International markets review
Despite the slowing Chinese economy and the implosion of its property market, continued geopolitical tensions in Middle East, the protracted war in Ukraine as well as the expectation that the US rate cut implementation would be slower than expected, markets launched 2024 on a largely positive note.
US markets ended January in the black even after Federal Reserve Chairman Jerome Powell discouraged a March rate cut in his post meeting briefing. The Dow rose 1.2% for the month, the Nasdaq was up by 1% and the S&P 500 by 1.6%. On the US economic front, headline consumer inflation (CPI) came in above expectations at 3.4% YoY vs the previous reading of 3.1%, while core CPI, which excludes food and energy components, printed at 3.9% vs the previous reading of 4.0% YoY. As a result of the higher print, market expectations for rate cuts starting in March vanished.
Growth in the US exceeded forecasts with fourth quarter GDP printing at 3.3%, as slowing inflation boosted consumer spending. This was also reflected in the retail sales number for December, printing at 0.6% MoM and higher than the 0.3% MoM print of November. This too exceeded the consensus number of a 0.4% MoM print. The Fed’s preferred inflation measure being personal consumption expenditure (PCE), slowed to 2.9% YoY vs the November number of 3.2% YoY, bringing it closer to the targeted 2% annual inflation rate. At its most recent meeting the Fed suggested only three rate cuts of 25 basis points for 2024. As a result, markets have pared back their rate cut expectations, with the Fed Funds Futures factoring in six instead of seven cuts for 2024. However, the continued Middle East and the new Red Sea crises could potentially add to US inflationary pressures, given that around 30% of cargo arriving on the US east coast travels through the Suez Canal and is now being diverted expensively around the Cape of Good Hope.
European markets also enjoyed a generally firmer start to January with the UK being the only market trending softer, ending January lower by 1.3%. Equities had a poor start as the UK December inflation number printed unexpectedly higher at 4.0% YoY vs the November YoY print of 3.9%. The Bank of England MPC December meeting voted to keep rates unchanged for the third meeting in a row, and despite a hard stance on rate cut discussions, expectations are for four rate cuts for the year, while anticipating a more aggressive monetary policy easing stance. Slower inflation
and wage growth have swayed investors into betting on a softer monetary policy as the BoE’s November 2023 report projected inflation reaching the 3.1% by the end of 2024 and to be within the target range of 1.9% by end 2025.
The other two major European markets, Germany and France, trended firmer, ending January better by 0.9% and 1.5% respectively. Inflation numbers in Germany for December surged to 3.7% YoY vs the November print of 3.2%, as energy surged by 4.1% YoY. German core inflation slowed 3.5% YoY vs the 3.8% December print. Similarly, France’s December inflation number also printed higher at 3.7% vs the November print of 3.5%, again on the back of higher energy prices. December inflation in the broader Eurozone rose to 2.9% YoY vs the previous 2.4% print in November, while the GDP number printed 0.1% YoY, contrasting with the third quarter 2023 0.1% YoY decline.
The European Central Bank kept rates unchanged for the third consecutive meeting, citing stagflation concerns, with the latest projections pointing to headline inflation averaging 2.7% for 2024, before decelerating to 2.1% in 2025 and thence 1.9% in 2026. ECB President, Christine Lagard, continues to warn about the upcoming wage negotiation season, also highlighting the Red Sea conflict as an area of concern for higher oil prices. While reducing the scope for monetary policy easing, the markets are still pricing in six rate cuts for the year.
Asia was mixed, as the Chinese market endured severe pressure with concerns over the fragile domestic property market, with the Evergrande liquidation and the absence of effective government stimulus to boost the economy weighing on investor sentiment. The Hang Seng fell by 9.2% for the month and the Shanghai composite by 6.3%. In an attempt to support the market, the People’s Bank of China announced a 50-basis point cut in the reserve requirement ratio (the amount of cash held in reserve by banks), which should add approximately US$140 billion into the local banking system, allowing for lenders to increase their capacity to extend loans in a weaker economy. The PBoC also acknowledged new policies aimed at supporting loans for high quality real estate developers, to bolster confidence in the sector, especially as many developers have defaulted on their debts after the government crackdown on excessive borrowing, which led inter alia to the Evergrande liquidation. Better news emerged on the economic front as Chinese Manufacturing PMI for January came in slightly better at 49.2 vs the previous print of 49.0, while the nonmanufacturing PMI, which measures business sentiment, came in at 50.7 vs the previous of 50.4. A reading below 50 indicates contraction, while one above 50 indicates expansion.
In contrast, Japan shrugged off its neighbour’s malaise, with the Nikkei closing up 8.4% for the month, while core CPI, which excludes food but includes energy, printed a December number of 2.3% YoY in contrast to the November number of 2.5%. At its final meeting of 2023, the Bank of Japan indicated that an interest rate hike may be imminent. The meeting minutes also revealed a discussion on the conditions needed to phase out the stimulus, the appropriate pace of interest rate hikes, as well as sustaining yield curve control in support of wage growth, while also introducing more flexibility to reduce speculation in the market. The Japanese market is pricing in the possibility of two interest rate hikes before the end of 2024.
Local markets review
South African markets lagged their international peers with the All-Share Index closing down 3.0% for the month, with the property sector being the star of the local scene, ending the month up 4.1%. In contrast, the resources sector was weaker, down 5.9%, financials, down 2.9% and industrials declining by 1.5% for the month. With the weakness in resources BHP group, being the largest resources company on the bourse was down over 8% for the month, Glencore was down almost 10% for the month and Anheuser Busch down almost 2%. On the flipside, there were significant gains in British American Tobacco, up almost 3% and Richemont by almost 10%.
On the economic front, eyes were cast towards February with the State of the Nation Speech (SONA), and the Budget announcement. Headline CPI slowed to 5.1% YoY, vs the November reading of 5.5% YoY, while core inflation, which includes the volatile food and electricity components, remained stable at 4.5% YoY in December.
Retail sales pulled back to 0.9% YoY vs the October reading of 2.5% YoY. On the back of the cooling inflation, at its first meeting in 2024 the South African Reserve Bank kept rates unchanged at 8.25%, maintaining its cautious stance for the fourth consecutive meeting. The SARB Governor stating that an easing in policy was not being strongly considered as a sustained deceleration of inflation to the midpoint of the 3% to 6% range was not fully within sight. The SARB continues to maintain a cautious stance on inflation, citing the main risks to be energy and food prices, and the possibility of higher wage increase, even though it expects future moderation in global and local inflation. The SARB will remain hawkish to keep inflation expectations at bay, and as a result the first rate cut of 25-basis points is now only expected in the second quarter of 2024, with two further cuts of 25-basis points throughout the rest of the year.
