Market activity was positive in April, with most equity markets up more than 1%, as volatility eased and investors were optimistic that banking crises jitters are easing along with inflationary pressures, especially as CPI continues to cool in some major economies as factors such as oil prices ease and economic data from the PMI surveys suggest that companies are experiencing some cooling in pricing across some sectors, raising expectations that central banks will need to pause interest rate hikes.
This was first evident in the United States. The central bank has signaled a pause in interest rates, as they raised the interest rate by 25 basis points to keep the key interest rate between 5% and 5.25%. This was the tenth interest rate hike in a row; the last time there was such a tightening of monetary policy was in 2006/2007.
The ECB also announced a 25-basis point hike while signaling a slowdown in the pace of rate increases but stressed that the bank is nowhere near a pause as inflation in the region remains stubbornly high.
The effects of the continued aggressive tightening of monetary policy will be felt for some time. Remember the banking crisis in March 2023, just when we thought it was over and had been smoothed out by many forms of financial bailouts. Today, investors are still not convinced and continue to worry as valuations of smaller banks fall like hot potatoes, such as PacWest Bank, which has fallen more than 50% as investors are wary.
In response to these credit events, the dollar index slipped to around 101 as speculation of a U.S. recession and signs of stress in another U.S. regional banking crisis increased. The influential bond market reacted to all this with a further slump in yields as growth concerns remain key and investors flee for safety in bonds and gold, which is also in demand as a haven. Meanwhile, confidence in the stock market is waning as it currently appears disoriented and is likely to be volatile in the near term as investors digest recent central bank monetary policy decisions and wait for more data on the state of the economy in the coming weeks.
In summary, global financial markets remain quite vulnerable as the economic environment shows a slowdown in inflation and growth (deflation). The next risks for investors are the upcoming figures from US CPI, the ongoing banking crises, and the debt ceiling issue.
Global Data Picture
The global macroeconomic picture continues to cloud as bad economic news is bad for growth as inflation slows.
In the US ISM, both consumption and employment reflect a further downward trend, but the overall number is still growing at 51.9 in April. Meanwhile, manufacturing remains under pressure for a sixth straight month at 47.1 as new product production continues to shrink as higher borrowing costs hurt activity.
The unemployment rate fell to 3.4 percent in April 2023 from an expected 3.6 percent as 253 thousand jobs were created. Meanwhile, the number of Americans filing for new unemployment benefits in the week ending April 29 rose 13,000 to 242,000, surprisingly beating market expectations of 240,000.
Annual inflation in the U.S. slowed for a ninth straight month to 5% in March 2023, helped by cooling prices for energy and used cars. Stubborn inflation continues to hurt the retail sector as increased cost pressures once again weigh on consumer spending. The S&P500 traded 1.5% higher in April, which was positively received.
Euro area consumer price inflation rose slightly to 7% in April after hitting a 13-month low of 6.9% in March, a preliminary estimate showed. The seasonally adjusted euro area unemployment rate fell slightly to 6.5% in March, the lowest rate on record and just below
market expectations of 6.6%. This latest figure reflects a labor market that remains tight, which, combined with high inflation, gives the ECB further scope to raise interest rates. In contrast, euro area producer price inflation fell for the seventh consecutive month in March, easing to 5.9% year-on-year. This was the lowest rate since March 2021.
The UK manufacturing PMI was revised upward to 47.8 in April from 47.9 in March, remaining down for the ninth consecutive month. Production fell for the second consecutive month, led by declines at consumer and intermediate goods manufacturers, while overall new orders fell at the fastest pace in three months and employment fell for the seventh consecutive month.
Developments on the stock markets were positive, with the FTSE 100 trading up 3% in April, driven by improved commodity prices.
In China, the economic recovery following the Covid Zero policy is still mixed. Services activity remains positive as consumers spend more by going to restaurants and shopping malls, which pushed the services PMI up to 57.8 in March. However, business confidence is taking longer to recover, and the manufacturing PMI fell to 50.0 in March. The mixed data has pushed Chinese stocks lower in April, and the MSCI China Index is currently down over 3%.
Locally
The Absa Purchasing Managers' Index rose to 49.8 in April from an eight-month low of 48.1 the previous month. The latest reading indicates that the country's manufacturing sector contracted for the third consecutive month. "The PMI would have deteriorated further had it not been for a significant improvement in the index of inventories, which rose to its highest level since mid-2022," Absa said.
South African vehicle sales declined 0.2% year-on-year to 37.11 thousand units in April. South Africa's S&P Global PMI slipped to 49.6 in April from 49.7 in March, defying market expectations of 50.1 and remaining contractionary for a second month due to intense load shedding, supply constraints, and continued price pressure.
The equity market posted a significant gain of 3% for the month of April, reflecting optimism and a rebound in market activity. Meanwhile, the 1 st week of May was disappointing with investors worried about risky events from the fed and banking crises.
Yields on 10-year South African bonds were around 10% in early May, tracking falling yields on U.S. Treasuries after the Federal Reserve raised rates by a quarter percentage point and hinted that it may soon pause its long path of rate hikes. Domestically, the South African Reserve Bank is likely to continue its rate hike cycle with at least a 25- basis point increase in May as inflation remains stubborn, accelerating for a second time to 7.1% in March.
The rate of inflation has exceeded the 6% ceiling of its target for eleven consecutive months and is not
seen firmly back in the middle until the second half of 2024. The performance of the rand is a good indicator of confidence, and a commodity currency traded weaker above R18.00 is driven by domestic issues such as lack of growth, power crises, and logistics problems, as well as rising interest rate decisions by developed countries.
In the commodities market, Brent crude oil prices traded around the $74 level. However, oil market fundamentals continue to be clouded by concerns about a demand-driven recession. Last week’s rate hikes by the Fed and ECB reinforced market fears that tightening financial conditions will lead to a contraction in major economies. In addition, the latest report from the International Energy Agency showed that gasoline inventories in the U.S. unexpectedly rose by 1.743 million barrels last week, indicating a slowdown in fuel demand. Oil prices remain on a downward trend.
Gold prices continue to gain momentum as they remain bullish from a trading and trend perspective, with future prices reaching a high of $2070. The gains are due to the ongoing banking crisis and speculation of a pause in interest rate hikes, as the financial sector of the world's largest economy shows signs of further credit risks that could affect other sectors.
