Inflation continued to be at the forefront of market news this past week as economies continue their recovery after the global COVID-19 pandemic. In the United States (US), inflation soared to 4.2% in April, from 2.6% in March, and well above the forecasted 3.6%. These are the highest US inflation numbers since September of 2008. Although markets can only wait and see, they are not expecting the US Federal Reserve (the Fed) to up interest rates in the short term.
US non-farm employment numbers disappointed, with the economy only adding 266 000 jobs in April, well below the March figure of 770 000 and the expected number of 978 000. This saw the unemployment figures rise from 6% in March to 6.1% in April. Upcoming months may see this trend reversed as the number of job openings rose by 597 000 to 8 123 000, which was well above the expected 7.5 million, showing that there is a demand by employers to increase their workforces. There was also good news on the US budget deficit front, which came in at US$226 billion in April compared with the US$738 billion deficit at the same time last year.
Across the Atlantic, the United Kingdom (UK) saw a mixed bag of economic data released during the week. The recent lockdowns saw the country’s GDP shrink by 1.5% quarter-on-quarter, ending a two-quarter growth spurt. However, both UK imports and exports rose 8% and 5.8% respectively from the previous month. The Halifax house price index rose 8.2% year-on-year in April as the housing market continued its recent momentum as the Stamp Duty holiday was extending beyond its March deadline.
Analysts and economists in the Eurozone are feeling extremely optimistic about the re-opening of economies as the region’s vaccination drives gather pace. The ZEW Indicator of Economic Sentiment for the Euro Area jumped by 17.7 points to 84 in May. This is the highest reading since February 2000. The Eurozone saw an increase of 0.1% in industrial production in April, following a revised 1.2% decline in February, but missing the market expectations of a 0.7% gain. Germany’s consumer price inflation rate increased to 2% year-on-year in April, up from 1.7% in March. The annual inflation rate in France increased to a 14-month high of 1.2% with energy prices being the main driving-force behind this increase.
Japan is also seeing an economic uptick with increases in both the index of coincident economic indicators – which includes factory output, employment, and retail sales – as well as the index of leading economic indicators – which includes data on job offers and consumer sentiment. These indexes saw their highest increases since February 2020 and March 2014, respectively.
China’s auto sales grew 8.6% year-on-year to 2.25 million units in April – the 13th consecutive month of gains. The country’s producer prices rose by 6.8% year-on-year, substantially up from March’s 4.4% gain. China’s annual consumer inflation jumped to 0.9% up from March’s 0.4%, but below market expectations of 1%.
Brazil’s consumer prices jumped 6.8% year-on-year in April. This was the fastest increase since November of 2016. India released its industrial output figures for March, and they surprised with a 22.4% increase from March 2020. The country’s annual inflation rate fell to 4.3%, a three-month low. Food inflation contributed significantly to this figure as it fell dramatically to 2%, down from 4.9% the previous month.
Economic data releases for South Africa were few and far between during the week. March manufacturing and mining production numbers increased materially month-on-month, both beating expectations, and speaking positively to South Africa’s economic recovery year-to-date. However, this did not seem to have had any major implications on financial markets.
The rand continued to trade stronger throughout the beginning of the week on the back of Moody’s decision to skip its ratings review on South Africa. It gave up some of its gains after the US Consumer Price Index (CPI) release on Wednesday, ending off at R14.15/$ after seeing a low of R13.95/$ during Tuesday’s trading.
Bonds and Equities
Domestic government bond yields rose, with the R2030 yield posting 8.89% on Tuesday, but rising to 9.15% towards the latter part of the week. The US 10 Year Treasury Yield also sold off towards 1.7% following the higher-than-expected US CPI release on Wednesday. A risk-off trend was seen across global equity markets earlier this week, and local equities were no exception to the rule as the FTSE/JSE All Share Index ended Thursday 3.4% weaker from the close last week Friday.
Spot gold prices were largely unchanged over the past week, holding above US$1 800 per ounce, despite surging US consumer inflation.
Oil slid the most intraday in over a month on Thursday with West Texas Intermediate futures falling as much as 4.1%, while Brent also retreated after failing to reach the psychological US$70-a-barrel mark in the prior session. Meanwhile, the Colonial Pipeline, a key source of gasoline supply for the US East Coast, is returning to service after a cyberattack last week.
Copper fell from near record highs, as mounting inflation fuels concerns for the economic recovery in the world’s top two economies – the US and China. Copper prices fell 0.3% to US$10,415 a ton on the London Metal Exchange after the metal hit a record US$10,748 on Monday. Other metals were mixed, with aluminium rising 0.5%, while nickel and lead declined. China reiterated its concerns over surging commodity prices, with Premier Li Keqiang urging the country to effectively deal with the gains and their impact.
Written by: Citadel Asset Management