Global Market Performance:
The global markets had a positive month, with the MSCI All-Country World Equity Index rising more than 3%. Both emerging and developed markets contributed to this growth, encouraged by signs of weaker money supply, cooling inflation in the US, and the belief that central banks have reached their peak in interest rate hikes.
However, this performance seems contradictory to the real economy, which is showing signs of weakness. Manufacturing business activity is declining, and consumption is shifting from goods to services. Despite higher interest rates, the consumption economy remains strong, fuelled by increased credit card balances and higher consumer spending to maintain their standard of living.
The situation could change, as inflation might pick up again. Energy prices have already seen a substantial increase, potentially leading to higher inflation in the future. Central banks might be forced to continue raising interest rates to combat inflation, even as economic growth slows down. The bond market has already anticipated this, with bond yields rising in July compared to the equity market.
Global Macroeconomic Picture:
The global macroeconomic outlook continues to show signs of weakening demand as central banks attempt to control inflation. The industrial sector is experiencing a recession, and the service sector is offering some support to various economies.
China, a major manufacturing hub, is facing contraction due to weak demand in both local and international markets, affected by inflation and interest rate challenges. However, stimulus measures from leadership could be expected to stimulate demand.
The United States is also experiencing weaknesses in its manufacturing business activity, driven by declining output and orders. Consumer demand is muted, and businesses lack confidence in the future, leading to a shift in consumer budgeting behavior towards essentials. Despite some slowdown in work, employment rates have expanded slightly, boosting confidence in the output outlook. The Euro Area is facing similar challenges, with manufacturing business activity contracting, and borrowing costs from the ECB biting new orders.
The service economy, on the other hand, continues to support most economies, with the US, China, and Europe experiencing expansion in business activity and new orders. Despite the credit tightening impacting the manufacturing sector, the service sector continues to grow with increased input prices and job opportunities.
Local Market:
The South African manufacturing sector showed weakness in July, contracting for the fifth consecutive month. High prices, weak confidence, and capacity constraints contributed to the decline in demand, leading to a drop in sales and steep declines in output. Employment was also affected, with the rate of job cuts being the quickest since February 2022. Inflationary pressures remained severe, driven by increased import costs, higher fuel prices, and salary pressures.
In the credit market, private-sector credit growth in South Africa slowed down, aligning with market expectations. The diminished economic outlook led to a decline in credit extended to the private sector. Household appetite for unsecured credit remains high due to rising living costs, but banks are adopting a more conservative approach to lending.
Corporate sector credit growth also eased compared to the previous year, while credit extension to households remained relatively stable. Inflation numbers were impacted by tightening lending conditions, with the annual inflation rate easing to a 19-month low of 5.4% in June 2023, moving back into the central bank's target range.
The Johannesburg Stock Exchange (JSE) experienced a 3.8% increase in July, driven by improved economic conditions, a stronger rand, and positive assumptions about China's stimulus measures. The South African rand traded favorably against the US dollar, strengthening by over 6% in July. The rand's performance was influenced by the dollar's movements and developments in the health of developed markets.
South African 10-year yields were trading at 10.2% at the end of July, with more investors buying bonds in anticipation of better economic prospects for South Africa, particularly after the SARB's decision to hold interest rates, signalling potential future growth.
Commodities Market:
Brent crude oil prices reached a high of $85 in July, driven by strong demand outweighing supply factors. Expectations of China's stimulus and increased travel in warm weather contributed to the demand, while supply was being constrained by oil production cuts from producers.
Gold prices saw a bullish trend, trading above $1950 level, as investors anticipated an end to interest rate hikes, leading to a collapse in Gold's Volatility (GVZ).
