Equity markets across the world traded down last week. Two major economic indicators for the US that were released show that the US economy may contract sooner and stronger than expected.
Many investors are nervous that the decision by the US Federal Reserve (Fed) on interest rates is too late and is behind the cycle. It is feared that even if the US lowers rates over two weeks, it will have a limited effect on its economy that moves towards lower growth and higher unemployment.
On Wednesday, it was announced that manufacturing production in the US dropped by 0.3% from the previous month in July of 2024. The US Institute for Supply Management (ISM) announced that: “Economic activity in the manufacturing sector contracted in July for the fourth consecutive month and the 20th time in the last 21 months.”
Its manufacturing Purchasers Managers Index (PMI) came down to 46.8% in July, from 48.5% recorded in June. On Friday, the US non-farm payrolls for August showed that the US economy is creating less and less jobs. Non-farm employment increased by 142 000 during August and below the 161 000 that was expected.
Although the unemployment rate contracted to 4.2%, as was expected, the US Bureau of Labour Statistics (BLS) made substantial downward revisions of 25 000 on the July number and 61 000 on the June data.
Of concern is the US average hourly earnings advanced by 0.4% over last month and by 3.8% from a year ago. This is both higher than the respective estimates of 0.3% and 3.7%. These mixed signals may cause the US Federal Reserve to be more cautious in the magnitude of the expected cut in September.
The latest forecast is now that the Fed will cut only by 25 basis points. The consensus forecast at the beginning of last week was a cut of 50 basis points.
The above two indicators had a substantial effect on most world equity markets during the last part of last week. In the US, Wall Street recorded strong losses over the last five days. The Dow Jones industrial index lost 1.1% on Friday after the non-farm payrolls was announced and was down for the week by 2.5%.
The broader S&P 500 board decreased by 1.73% on Friday and lost 3.6% last week. The US equity markets follow the same pattern as the beginning of August after the July job data were published. This uncertainty is not good for global markets and the JSE.
The growth rate for South Africa during quarter two was announced on Wednesday. The growth in the gross domestic product (GDP) in South Africa grew by 0.40% in the second quarter of 2024 over the previous quarter.
GDP growth rate in South Africa is expected to be 0.7% during the third, according to Trading Economics global macro models and analysts’ expectations. The market expected an increase in economic activity of 0.3%. During the first quarter the economy recorded 0% growth.
Despite this improved outlook for the economy, it could not help the JSE to absorb the negative sentiment towards risk assets. The All Share index ended Friday 0.8% lower and is down by 2.4% for the week and in line with global markets. This index is now only 5.5% higher since the beginning of the year. It is also expected that until the Fed announces its decision on interest rates, world markets will remain under pressure. The Top 40 index was down by 0.8% Friday and traded lower by 3.8% for the week.
Commodity prices remain under pressure due to the uncertain US economic outlook. Gold billion traded $16 (R285) down last week and closed Friday at $2487 per ounce. The rand exchange rate managed to move flat against the major currencies. For the week, the currency traded in a narrow band against the dollar to close Friday at R17.85/$, just 3c weaker than the R17.82 the previous Friday.
The much weaker oil price, reaching $71.06 per barrel for Brent Crude on Friday (down by 9.2% over the past seven days), as well as the stronger rand already show that the petrol price may decrease strongly by 135c per litre at the beginning of October.
This coming week global financial markets await the release of China’s (today) and the US (Wednesday) inflation rates for August.
Especially the US change in its core consumer price index (CPI) and main CPI rates will be of importance. It is expected that one of the main indicators that the Fed will use at their next meeting, namely core inflation, will remain flat on an annual rate of 3.2%. Mainline inflation is expected to subside from 2.9% to 2.6%.
On Thursday, the US will also announce its producer price inflation rate. Locally, equity markets await the release of South Africa’s manufacturing production data for July on Tuesday.
In June, factory production decreased by -5.2% and it is expected that this figure will improve to -3.5%, but remains worrisome.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT