Another month and another strong performance by both the global and local markets, as inflationary fears receded, buoyed by resilient US economic data, and the hope that the Federal Reserve’s rate raising cycle is coming to an end.
US Markets were strong as month end figures came through, with the Dow up 3.3% for July, the S&P 500 up 3.1% and the Nasdaq 4.0%. Economic data in the US saw a sharp decline in the June inflation data (CPI) to 3.0% YoY vs the May print of 4.0%, coming in at its lowest levels since March 2022, while core CPI, which excludes the volatile food and energy components, declined to 4.8% YoY in June, contrasting with the May reading of 5.3%. There was an upward revision of the May retails sales numbers (0.3% to 0.5%), with the June retail sales coming in at 0.2% MoM, being less than expected.
Second quarter US GDP growth of 2.4% came in higher than the expected 2%, and above the first quarter print of 2.0%. In addition, the Fed’s preferred method of inflation measurement of personal consumption expenditure (PCE), cooled, dropping to 0.2% MoM in June, contrasted with the May reading of 0.1%, while YoY, PCE advanced 3.0% in June, below the May reading of 3.8%.
The jobs report for June indicated growth in US employment for the 30th month in a row, maintaining the low unemployment rate of 3.6%, while participation in the labour force by those between the ages of 15 and 54 reached the highest level of 84% since 2002. The IMF has, however, cautioned against extrapolating these trends as the impact of the previous monetary tightening policy is still being unravelled, with the full effects still to be felt. As expected, at the July Federal Open Market Committee meeting, the Fed increased rates by 0.25% to the range of 5.25% to 5.5%, after pausing at its June meeting. Rhetoric after the meeting reinforced the view that the Fed would be making data-driven decisions on a meeting-by-meeting basis in future.
European markets followed their US counterparts firmer in July. In the UK, the FTSE ended the month higher by 2.2%, as inflation for June cooled to 7.9% YoY. This was below the consensus estimate of 8.2%, and lower than the higher May reading of 8.7%, while core inflation came in at 6.9% vs the 7.1% reading in May. Both the German and French markets were up for July by 1.9% and 1.3% respectively. Inflation in the European Union came in at 5.5% YoY for June, vs the previous reading of 6.1% in May, while inflation in Germany was lower for June at 6.5% vs the 6.8% reading in May. Growth in the EU for the second quarter of 2023 printed at 0.3% QoQ, better than the 0.2% consensus figure, and saw resilience in member states France and Spain. The European Central Bank raised rates by 0.25% at its July meeting, stating that, although inflation continues to decline, it is “still expected to remain too high for too long”. Asian markets had a mixed performance as markets in China demonstrated some strength with the Hang Seng up by 6.1% and the Shanghai Composite higher by 2.8% for the month.
Economic data in China continued to disappoint, however, as factory activity declined for a fourth month in July as the official manufacturing PMI came in at 49.3 vs an expected 49.2. Similarly, the official non-manufacturing PMI, which is a measure of business sentiment in the construction and services sector, printed at 51.5 vs the June print of 53.2, which constitutes a fourth straight monthly decline. Growth is still expected to come in above the government target of 5%, however, as the authorities continue to focus on the advancement of Chinese technological self-sufficiency and security amid growing tensions with the USA.
By contrast, Japan experienced a weaker July, with the Nikkei closing the month lower by 0.1% as core inflation rose by 3.3% in contrast to the May reading of 3.2%. The Bank of Japan continues to adopt a wait and see approach keeping its benchmark interest rate at -0.1%, while maintaining the stance of being able to ‘fine-tune’ bond purchases to allow for greater flexibility given the uncertainty for the economy and prices.
The South African market ended July stronger, with the All Share up by 3.9%. The best performing sector locally was the Financial Sector, up almost 8%, followed by Resources up almost 4%, Industrials up 2.5% and Property up 2.1%. Standout performers from a large cap perspective were Prosus (2.9%), Naspers (3.4%), Standard Bank (7.6%), FirstRand (6.3%), while BHP Group lost 1.4% and Richemont dropped 10%.
South Africa’s headline CPI slowed for the third month in a row, printing at 5.4% YoY vs the May figure of 6.3%. The decline in food and fuel inflation being the main drivers behind the slowdown. Core inflation, which excludes food and energy, also surprised on the downside at 5% YoY vs the May print of 5.2%, as retail sales data for May, which were released in July, also fell for the fifth month in a row by 1.45 YoY following the revised April number of 1.8%.
Against the backdrop of the positive inflation print, in the SARB’s Monetary Policy committee July meeting voted to keep rates at the current levels, leaving the repo rate at 8.25% and prime at 11.75%. The SARB sees inflation dropping back to its midpoint in a sustainable manner in mid- 2025, but remains watchful for risks posed by network constraints, and uncertainty regarding energy and food prices. The pause in rate hikes currently begs the question as to whether the SARB hikes have reached the end of the current cycle? Evidence suggests that there may be further modest tightening based on the ongoing inflation and fiscal risks.