In a recent Weekly Wrap, dated 9 June 2023, we made mention of a meeting that took place between the Presidency and key private sector players. The aim of the meeting was to forge collaboration between the private and public sectors to keep, what many deem to be the South African sinking ship, afloat. This week, 115 South African Chief Executive Officers (CEO’s) have pledged their commitment to the cause.
Key themes for this week:
- South African private sector commits to the task at hand
- United States (US) Federal Reserve (Fed) and European Central Bank (ECB) both hike rates by 25 basis points
- Global equities remain on the front foot
- Oil rebounds on the back of a Chinese stimulus package
- Rand rallies in July
FORGING A PATH TO PROSPERITY: UNITING GOVERNMENT AND PRIVATE SECTOR FOR SOUTH AFRICA’S ECONOMIC GROWTH
In the volatile landscape of South Africa’s economic development, the relationship between the public and private sectors has often been marked by discord and competing interests. However, amid the challenges of economic inequality, unemployment, and limited access to basic services, a new chapter is being written. The South African government and the private sector have recognised a need to start working together to foster growth and change the course of the nation’s economic trajectory.
In a commendable move, top South African CEOs have stepped forward to make a significant commitment to assist in bringing South Africa back to its full potential. Their pledge is not merely limited to financial assistance, but also to lend their expertise and financial backing to the government, while setting their sights on forming strong partnerships with various stakeholders, all in the shared pursuit of supporting the country as a cohesive force.
The need for collaboration:
South Africa’s journey towards economic progress has been hindered by persistent issues that demand a collective response. Economic inequality remains a stark reality, depriving many of the chance to participate fully in the nation’s growth. Unemployment rates have soared, leaving swathes of the population disillusioned and struggling to secure livelihoods. Furthermore, the lack of accessible basic services hinders societal development and poses a formidable barrier to the realisation of South Africa’s true potential.
In the face of these challenges, the Government and the private sector have decided to unite their efforts to drive positive change. A collaborative approach is considered the first step in actively addressing these pressing issues and creating an environment conducive to sustainable economic progress.
Harnessing private sector potential:
The private sector, armed with its expertise, resources, and innovative spirit, possesses the power to be a potent force in South Africa’s economic transformation. By making strategic investments in critical sectors such as manufacturing, technology, and infrastructure, the private sector can spur job creation and stimulate economic activity. This injection of opportunities into the job market holds the potential to uplift communities and alleviate unemployment, instilling hope and purpose in the lives of many.
Paving the way for economic growth:
By partnering with the government, the private sector can be a catalyst for bolstering economic growth. The combined efforts of these two entities have the potential to propel the nation forward, enhancing living standards and reducing poverty rates. Through strategic planning and joint initiatives, they can work towards stabilising South Africa’s gross domestic product (GDP) growth rate, counteracting the challenges posed by unforeseen events such as the most recent COVID-19 pandemic.
The way forward:
The pledge to form partnerships with various stakeholders amplifies the collaborative spirit that is essential for lasting change. By actively engaging with local communities, non-government organisations, state-owned enterprises and educational institutions, the public-private partnership can foster inclusivity in economic development. This approach ensures that the benefits of growth are shared widely and equitably across the nation, strengthening the social fabric and building a foundation for sustainable progress.
This collaboration between South Africa’s government and the private sector marks a pivotal juncture in the nation’s pursuit of economic growth and prosperity. While it would be naïve to think that it will be an easy task, without numerous obstacles, it marks the first step in the right direction for the country as a whole.
DIGESTING THE DATA
On Wednesday, the Fed raised the target range for the federal funds rate by 25 basis points. The move was aligned with market expectations and has brought US borrowing costs to their highest level since January 2001. The decision was made as policymakers remained vigilant about the US’s economic outlook and stated their readiness to adjust monetary policy if risks to inflation and employment goals emerge. The tightening campaign resumed after a pause in June, with the Fed noting a moderate rate of economic expansion, robust job gains, low unemployment, and elevated inflation. In the week ending 22 July, the number of Americans filing for unemployment benefits declined by 7,000 to 221,000, the lowest number in five months and well below market expectations of 235,000. Continuing claims also dropped significantly by 59,000 to 1,690,000 in the previous week, their lowest since January, indicating a swift reemployment of jobseekers, and a continuing tight labour market. The US economy exhibited resilience, with a GDP growth rate of 2.4% in the second quarter, surpassing market expectations of a 1.8% expansion, despite the challenges brought on by high interest rates.
The ECB raised interest rates by 25 basis points on Thursday, making it the region’s ninth consecutive rate hike. Despite a recent slowdown in inflation, the ECB expressed concerns that it remains persistently high. As a result, the rate on main refinancing operations now stands at 4.25%, its highest level since October 2008, while the rate on the deposit facility reached 3.75%, its highest level in over 22 years. The ECB, however, has committed to a “data-dependent approach” for future rate decisions, aiming to keep rates at sufficiently restrictive levels until inflation returns to its 2% target. Since starting its tightening cycle in July 2022, the ECB has implemented an unprecedented 425 basis point increase in rates, marking the fastest tightening pace in its history. Meanwhile The HCOB Eurozone Composite Purchasing Managers’ Index (PMI) declined to 48.9, marking a drop from the previous month’s reading of 49.9. This figure came in below market expectations of 49.7, as indicated by a preliminary estimate. The latest PMI reading revealed a notable contraction in business output, reaching its sharpest decrease since November of the previous year. The downturn was fueled by a sharp decline in new business inflows, the most substantial drop seen in eight months.
