September 2022 Economic Review
Global and local equity markets closed out the month and quarter in negative territory in September. Continuing concerns about rising inflation saw major central banks raising interest rates further despite concerns about growth, market volatility, and a global recession. Geopolitical risks (Russia’s ongoing war in Ukraine and the increasing tension between Russia and much of Europe), Europe’s energy crisis, and China’s COVID-19 lockdowns added to the negative sentiment.
Fed is eager to continue increasing interest rates
The US CPI unexpectedly rose in August, driven by increasing rental and food prices. The annual core inflation rate, which excludes volatile food and energy prices, accelerated to 6.3% in August of 2022, the highest since March, from 5.9% in July and above market forecasts of 6.1%. As a result, the US Federal Reserve (Fed) hiked interest rates by 75 basis points to 3.25% in September. The increase was largely expected by the market. The Fed has been very clear throughout the year on its intention to increase interest rates. However, the comments during the month showed that the Fed is eager to curb rising inflation even if it means further economic deceleration. The Goldman Sachs Global Investment Research (GIR) now predicts a 75/50/25 basis points rate increase in November, December, and February 2023, respectively, leading to a 4.375% rate by the end of this year and a terminal rate of 4.625% sometime in 2023. While the US economy is battling with high inflation and tight monetary policy, it has shown resilience. The US dollar has strengthened against major currencies, and the labor market added 315k jobs in August vs 199k jobs in July.
In terms of activity, the US Manufacturing PMI rose to 51.8 from 51.5 previously, and US Services PMI for September rose to 49.2 from 43.7 in August. Both readings came in higher than consensus expectations. The Fed’s hawkish comments indicated that, to control inflation, the activity would need to cool.
Eurozone inflation reaches a new record high
The Eurozone headline inflation reached a new record high of 9.1% year-on-year (y/y) in August vs 8.9% in July, and high energy prices (up 40.8% y/y) were the main contributors. Central banks have therefore taken a stance to control energy prices to ensure that corporates and households have adequate access to energy. UK Prime Minister Liz Truss announced an energy price cap that would reduce energy’s contribution to UK inflation going forward. Germany’s inflation reached double digits at 10.8% y/y in September vs 6.5% in August. The inflation rate in the Netherlands increased to 17.1% in September vs 12% in August – the highest since World War II. The European Central Bank (ECB) raised all three of its key rates by 75 basis points, taking the refinancing rate to 1.25%, and bringing its deposit rate, which has been negative until the last meeting, to 0.75%. The central bank indicated that it expects to raise interest rates further to curb inflation pressures.
Controversial UK plan to cut taxes cause bond market chaos
The new Finance Minister, Kwasi Kwarteng, published a mini-budget mid-month that stipulated the government’s intention to cut taxes for top earners. The tax cut announcement weighed heavily on the pound and UK assets as investors worried it would make debt levels soar since the announcement lacked details of how the tax cuts would be funded, particularly at a time of rising inflation and interest rates. Kwasi Kwarteng showed optimism in this economic strategy, saying he remains committed to bringing debt under control and reiterated that the 45 billion pounds of tax cuts would boost economic growth. Since then, the government sought to calm the markets by announcing that it would purchase long-dated government bonds until 14 October to curb soaring bond yields. Despite the risks facing the UK economy, the UK GDP number unexpectedly expanded 0.2% in Q2, better than initial estimates of a 0.1% contraction. The UK August headline inflation eased to 9.9% y/y vs July’s 40-year high of 10.1% y/y, on lower petrol prices.
Covid lockdowns continue to weigh on the Chinese economy
China’s shaky economic recovery picked up in the third quarter. But the rebound was undermined by Covid lockdowns, the continued housing slump, and the weakening export demand. On the economic data front, China’s official manufacturing purchasing managers’ index (PMI) unexpectedly expanded to 50.1 in September from 49.4 in August. The official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, fell to 50.6 in September from 52.6 in August – the 50-point mark separates expansion from contraction. Chinese retail sales beat expectations, rising 5.4% y/y in August vs a 2.7% y/y increase in July, as strong vehicle sales (up 15.9% y/y) led the way on the back of government tax cuts and subsidies.
South Africa’s power cuts weigh on activity
South Africa (SA) faced another quarter of extensive bouts of load-shedding during September. Energy data shows that the country’s energy crisis is worsening at a dangerous speed compared to energy data over the past decade.
In terms of local data, the annual headline inflation rate eased slightly to 7.6% in August from a 13-year high of 7.8% in July. As anticipated, fuel inflation was the largest contributor to the lower inflation print. The August core CPI inflation, which excludes food and non-alcoholic beverages, fuel and energy, eased slightly to 4.4% in August y/y vs 4.6% in July. While South Africa had a solid start to the year with a GDP growth of 1.9% quarter-on-quarter(q/q) seasonally adjusted in 1Q22, SA GDP shrank by 0.7% q/q in 2Q22, as devastating floods in KwaZulu-Natal and intense power cuts had a negative impact in the goods-producing economic sector. As a result, the manufacturing, agriculture, trade, and mining industries contributed negatively to growth. South Africa recorded a trade surplus of R 7.18 billion in August, down from a R 24.8 billion surplus in July. Following the global monetary policy tightening trend, the SA Reserve Bank’s Monetary Policy Committee (MPC) hiked the interest rate by 75 basis points, taking the repo rate to 6.25%.
Global equity markets ended the month and quarter down. The MSCI World Index closed 9.3% down m/m in USD and 4.36 down m/m in ZAR. Announcements from the US Federal Open Market Committee and the August US Consumer Price Index data triggered the biggest market sell-off since 2020. The US S&P 500 declined by 9.22% m/m, its worst monthly performance since March 2020. The Dow Jones closed the month 8.76% lower with all the 30 stocks in the Dow in the red and more than 20 stocks losing at least 1%. The Nasdaq fell by 10.5% m/m. The US dollar continued to strengthen and is currently at a 20-year high against major currencies. European equities also closed the month with a negative return, with the FTSE 100, DAX, and CAC Index down, 5.88%, 5.61%, and 3.04%, respectively. The British pound depreciated to a 37-year low against the US dollar.
Lockdowns in several of China’s large cities tightened COVID-19 control measures, and an embattled real estate sector weighed on Chinese markets and further dragged emerging markets lower for the month. Hong Kong’s Hang Seng Index and the Shanghai Composite Index ended 13.7% and 5.6% down m/m. The MSCI Emerging Market Index returned 11.67% down m/m in USD and 6.86% down in ZAR.
The South African equity market followed international markets to end the month lower. Eskom implemented a record-long stretch of load-shedding for most of September and this weighed heavily on activity. The FTSE/JSE All Share Index closed 4.13% down m/m. The Resources sector was the only sector that ended the month in positive territory, driven higher by BHP Group, the largest company on the exchange (up 4.0% m/m), followed by Glencore (up 6.6%), Anglo American Platinum (up 7.5% m/m) and Gold Fields (up 6.6% m/m). The SA Listed Property index was one of the worst-performing indices, falling by 6.28% m/m, followed by the Industrial and Financials, which ended down 5.05% and 5.95% respectively. Prosus and Naspers dragged the Industrials lower ending the month down 10.9% and 6.7% respectively. The rand could not keep up with the strengthening US dollar and weakened by a further 5.16% m/m against the greenback. The rand further lost 2.66%, 1.15%, against the euro and pound. The SA Reserve Bank (SARB) hiked the interest rate by 75 basis points, taking the repo rate to 6.25%. SA bonds (ALBI) returned 2.11% down during the month and cash (STeFI) returned 0.46%.