Fears of an impending recession have, yet again, made headlines. Sluggish economic performance across the globe has sounded the alarm bells as ongoing interest rate hikes, to combat stubborn inflation, continue to put pressure on global economic growth prospects.
Key themes for this week include:
- Federal Open Market Committee (FOMC) minutes feed recession fears
- United States (US) Consumer Price Index (CPI) declines, but core CPI remains stubborn
- Equities trade stronger on softer US inflation
- Gold steals the show
- Dollar buckles under recession fears
IN FOR A BUMPY RIDE
A recession is a period of economic decline, typically characterised by a decrease in economic output, a rise in unemployment, and a contraction in business activity. For an economy to be considered in recession, it needs to experience negative growth for at least two consecutive quarters.
The concern in the markets is that the US is heading for a recession. A US recession will have a negative impact on the global economy, because the US is the world’s largest economy and a significant player in global trade. When the US economy struggles, it leads to decreased demand for goods and services from other countries, which then has a ripple effect across the globe.
Just as a spark of optimism crept into the markets following softer US inflation numbers, the lowest US inflation in two years, Wednesday’s FOMC minutes soured the mood again. The minutes indicated that the Fed is projecting a mild recession in the US later in the year as a result of the rapid increase in interest rates and a slowdown of lending by banks following the recent banking crisis. While a recession in the US is expected by most Fed members, they agree that the US economy should recover quickly, with an upturn in 2024 and 2025.
In addition to the FOMC minutes, the International Monetary Fund (IMF), during its Spring Meeting in the US, also warned of a one-in-seven chance of a global recession, when addressing the topic of a financial crisis. The Financial Counsellor of the IMF, Tobias Adrian, noted, “There is a one-in-20 chance that world output could contract by 1.3% over the next year. There’s an equal probability that gross domestic product could shrink by 2.8%.”
This year has seen financial markets experience a bumpy ride, with investors trying to predict the road ahead in terms of interest-rate hikes by the Fed, specifically amid an array of dynamics including slowing growth and the financial sector fallout.
DATA IN A NUTSHELL
The number of Americans filing for unemployment benefits rose by 11,000 to 239,000 in the week ending 8 April, overshooting market expectations of 232,000 claims. The result was in line with a batch of labour market data for March that pointed to the softening of the US labour market, strengthening current bets that the Fed could potentially move to cut rates towards the end of the year. The annual CPI in the US slowed for a ninth consecutive month to 5% in March, the lowest level since May of 2021, from 6% in February, and below market forecasts of 5.2%. Core CPI, which excludes food and energy, increased 5.6% year-on-year, as expected. The Producer Price Index (PPI) for final demand in the United States increased by 2.7% year-on-year in March, easing from an upwardly revised 4.9% increase the previous month. The Producer Price Inflation was at its lowest level since January 2021, adding to signs that inflationary pressure in the world’s largest economy might be cooling.
The British economy expanded 0.5% year-on-year in February, following an upwardly revised 0.4% growth in January, outperforming market forecasts of 0.3%. United Kingdom (UK) manufacturing production declined by 2.4% year-on-year in February, following a downwardly revised 2.8% contraction in the previous month.
Mining production in South Africa sank by 5% year-on-year in February, following an upwardly revised 2.7% decline in the previous month, significantly undershooting market forecasts of a 1.75% rise. This was the thirteenth consecutive month of contraction in mining activity, amid the adverse impact of prolonged load-shedding. Meanwhile, manufacturing production in South Africa slipped by 5.2% year-on-year more than market forecasts of a 2.2% fall. This was the fourth consecutive month of decreases in industrial activity and at the sharpest pace since April last year, also largely due to the persistent rolling blackouts.
EQUITY MARKETS DIGEST US INFLATION DATA
Stock futures tied to the Dow Jones rose 0.2% on Thursday, while those linked to the S&P 500 and Nasdaq were up 0.4% and 0.5%, respectively, as softer-than-expected inflation numbers reinforced expectations that the Fed will soon end its rate-hike cycle. On the corporate side, Delta Air Lines jumped more than 4% in pre-market trading after forecasting revenue growth and profits, for the second quarter, which beat analysts’ estimates.
Equities in London traded mostly sideways on Thursday, with the benchmark FTSE 100 hovering around a one-month peak of 7,800 points, as gains among consumer discretionary partly offset losses in energy and materials. The UK economy stagnated in February after civil service and teachers’ strikes hit output in the services sector, official figures showed. Among single stocks, commercial property developer, Barratt Developments, rose more than 3% to be among the top gainers on the index. Conversely, Imperial Brands slipped 2% after the tobacco group said its revenue for the first half of 2023 would be below the previous year’s figures. Britain’s biggest retailer, Tesco, forecast flat profit in its new financial year after a 6.3% fall in the 2022/23 financial year, on the back of soaring inflation.
European shares extended gains on Thursday to hover around an over four-week high, with Germany’s DAX 40 rising above 15,770 for the first time since January 2022 and France’s CAC 40 hitting a new record peak, amid hopes the Fed’s monetary tightening cycle might end soon. On the corporate front, LVMH, the world’s largest luxury company, reported a 17% rise in first quarter sales, more than double analysts’ expectations, following China’s reopening.
