- Global equities continued to slide in September following hawkish comments from central bankers that dented risk sentiment. Adding to market concerns is the ongoing increase in crude oil prices, with West Texas Intermediate (WTI) crude up 44.2% since hitting a low in May. The sharp rise in oil prices has also raised fears that global central banks will maintain persistently high interest rates at a time when investors are already worried about global growth. The heightened uncertainty has led to a drop in equities, with the Morgan Stanley Capital International (MSCI) All Country World index ending September down 4.3%. Both developed and emerging markets finished in the red, with the MSCI World and Emerging Markets indexes down 4.5% and 2.8%, respectively.
- US CPI data revealed that headline inflation experienced its most significant increase in 14 months in August, primarily driven by a surge in gasoline prices. The monthly figure rose to 0.3%, consequently pushing the annual rate up to 3.7%. More importantly, core CPI, which excludes volatile food and energy items, decreased to 4.3% from the previous 4.7%. While encouraging, the sharp rally in crude oil puts an upward bias on future headline inflation prints and may keep the Federal Reserve (Fed) tighter for longer.
- The US economy added another 187 000 jobs in August, marking the third consecutive month below the 200 000 thresholds, indicating that labour market conditions are gradually easing. Furthermore, average hourly earnings rose by 0.2% for the month, representing the smallest increase since February 2022. While the easing labour market conditions bode well for the fight against inflation, the Fed made it clear during the latest Federal Open Market Committee meeting that rates will need to remain higher for longer.
- While the Fed kept interest rates unchanged at its meeting in September, the Fed’s dot plot, which outlines its economic projections, signalled an expectation for one more rate hike before the year’s end. It also revealed a shift from the previous update in June, now suggesting two rate cuts in 2024, a reduction from the earlier indication of four cuts. The hawkish tone has sent Treasury yields to fresh highs and put downward pressure on interest-rate-sensitive equities.
- The Chinese economic outlook remains dire as it struggles to revive domestic growth despite several moves to stimulate demand. Ongoing problems in its property sector, which at its peak accounted for a quarter of its GDP, continue to weigh on domestic consumption. Given the ongoing challenges, advisors are urging for more robust stimulus policies to steer the economy back on track. For now, China’s ongoing decline will continue to negatively impact both growth and risk sentiment on a global scale.
- Looking at the UK, consumer price inflation eased to 6.7% in August from 6.8% the month before. Although this is encouraging, the economy still faces a deteriorating growth outlook as consumers struggle with the rising cost of living. This is evident in the 1.4% year-on-year drop in retail sales in August, marking the 17th consecutive month of decline. The slowing economy led the Bank of England to maintain steady rates at its September meeting, despite inflation persisting well above the 2% target. The Monetary Policy Committee did reiterate that it is prepared to raise borrowing costs again if needed, emphasising that rates will be kept high to ensure inflation returns to normal levels.
- The South African economy exceeded expectations in the second quarter of 2023, registering a 0.6% quarter-on-quarter growth. The upside surprise can mainly be attributed to the manufacturing and finance sectors, which drove most of the outperformance. While encouraging, 0.6% growth is nothing to write home about, and the fact that load shedding has accelerated does not bode well for consumer and business sentiment going forward.
- On the inflation front, the August CPI report showed that both annual headline and core inflation accelerated, both coming in at 4.8%. With inflation within the target range, the South African Reserve Bank (Sarb) left interest rates unchanged in September. It did, however, stress that a deterioration in public finances risks igniting price pressures. Increased public sector wage demands and reduced tax collections have compelled the government to implement cost-cutting measures as it struggles to manage expenditure requirements. Regarding future rate cuts, the Sarb governor said that inflation needs to decline to the target (4.5%) and remain there on a sustainable basis.
- South African equities have followed global peers lower, with the JSE All Share index losing 3.4% in September. At a sectoral level, industrials and financials were the biggest drags, both losing 5.0%. Resources, on the other hand, ended the month marginally lower, losing 0.1%. South African listed property has wiped out gains made since June after falling 4.3%.
- One-month index movements:
- JSE All Share Index: -3.43%
- S&P 500 Index (US): -4.87%
- FTSE 100 Index (UK): 27%
- Hang Seng Index: (Hong Kong): -3.11%
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