In May 2023, South Africa’s Composite Leading Business Cycle Indicator decreased by 1.7% from the previous month, continuing its downward trend for the fourth consecutive month. The decline was primarily influenced by downturns in approved residential building plans and South Africa’s export commodity price index denominated in US dollars. However, there were positive contributions from the widened interest rate spread and the accelerated six-month smoothed growth rate of the real M1 money supply. South Africa’s annual producer price inflation (PPI) declined to 4.8% in June, a significant drop from 7.3% in the previous month and below market expectations. This is the lowest level recorded since February 2021. The decline was primarily driven by falling prices of coke, petroleum, chemical, rubber, and plastic products, as well as a slowdown in the costs of metals, machinery, equipment, computing equipment, food products, beverages, tobacco products, paper & printed products, and transport equipment. Additionally, on a monthly basis, producer prices fell by 0.3% in June, following a 0.6% increase in the previous month.
EQUITY MARKETS REMAIN ROBUST
On Thursday, US stocks gained across the board, with the Dow Jones rising approximately 80 points -on track for a 14th consecutive session of gains – the S&P 500 showed a 0.8% increase, and the Nasdaq surged by 1.5%. Investor sentiment was positive as fresh data and corporate earnings results were welcomed. Meta Platforms, the parent company of social media giant Facebook, soared by about 8% following strong earnings and profit reports, accompanied by a better-than-expected forecast for the current period. Fellow global tech company, Comcast, also experienced significant gains, jumping over 6.5% after surpassing earnings and revenue expectations. McDonald’s joined the rally, rising approximately 1.4% after the fast-food company’s sales exceeded forecasts. Additionally, financial services company, Mastercard, demonstrated positive performance, up 0.2%, as it delivered robust revenue and earnings growth. Looking ahead, semiconductor company, Intel, motor manufacturer, Ford, and telecommunications company, T-Mobile, are scheduled to report their earnings today after the closing bell, further adding to market anticipation and sentiment.
The United Kingdom’s (UK’s) FTSE 100 saw gains on Thursday, with investors closely examining quarterly corporate results and interest rate decisions. Marketing and information company, Informa’s shares rose by nearly 4%, driven by strong bookings and China’s economic recovery, positioning the company to meet its full-year forecasts. Energy services company, Centrica, also experienced a 4% increase in share value after announcing a significant dividend hike and posting higher first-half profits. However, petroleum giant, Shell, faced a setback, with its shares retreating by around 2% following a 56% drop in second-quarter profit. Similarly, Barclays saw a decline of more than 5% due to a 56% decrease in second-quarter profit, and as the bank fell short of expectations for its investment banking unit, leading to concerns about business pressures in the UK.
European shares also continued their upward trajectory on Thursday afternoon, with Frankfurt’s DAX 40 rising by approximately 1.2% to reach a near six-week high of 16,320 points. Investors were digesting the latest policy decisions from both the ECB and the Fed, as well as a flurry of earnings releases. On the corporate front, several companies made notable announcements that captured investors’ attention. Food and beverage giant, Nestle, improved its full-year organic sales outlook, while vehicle manufacturer, Renault, achieved its largest-ever operating margin. Aeronautics company, Airbus, surpassed expectations with higher-than-anticipated underlying operating profit and reaffirmed its financial goals for the year. However, there were mixed results in some sectors.
On Thursday, Japan’s Nikkei 225 Index showed a strong performance, rising by 0.68% to close at
32,891, while the broader TOPIX Index gained 0.53% to reach 2,295. Both indices achieved their highest levels in three weeks, driven by investors’ reactions to the Fed’s policy decision, which was met with positive sentiment among investors, propelling the Japanese markets higher. The technology sector led the charge, with impressive gains from companies such as Tokyo Electron, SoftBank Group, Capcom Ltd – up a staggering 15.1%, Renesas Electronics, and Keyence. Other heavyweights in the index also made significant advances, including Disco Corp, Fast Retailing, Mitsubishi UFJ, Kawasaki Kisen, and Nidec Corp. Overall, the upbeat market sentiment and strong performances from key sectors and companies contributed to the notable rally in the Japanese stock market on Thursday.
The local JSE FTSE showed a positive trend, gaining around 1% and trading at 78,347. This uptick was in line with a general risk-on sentiment prevailing in the market as traders processed the 25-basis point interest rate hike by the Fed. Additionally, investors reacted positively to South Africa’s smaller-than-expected Producer Price Index. On the corporate front, Impala Platinum and Premier Group were among the top-performing companies, displaying robust gains. The banking sector also saw favorable results, with Standard Bank and FirstRand contributing to the overall positive performance of the JSE FTSE.