The Nikkei 225 Index rose 0.26% to close at 28,157 while the broader TOPIX Index inched up 0.05% to 2,008 on Thursday, though market caution capped gains as softer-than-expected US inflation data was offset by expectations that the Fed would raise interest rates in May, by 25 basis points, before the anticipated pause, despite growing recession fears. The benchmark indices have now notched their fifth straight winning day as a weakening yen and dovish signals from new Bank of Japan Governor, Kazuo Ueda, supported Japanese assets.
The JSE FTSE All Share index was firmer around 78,330 on Thursday, its highest in over a month, in line with major bourses, after cooler-than-expected US inflation data and the latest FOMC minutes supported expectations the Fed might soon pause its current tightening cycle. Tech stocks and industrials were among the biggest gainers, while financials posted slight losses. Domestically, South Africa is hosting its fifth investment conference in Johannesburg to showcase investment opportunities to local and international companies.
Gold traded around $2,025 an ounce on Thursday, remaining close to levels not seen since March 2022, as growing fears of a recession supported safe haven buying. Meanwhile, the dollar index remained at some of its lowest levels since early February as investors continued to digest the latest US inflation report and FOMC minutes. While most investors still see the Fed delivering a 25 basis point increase in May, markets are positioning for an imminent pause in rate hikes by the Fed. A pause, and subsequent rate cuts by the Fed, bodes well for the non-yielding safe haven asset in an ongoing risk-off environment.
West Texas Intermediate Crude futures steadied above $83/barrel on Thursday, pausing its ascent as the Fed projected a mild recession in the US later this year due to the recent banking turmoil, stoking concerns about future oil demand. Still, the US oil benchmark jumped more than 4% in the past two sessions to reach its highest levels in nearly five months amid signs of tighter global oil supplies. The expanded Organization of the Petroleum Exporting Countries, OPEC+, recently surprised markets by announcing that it will cut output by 1.16 million barrels per day from May until the end of 2023. Analysts also pointed to slowing oil shipments from Russia and halted pipeline flows from Iraq’s semi-autonomous Kurdistan region. In addition, the market shrugged off official data showing US crude inventories unexpectedly increased last week. Investors now look ahead to the monthly reports from OPEC and the International Energy Agency for further clues on demand and supply forces.
Copper prices reached their highest level in a month at US$4.10/pound amid a weak dollar, expectations of elevated demand, and concerns surrounding low supplies. Data from the London Metal Exchange highlighted that inventories have fallen to 56,000 tonnes, their lowest level since 2005, which has sparked concerns over reserves. Adding to the copper-supply woes, Chile, the world’s largest copper producer, said its state-owned copper mine, Codelco, expects output to shrink by 7% in 2023, following its 10.6% decline in 2022. These low levels of supply have sparked commodity trader, Trafigura, to forecast that copper prices will reach record highs later this year, breaking the peak of US$4.75/pound reached in March 2022.
RECESSION WOES WEIGH ON DOLLAR
The US Dollar Index extended losses, for a third straight day, to below 101.2 on Thursday, holding at levels not seen since early-February, amid increasing prospects the Fed could soon pause the tightening cycle and even start cutting rates by year-end. Fresh data released on Thursday showed producer prices easing more than expected and initial jobless claims rising for the first time in three weeks. On Wednesday, consumer inflation also surprised to the downside while FOMC minutes showed officials dramatically scaled back the expectations of aggressive rate hikes this year.
The euro extended gains above the $1.10 mark, touching its highest level since April 2022, as investors dumped the US dollar on expectations that the Fed will pause its tightening-policy campaign after May’s hike. In Europe, the European Central Bank (ECB) is set to deliver a 25 basis point rate increase on 4 May and another 25 basis point hike by mid-year to combat inflation. However, some analysts suggested policymakers remain divided on how much to raise interest rates, with some officials advocating for no change in May, while others are arguing for another 50 basis point hike. Earlier this month, ECB’s Klaas Knot said it was unclear whether 50 basis points would be needed or if a 25 basis point hike was enough. Robert Holzmann backed another 50 basis point move, while Peter Kazimir said the ECB could perhaps slow down the pace of its increases.
The British pound extended gains above $1.25, touching its strongest level since June 2022, as investors digested a batch of economic data and assessed views of the Fed’s policy path. Elsewhere, an Office for National Statistics report showed Britain’s GDP stagnated in February due to strikes by public workers, but January’s growth was revised higher, suggesting the economy might avoid a recession in early 2023. On the policy front, the Bank of England (BoE) will likely raise interest rates further to combat inflation. BoE Chief Economist, Huw Pill, said last week the central bank cannot be sure that it has raised interest rates enough to tame inflation.
The South African rand gained back substantial ground, to trade around R18.10/$, as the greenback softened on bets for a rate peak following May’s hike by the Fed, while markets are also positioning for potential rate cuts toward the end of the year. Locally, the South African Reserve Bank (SARB) raised its main lending rate by a larger-than-expected 50 basis points to 7.75% in March, citing upside risks to the inflation outlook. In particular, the Bank noted food price inflation was rising much faster than their models suggested, at 14% year-on-year in February, amid the impact of severe power outages. That said, the SARB might leave its key rate unchanged at the highest level in more than a decade or hike borrowing costs further at its May meeting. The South African rand remains under pressure, even as the dollar weakens, amid ongoing weak growth and power outages, and will likely only start seeing some reprieve once the Fed implements rate cuts.
The rand is trading at R18.09/$, R20.02/€ and R22.66/£.