On Tuesday, following a marginally lower than expected consumer price index (CPI) reading from the United States (US), financial markets across the globe were buoyed, the local market included.
Key themes for this week include:
- US CPI softer than expected
- Equity markets navigate mixed signals as optimism meets caution
- Revised oil demand outlook sends prices lower
- Currencies react to shifting economic tides
WHAT A DIFFERENCE 0.1% MAKES
In a surprising twist to the recent market narrative, The US’s October CPI print came in at 3.2%, slightly below the expected 3.3%. This unexpected drop from September’s reading of 3.7% has sparked market optimism and a rally which is challenging the prevailing concerns about rising rates and persistent inflation.
The US Federal Reserve (Fed), led by Chair, Jerome Powell, however, remains cautious despite the positive CPI figures. Powell emphasised last week that the Fed won’t be swayed by short-term data trends and stressed a commitment by the Central Bank to make a comprehensive assessment of inflation dynamics. While the market initially responded positively, Powell’s warning suggests the Fed is taking a tempered approach.
Tuesday’s stock market performance echoed the newfound optimism. The S&P 500 surged 1.9%, and the Russell 2000 index, representing smaller companies’ stocks, experienced a robust 5% climb, while locally, the JSE gained 2%. These gains signalled a hope that the Fed might pause its tightening campaign sooner than initially expected.
Currency markets also reacted swiftly to the news. The US dollar bore the brunt of this buoyant market sentiment with a 1.3% decline in the Bloomberg dollar gauge, its most significant decline in a year. The euro strengthened against the dollar, rising from the $1.06/€ to $1.0820/€. The South African rand mirrored this enthusiasm, strengthening from R18.75/$ to R18.45/$ in response to the news.
In the bond market, yields experienced significant movements. The US two-year Treasury yield plummeted nearly 20 basis points to 4.84%, and the 10-year yield dropped 18 basis points to 4.46%. These substantial shifts reflect not only a reduced likelihood of a December rate hike but also a growing belief amongst investors that the Fed might eventually reverse course and cut interest rates in 2024.
The market’s exuberance continued into Wednesday, following additional data which signalled a slowing US economy. Retail sales declined slightly in October, marking their first drop since March, while producer prices fell 0.5%, the most significant decrease since April 2020. Investors interpreted this as further evidence that the Fed could transition from rate hikes to rate cuts in the coming year.
However, caution is warranted. The market’s current enthusiasm appears to be overdone with pricing leaning heavily towards potential Fed rate cuts, despite Powell’s recent warning that discussions about rate cuts are premature. Powell has continuously emphasised the Central Bank’s commitment to maintaining pressure on the economic brakes until inflation approaches the 2% target.
In summary, the recent market movements indicate a shift in sentiment driven by the unexpected moderation in US CPI. While optimism is palpable, it’s crucial to navigate these evolving dynamics with a measured approach, considering the cautious stance articulated by the US Fed. The markets may be pricing in rate cuts, but Powell’s recent statements suggest a more guarded stance is needed.
A CLOSER LOOK AT EQUITIES
US stock futures saw cautious trade on Thursday, reflecting a market seeking consolidation after robust gains in the first half of November. Looking at the US stock exchanges, information technology company, Cisco, faced an 11% downturn, driven by a tepid outlook for the current quarter and the full year. Similarly, cybersecurity multinational, Palo Alto Networks, dipped over 5% following a less-than-stellar billings forecast. Despite these setbacks, the Dow added 0.47%, the S&P 500 rose 0.16%, and the Nasdaq Composite edged up 0.07% in regular Thursday trading. The market’s mixed movements were underscored by contrasting economic indicators. US producer prices witnessed their most significant drop since April 2020, declining 0.5% in October, signalling a potential easing of inflationary pressures. However, retail sales showed a marginal 0.1% dip, below the anticipated 0.3% fall, with previous months receiving upward revisions. The net effect is that markets are pricing in zero chances of a December interest rate hike by the Fed, while the odds for a mid-2024 rate cut are on the rise.
In the United Kingdom (UK), the FTSE hovered around a four-week high at 7,490, sustained by three consecutive sessions of gains propelled by easing UK inflation figures. Luxury retail brand, Burberry, faced a 9% dip on concerns about meeting revenue targets, while energy giant, Shell, investment services firm, Hargreaves Lansdown, and consumer goods retailer, B&M European Value, saw declines due to trading without entitlement for dividends. The oil and gas sector mirrored a two-day decline in oil prices, falling nearly 1%. Precious metal miners dipped by 0.4%, and industrial metal miners by 0.2% as metal prices lost momentum.