COPPER AND OIL CELEBRATE CHINESE STIMULUS
On Thursday, West Texas Intermediate Crude futures surged above $79.00/barrel, reaching a near three-month high achieved earlier in the week. This impressive rally was driven by expectations of tighter global supply and a resurgence in Chinese demand, which provided significant support to the market. The recent increase in oil prices, totalling more than 10% this month, can be attributed to voluntary output cuts implemented by major oil-producing countries like Saudi Arabia and Russia. Additionally, indications from the expanded Organization of the Petroleum Exporting Countries, OPEC+, of their readiness to take further action further bolstered market sentiment. Chinese authorities’ commitment to strengthening policy support to boost their economy also contributed to a positive outlook for the world’s largest crude importer. However, oil prices experienced some pressure on Wednesday following the Fed’s decision to raise interest rates by 25 basis points. This move raised concerns about overall demand in the market.
Gold experienced a decline on Thursday, wiping out its early gains and falling below $1,950/ounce. This retreat came after the precious metal reached a two-month high of $1,980 on 18 July. The drop was fuelled by the release of robust economic data, strengthening the case for the Fed to raise interest rates in September. In response to this encouraging data, the US central bank raised its funds rate by 25 basis points to 5.5%. Additionally, the Fed kept the possibility of future rate hikes open, further influencing the direction of gold prices.
Copper futures climbed towards the $3.90/pound threshold, reaching their highest level since 14 July. The surge was fuelled by expectations of a demand rebound, driven by Chinese government’s commitment to providing further economic support. Beijing’s plans to bolster economic policy adjustments, with an emphasis on expanding domestic demand and supporting private investment, contributed to the positive outlook. Additionally, efforts to develop underdeveloped areas in megacities were unveiled by China’s state planner. Furthermore, concerns about supply shortages also played a role in the price surge. In May, copper output in Chile, the top producer, declined by 14% year-on-year, raising potential concerns about supply constraints. As copper plays a vital role in the world’s transition to sustainable energy sources, these supply issues have added to the upward pressure on prices.
RAND MAKES IMPRESSIVE STRIDES
The US dollar index surged above 101 on Thursday, rebounding from earlier losses, as key data supported the possibility of the Fed extending its tightening campaign in the upcoming September meeting. Yesterday, Fed Chair, Jerome Powell, emphasised the Central Bank’s data-dependent approach going forward, indicating that any further decisions to raise borrowing costs have not been finalised. The rise in the dollar was driven by robust economic data, signalling the possibility of additional rate hikes by the Fed in the future. Powell’s comments on the Central Bank’s approach added to the market’s anticipation for further tightening measures.
The euro initially gained ground but later traded around $1.10/€ as the US dollar strengthened following a positive GDP growth figure for the US. As expected, the ECB implemented another 25-basis point increase in borrowing costs and emphasised its data-dependent approach for future decisions. ECB President, Christine Lagarde, mentioned that a pause or hike, but not a cut, should be anticipated for upcoming meetings, with data guiding the Central Bank’s actions. Despite signs of weakness in the eurozone economy, inflation remains significantly above the target, prompting policymakers to acknowledge that inflation is expected to remain high for an extended period. Flash PMI (purchasing managers’ index) surveys for July revealed the most substantial contraction since November of 2022, with manufacturing experiencing a sharp decline not seen in over three years.
The British pound strengthened, reaching above $1.29/£ and nearing a 15-month high of $1.314/£ achieved on 14 July. The move was influenced by the Fed’s rate decision on Wednesday. However, Federal Reserve Chair Powell’s dovish tone during the press conference and uncertainty about future rate hikes contributed to the pound’s appreciation. Looking ahead, the Bank of England (BoE) is also anticipated to raise interest rates by 25 basis points in the coming week. However, weaker-than-expected PMI data and a reduction in inflationary pressures in the UK have raised doubts about the need for higher interest rates as initially projected. As a result, the BoE might not have to implement rate increases to the extent initially anticipated. Overall, the British pound’s strength was driven by the Fed’s cautious stance on future rate hikes, while upcoming decisions from the BoE are being influenced by recent economic data and inflationary pressures.
The South African rand gained impressive ground against the greenback to trade to a high of R17.41/$, before stabilising back around the R17.70/$ mark following robust US data. The rand experienced a 6% gain during July, primarily due to a weaker dollar. On the domestic front, the South African Reserve Bank (SARB) opted to keep interest rates unchanged after ten consecutive rate hikes. Inflation returned to the central bank’s target in June for the first time in over a year. However, SARB Governor, Lesetja Kganyago, warned that the interest rate pause does not signal the end of the local hiking cycle. The rand will remain volatile as the South African economy remains fragile, and persistent blackouts continue to pose significant challenges for businesses and households. Additionally, there are political concerns ahead of the 2024 general election, contributing to uncertainties in the country.
The rand is trading at R17.80/$, R19.54/€ and R22.77/£.
Sources: Trading Economics, Refinitiv and News 24.