China’s artificially constrained economic performance in 2022 should have set the stage for an easy economic win in 2023. However, the onset of recent deflationary trends hint at a far more challenging path to its economic resurgence than originally anticipated.
Key themes for the week include:
- Concerns as China sees consumer price deflation
- United States (US) initial jobless claims exceed expectations
- Key earnings updates including Amazon, Apple and Disney
- Energy prices on the march
- Dollar extends losses
Chinese consumer demand down
Global inflation has been a significant contributor to market conditions since 2021, now talk of deflation has emerged from the Far East as China’s recent consumer price index (CPI) data showed price levels in July declined by 0.3% year-on-year. China’s producer price index (PPI) has consistently fallen year-on-year for most of 2023, however, the market long abandoned the idea that China’s manufacturing sector would drive an economic rebound this year. Rather, it was expected that consumer demand for services would be the saving grace for China’s hobbled economy as households, previously under punitive lockdown conditions, got back to business as usual. Now, however, a negative CPI print casts doubt on this consumer narrative.
The recent consumer data suggests that the expected wave of pent-up demand has mostly run its course. China’s monthly retail sales and vehicle sales which posted high year-on-year growth rates between February and May, both fell to below 5% growth in June. The official PMI (Purchasing Managers Index) for services, which consolidates data across most services industries fell to 51.5 points in July from a peak of 55.6 points in May. This lackluster consumption belies the fact that the prolonged lockdown led to China’s households accumulating savings equivalent to the country’s GDP and suggests that China’s consumer base has grown wary.
In addition, the slump in property prices and systematic risks in China’s property sector are a threat to consumer confidence – Chinese households invest most of their wealth in real estate – and could explain the disappointing consumption and price trends we are observing. A case in point is the recent news that China’s sixth-largest developer, Country Garden Holdings, missed a $22.5 million bond coupon payment which does not bode well for homebuyers whose apartments may be delayed as development is halted.
If China’s deflation persists, the state’s fiscal policy response will need to bear fruit sooner rather than later, especially if the country hopes to achieve its optimistic GDP growth target of 5.0% in 2023.
DATA IN A NUTSHELL
The latest report from July reveals that the US Initial Jobless Claims stood at 248,000, significantly higher than both the expected 230,000 and the previous month’s 227,000. CPI Inflation for July remained stable month-on-month at 0.2%, aligning with expectations and unchanged from the previous month. On a year-on-year basis, CPI Inflation increased to 3.2%, just shy of the anticipated 3.3%. Core CPI Inflation in July remained sticky at 4.7%, though in-line with expectations.
In July, Germany’s industrial production declined by 1.5% month-on-month, a more substantial drop than the expected 0.5% and worsening from the 0.2% decrease in June. Meanwhile, year-on-year CPI Inflation remained unchanged at 6.2%, consistent with both market expectations and the previous month’s figure.
South Africa’s mining production in June witnessed a growth of 1.1% year-on-year, surpassing the expected 0.30%. Pleasingly, manufacturing production for the same month saw a boost, registering at 5.5% year-on-year, well ahead of the anticipated 3.0% and marks the third month of growth in a row. Motor vehicles, parts and accessories were the biggest contributors to manufacturing growth in June.
July’s trade data from China signaled some concerns. Exports decreased by 14.5% year-on-year, slightly worse than the projected 13.2% fall. Imports also fell, recording a 12.4% year-on-year decrease, much worse than the anticipated 5.6% and highlighting the plight on local consumption. However, on a positive note, China’s trade balance for July stood at $80 billion, outpacing the market’s expectations of $70 billion.
EQUITIES – A MIXED BAG
US markets closed flat on Thursday as investors digested US inflation data. The CPI figure showed a moderate rise, which was in line with expectations, and could make the case for another pause in rate hikes from the US Federal Reserve (Fed). Rating agencies also downgraded small and mid-sized banks in the US which saw some US banks’ shares drop as a result. The risks of higher funding costs, weaker capital ratios and exposure to commercial real estate were some of the issues raised. Sentiment around banks is still negative after regional bank failures earlier this year.
On the stock front, in the last week we saw two big tech players, Apple and Amazon report results. Apple showed slower revenue growth for a third straight quarter, albeit improving from last quarter, while Amazon fired on all cylinders and beat all expectations. Apple has lost almost 7% of its value since the release while Amazon gained roughly 8%. This showcases the tricky position these businesses are in now with near-term uncertainty and mixed expectations from the market. Big pharma also showed some strong share moves this week as Eli Lilly and Novo Nordisk released positive news around obesity drugs. Disney reported mixed third quarter results with sales missing expectations while earnings came in better than expected. The stock was up 5% post its results presentation.
The United Kingdom’s (UK’s) FTSE 100 index has increased 0.4% on Thursday with contributions from premium drinks manufacturer, Diageo, insurance provider, Prudential, and resources giant, Glencore. The index is trading around the 7,600 level. Looking at individual stocks, Diageo, reported a mixed set of results with sales below expectations, while Glencore reported a large decline in earnings, down 50% year-on-year, following a significant drop in commodity prices.
European shares awaited data from the US this week and performance has been flat as a result. The DAX and STOXX 600 each gained 0.9% on Thursday. In the current earnings season, the DAX index has seen earnings decline 10%. On a company level, technology company, Siemens, downgraded their guidance due to slower growth in China that might last into 2024. This saw the stock trade down 13% this week. The STOXX 600 index has also seen earnings on an index level in the current season being negative, reducing around 5.75% so far.
The local JSE All Share index traded mildly positive this week, up 1.2% on Thursday but showed a few pockets of outperformance. Omni-channel wealth manager, Quilter, delivered a good set of results due to better cost control and higher interest income. The stock is up 16% for the week so far. On the negative side, explosives manufacturer, Omnia, was down 5% for the week.
COMMODITIES – OIL PRICES UP
Oil is trading close to a nine-month high with West Texas Intermediate crude at around $82/barrel as concerns increase over the potential escalation in tensions between Ukraine and Russia. US data showed that crude inventories rose six million barrels last week, but markets broadly ignored this.
Coal has been trending higher on the back of higher demand from India and China. Newcastle coal is trading at $143/tonne, its highest level since the beginning of July. Iron ore fell to $105/tonne on the back of Chinese property market concerns. Gold prices were steady before the US CPI print which again gave a clearer indication on the Fed’s next move. Gold has been weaker in recent weeks on the back of a strong dollar and better sentiment.
CURRENCIES – DOLLAR DOWN, POUND UP AND EURO FLAT
The US Dollar Index extended losses to 101.8 following US inflation and jobless data but recovered late Thursday to 102.5. With jobless claims coming in higher than expected, confidence was boosted that the Fed will pause interest rate hikes again in September.
The British pound traded stronger at $1.28/£ following the release of the US inflation numbers. Economic data out of the UK has shown lackluster growth and the Bank of England expects growth to remain below pre-Covid levels in the medium term.
The euro strengthened 0.4% to $1.10/€ but remained relatively flat for the week. The European Central Bank (ECB) has stated that growth in the eurozone remains uncertain. Inflation is expected to remain high, although it is declining. The complex economic situation is recognized by ECB Chair, Christine Lagarde, as she noted the prospects for the eurozone has weakened on the back of low growth and higher inflation.
The rand is trading at R18.86/$, R20.71/€ and R23.95/£.