.37% m/m and 0.81% m/m. SA Listed Property ended its three-month losing streak. The Index was July’s outperformer, rising 8.81% m/m. Local bonds gained in the high interest rate environment, the All Bond Index (ALBI) returning 2.44% m/m. Cash (STeFI) delivered a moderate return of 0.43% m/m. South African growth managers (5.03% m/m) outperformed value managers (3.41%) for the second consecutive month, consistent with what occurred globally.

Despite the rate hike delivered by the SARB, fears of a recession continue to encourage demand on the safe-haven dollar, resulting in the rand losing 1.66% m/m against the US dollar. Furthermore, the rand also lost as much as 1.86% and 1.62% against the pound and Japanese yen. On a positive note, the rand gained 0.83% m/m against the euro.