Frankfurt’s DAX 40 extended its winning streak, reaching 15,810 points on Thursday, its highest level since 15 September. Investor optimism centers around expectations of a peak in policy tightening and the anticipation of future rate cuts due to decreasing inflation across major economies. Industrial technology company, Siemens, soared 5% on better-than-expected fourth quarter industrial profits, while online food delivery company, HelloFresh, plummeted 20% with a downward revision of its annual core profit outlook.
In South Africa, the JSE All Share Index dipped nearly 1% to approximately 74,200, ending a three-day surge. Profit-taking ensued amid investor scrutiny of recent Chinese data indicating ongoing weaknesses in the country’s property sector, posing risks to the world’s second-largest economy’s recovery. Traders remained vigilant, monitoring economic data and corporate earnings, as South African lender, Investec, reported a 15.3% increase in half-year profit, buoyed by rising loan volumes, corporate deposits, and funds under management.
A LOOK AT GOLD AND OIL
Gold steadied around $1,960/ounce on Thursday, marking a period of consolidation following recent surges. Mixed economic data in the US prompted a cautious stance among investors, despite the metal’s earlier 1% jump this week, fueled by indications of easing inflationary pressures in the latest US CPI and Producer Price Index reports. Gold found support this week after Moody’s downgraded its US credit rating outlook from stable to negative, citing concerns over growing fiscal deficits and political standoffs in Washington.
On the energy front, Brent Crude futures dipped below $81/barrel on Thursday, extending losses from the previous session. The Energy Information Administration’s report – which showed a significant jump of 3.6 million barrels in US crude inventories last week and surpassed market forecasts – contributed to the downward pressure. In China, oil refinery throughput softened in October due to weakened industrial fuel demand and narrowing refining margins. Oil prices faced additional headwinds after the International Energy Agency revised its initial expectations and stated that the oil market for the current quarter won’t be as tight as anticipated. This shift is attributed to better-than-expected production growth in the US and Brazil. However, the Organization of the Petroleum Exporting Countries, OPEC, sought to reassure markets, by emphasising that fundamentals remain robust and are attributing the recent price drop to financial market speculators.
As global markets navigate these shifts, investors in both precious metals and oil are carefully assessing the evolving economic landscape and its impact on commodities. The delicate balance between easing inflation, geopolitical developments, and production dynamics will likely continue to influence these key sectors in the near future.
The US Dollar Index dipped to 104.2 on Thursday, approaching a two-month low of 104.0 observed earlier this week on the back of data indicating a slowing down of the US economy. The surge in Americans filing new unemployment benefit claims indicated a continued easing in the US labour market. October witnessed a steeper-than-anticipated 0.8% drop in import prices, their most significant decline since March. Softer consumer prices and reduced retail sales also suggest a slowdown in demand.
The British pound retraced to the $1.24/£ mark from its two-month high of $1.2505/£ on Tuesday. British inflation cooled more than anticipated in October, with consumer prices increasing by 4.6%, their lowest rate since October 2021. The core rate, excluding volatile items, decelerated to 5.7%, its lowest level since March 2022. Investors now foresee the Bank of England (BoE) considering interest rate cuts by May next year.
The euro strengthened to $1.08/€, its highest level since early September, as investors shifted away from the dollar. German investor confidence surpassed expectations, contributing to the euro’s earlier gains. While European Central Bank President, Christine Lagarde, affirmed restrictive interest rates will remain in place for several quarters, a Bloomberg survey suggested a potential dip in eurozone inflation below the 2% target by early 2025. This dip in the region’s inflation rate raises the possibility of an initial rate cut in June 2024, which is earlier than previously anticipated.
The South African rand traded around R18.20/$ on Thursday afternoon, its strongest level since late July, brought on by softer-than-expected US inflation data which has led to increased speculation that the Fed may halt interest rate hikes. South African Reserve Bank Governor (SARB), Lesetja Kganyago, reiterated the Central Bank’s commitment to being decisive in preserving price stability. Despite headline inflation rising to 5.4% in September, within the 3% to 6% target band, SARB remains vigilant, warning against premature celebration in managing price pressures with risks skewed to the upside.
The rand is trading at R18.39/$, R19.96/€ and R22.84/£.
Sources: Refintiv, Reuters, Bloomberg, Investing.com and Trading economics.