June 2022 Economic Review

The month of June brought no relief for investors, as most global markets ended the month in negative territory, including South Africa. June further exacerbated the poor first half of the year experienced by most global markets. Global inflation data results continued to raise expectations of rate hikes by central banks, increasing concerns of a possible recession.  In addition, the ongoing Russian invasion of Ukraine seems to have no resolution in sight, serving to only exacerbate bleak investor sentiment. Chinese markets were a positive exception for the month as the country emerged from lockdowns.

US consumer confidence falls to record lows, inflation accelerates

US consumer inflation rose by a worse-than-expected 8.6% year-on-year (y/y) in May, compared to the deceleration in April to 8.3% y/y. The result marks the biggest increase in inflation since December 1981. The higher-than-expected inflation print pushed the US Federal Reserve (Fed)  to raise rates by 75 basis points during their monthly meeting – its biggest rate hike since 1994.

The unemployment rate remained unchanged in May, with wage growth remaining strong. However, consumer sentiment has fallen sharply: the University of Michigan consumer sentiment for the US was downwardly revised to a record low of 50.0 in the month of June.

Despite the US beginning to show signs of a slowdown, the ISM Manufacturing Purchasing Managers Index (PMI) surprised to the upside to 56.1 in May from 55.4 in April.

According to Bloomberg market estimates, there’s now a 72% risk of recession in the US by the first quarter of 2024. Elon Musk stated, “A US recession is inevitable at some point and more likely than not in the near term.”

In other interesting news, single-family rents increased by 14% y/y in April, the 13^th period of record-breaking annual gains. Miami posted the biggest gain with a 41% rise y/y in April.

SA economy grows for second consecutive quarter despite current market conditions

The SA economy expanded by 1.9% quarter-on-quarter (q/q) in the first quarter of 2022, coming in ahead of most forecasts. Furthermore, y/y SA GDP rose by 3%. The easing of all remaining COVID-19 restrictions helped the economy to regain its size as it was before the pandemic, according to Statistics SA. The SA current account surplus increased to 2.2% of GDP in the first quarter of 2022, an increase from the upwardly revised 2.1% in the fourth quarter of 2021. Retail sales rose by 3.40% y/y in April, beating market estimates of a 1.60% y/y increase.

In local economic data, May’s annual headline inflation measured by the consumer price index (CPI) accelerated to 6.5% y/y, compared to 5.9% y/y in April. SA officially breached the upper limit of the SA Reserve Bank’s (SARB’s) 3 – 6% target band, Statistics SA stating that the upside surprise stems from food and fuel prices.

SA’s consumer sentiment seems to be consistent with other major nations, as the FNB/BER Consumer Confidence Index fell to -25 in the second quarter of 2022, from -13 in the first quarter of 2022. The result marks the lowest reading in 30 years, signaling a slowdown in consumer spending in the coming months.

Striking workers at Eskom did the country no favours to ease the blackouts across the country, with Stage 6 loadshedding being implemented for the first time since December 2019, and the country experiencing 62 days of blackouts in the first half of the year. On the pandemic front, South Africans will no longer be required to wear face masks indoors for the first time since the start of the pandemic.

UK inflation comes in at another high

May UK inflation reached another high of 9.1% y/y (9% y/y in April). Thus, it was no surprise when the Bank of England (BoE) raised rates by another 25 basis points during its June monthly meeting. The reading is the highest in 13 years as the BoE continues its fight to tame soaring inflation.

The GfK Consumer indicator in the UK fell to -41 in June, setting a new record low for the second consecutive month. Furthermore, the UK economy shrank for the second consecutive month, down 0.3% m/m in April. Both results signaled concerns of a pullback in consumer spending amid sluggish economic growth.

China’s macroeconomic data improves

May economic data (released in June) showed key indicators improving, including industrial production, fixed-asset investments and the services purchasing managers indices (PMIs). China’s official manufacturing PMI expanded to 50.2 in June, while the non-manufacturing PMI, which measures business sentiment in the services and construction sectors, also expanded to 54.7 in June. The 50-point mark separates expansion from contraction.

China also recently announced that quarantine times for incoming travelers will be halved, indicating that the country may begin easing up its zero-COVID policy. However, President Xi Jinping recently stated China cannot afford to relax its zero-COVID policy at the cost of short-term economic growth.

Eurozone

May eurozone inflation rose to a much higher-than-expected 8.1% y/y, compared to 7.4% y/y in April. This was the eleventh consecutive rise in inflation for the region and the highest reading since records began in 1997. The Russian invasion of Ukraine continues to drive energy and commodity prices higher.

According to JP Morgan, “the biggest risk to the European economy is the reduction in gas supplies coming from Russia, pushing prices up significantly and raising fears of outright shortages and rationing if it continues. Gas shortages could have grave consequences for the European economy.”

Global Markets

June was the worst month of an already tough year for developed equity markets, falling enough to push them into a bear market for the year. The MSCI World Index closed -8.77% m/m in USD and -4.10% m/m in ZAR, giving the index the worst first-half performance since 1970. US inflation data was a catalyst for investor pessimism, sinking the S&P 500 down 8.26% m/m and 19.97% year-to-date (YTD). The US blue-chip index posted its worst first-half of the year in more than 50 years, and technology equities were still amongst the biggest losers, with the tech-heavy Nasdaq 100 index losing around 9% m/m and around 29% YTD. After surprising to the upside in April and May, the UK’s blue-chip FTSE (£) ended June 5.98% in the red. The Euro Stoxx 50 (€) returned -8.75% m/m.

Emerging equity markets outperformed their developed counterparts for the third consecutive month. Despite its worst month of the year, the MSCI Emerging Markets Index closed -7.14% m/m in USD and -2.39% m/m in ZAR. The Emerging Market outperformance was predominantly due to a strong performance by Chinese equities, the Shanghai Composite finishing higher m/m. The drop in commodity prices weighed on the Brazilian equity market, this year’s best performing global market.

Local Markets

The South African equity market recorded its biggest monthly fall since the start of the pandemic in March 2020, as the FTSE/JSE All Share Index followed global markets lower, closing 8.01% down for the third consecutive month. Miners were amongst the worst performers, falling with commodity prices.

On a sector level, Industrials was the only sector to finish in positive territory, closing 1.60% m/m, supported by a strong performance from market heavyweights, Naspers and Prosus ending the month around 38% and 30% up respectively. Financials lagged, closing the month 3.72% down, Resources fell significantly lower, -17.15% m/m, and local bonds lost ground, with the All Bond Index (ALBI) returning -3.06% m/m. SA listed property fell 10.33% m/m and Cash (STeFI) delivered a moderate return of 0.40% m/m. South African growth managers (-4.26% m/m) outperformed value managers (-11.47% m/m) for the first time this year; however, YTD value managers remain ahead.

The rate hike by the US Fed and the safe-haven status of the US dollar lifted demand for the greenback. This, along with the ongoing load shedding, caused the rand to lose as much as 4.88% m/m against the US dollar. The rand further lost 2.53% and 1.28% m/m against the euro and pound. On a positive note, the rand gained 5.60% m/m against the Japanese yen.