The United States (US) economy grew 2% on an annualised basis for the third quarter of the year, below economist expectations of 2.7%.
Key themes for the week include:
- US economic growth slows in third quarter
- Price increases in South Africa driven by fuel costs
- Strong earnings from large caps drive S&P to new highs
- Constrained supply, coupled with increased demand, in oil markets
RESURGENCE OF COVID-19 AND SUPPLY CHAIN CRUNCH CAUSE SLOWDOWN IN US ECONOMY
The 2% growth in US GDP represented a significant slowdown from a historically fast annual rate of 6.3% in the first quarter and 6.7% in the second quarter, which was a result of government stimulus, increased vaccination rates, as well as extensive business re-openings which fueled spending. Consumers spending rose just 1.6%, in the third quarter, which was well below the 12% rise in the previous quarter. The drop in auto sales, which have been hindered by semiconductor shortages, have resulted in the spending on long-lasting goods decreasing by 26%. US consumers have shifted from goods consumption to services consumption, which climbed 7.9% in the second quarter, albeit at a slower pace than the previous quarter’s 11.5% gain.
Supply chain disturbances, such as backlogs at the ports and challenges with offshore manufacturing, have contributed to a sharp increase in inflation and constitute another risk to the economic outlook. The US’s consumer price index (CPI) rose 5.4% in September year-on-year, close to its highest level since 2008. The core Personal Consumption Expenditure Price Index, which excludes volatile food and energy expenses, rose 4.5% in the third quarter compared to a 6.1% increase in the second.
Despite these challenges, many market participants are expecting the economy to regain some momentum in the final months of the year, as long as COVID-19 cases continue to decline. Consumers are going out more in the US, and hotel occupancy was at 65% for the week ended October 16, the highest level since Mid-August. Last week the number of diners seated at restaurants was only down 5% from the same period in 2019. The US Federal Reserve (Fed) has also indicated that the economy might be in a good enough position to allow it to cut back on its $120 billion a month asset purchase program in November, with a potential of raising interest rates, from their current lows, as early as next year.
DATA IN A NUTSHELL
The US economy grew by 2%, annualised, in the third quarter of 2021, falling short of expectations of 2.6% growth. The sharp slowdown reflects impacts of COVID-19’s Delta wave and supply chain disruption on the economy.
Germany’s consumer confidence rose for a second month in a row to 0.9 points heading into October, marking its highest levels since the pandemic began. Consumer confidence for the eurozone fell to -4.8 points from -4 points in September. Unemployment levels in Germany remained at 5.4% in October with 39,000 fewer people out of work.
Japan’s retail sales only fell by 0.6% in September after the sharp 3.2% decline experienced in August. Although negative, it was lower than the 2.3% decline economists expected, as Japanese consumers stepped out and shopped in the face of cooling COVID-19 infection rates.
South Africa’s producer price index (PPI) inflation increased to 7.8% in September led by a 24% and 17% PPI inflation in petrol and diesel respectively. In August, 268,946 foreign travellers entered the country, which was a 23.7% increase on the previous month and four times higher than August 2020.
EARNINGS COMING IN THICK AND FAST
The S&P 500 exceeded its September high of 4 537, to hit 4 598 on Thursday, bringing its weekly gains to 0.74%. On the company earnings front, Coca-Cola’s earnings beat market expectations after its third quarter volumes exceeded 2019 levels. Ford jumped during Wednesday’s trade, after the car manufacturer released earnings that were almost twice what the market was expecting. General Motors, on the other hand, was down 4.8% for the week on Thursday, after lowering its free cash flow guidance. In the tech space, a pleasing performance from Twitter was followed by Alphabet’s earnings which topped analyst expectations, though both YouTube and Cloud revenues disappointed. The Dow Jones was down 4.3% on Thursday, impacted by Visa’s 8.5% fall, after it delivered a downbeat earnings outlook. The Nasdaq gained 1.42% during the week.
The Japanese Nikkei Index improved by 1% during the week while the Hang Seng lost 2% in value. The Sony Group reported market beating results citing improvements in its music, movies and electronics businesses. Chinese tech stocks came under pressure this week as political tensions with the US raised risk levels.
The Stoxx 600 delivered a relative flat performance this week with a 0.43% gain, which came ahead of the FTSE 100’s equally weak 0.17% movements. The Euro Stoxx Basic Resources Index declined by 1.56% over the week. Deutsche Bank fell 5% by Thursday, despite better-than-expected results, the bank reported poor trading revenues offset by high merger and acquisition fees.
The JSE All Share Index managed a 0.75% increase during the week and closed Thursday at 67,760. The market did not see any wild sector moves, the JSE Financials 15 Index gained 0.84% while the JSE Resources Index was flat. This week Sibanye-Stillwater said that it is in talks to acquire a nickel and copper mine in Brazil.
CONTINUED TIGHTNESS IN OIL MARKETS AS INVENTORIES DROP
Upward pressure on oil prices continues, as inventories are set to decline by an average of 1.1 million barrels per day in the fourth quarter. Fuel demand is expected to be higher and supply from outside of the extended Organisation of Petroleum Export Countries, OPEC+, to be lower than previously anticipated. It is estimated that stockpiles in developed economies will be 158 million barrels below average, bigger than the deficit of 106 million barrels projected a month ago. Oil prices have rallied to a seven-year high already this month as the shortage of natural gas stirs a market already tightened by increasing consumption and strict management of supply from OPEC+. As further indication of the tightness of the oil markets, they are currently in backwardation as the spot price is around $8 higher than the 12-month futures price. Year-to-date oil prices have already gained around 62%.
Commodities from coal to aluminum posted huge swings as traders reacted to rumors that China’s government is growing concerned over recent sharp declines in China’s industrial commodity prices. Iron ore prices continued to decline as China’s steel production curbs hurt demand. Futures in Singapore fell more than 8% on expectations that Beijing’s push to reduce emissions and lower energy consumption will pressure steel production. Iron ore dropped as much as 8.7% to $107.40 a ton before recovering to $113.50. Thermal coal contracts closed 8.1% lower on Thursday, the futures had started the morning falling by their daily limit on the news of a cap on prices, before almost erasing their entire morning’s losses in the afternoon before plunging again. Gold gained for a third successive week and traded at $1 802 per fine ounce up 0.5%, as bond yields slid amid concerns over the global recovery.
EURO AND POUND GAIN FROM DOLLAR
The US Dollar Index struggled for direction during the week ending Thursday, down at 93.3 after trading for most of the week above its opening. The market is looking ahead to November’s Federal Open Market Committee meeting, which is crucial given sticky inflation and the recent miss on GDP. The market is concerned that given the hawkish tone Fed members have taken, the Fed’s actions could lead to a policy mistake if liquidity is drained from the economy too abruptly and high interest rates do not pair well with high national debt levels.
The euro traded at €1.168/$ on Thursday appreciating by 0.16% against the greenback and reaching its strongest level for October on the back of a weaker dollar. This week the European Central Bank’s (ECB’s) President, Christine Lagarde, tempered markets expectations of a rate hike in 2022 by reiterating the ECB’s analysis that inflation will be transitory. The central bank is struggling to counter sentiments that the ongoing energy crunch will lead to prolonged inflation and force the ECB’s hand.
The British pound appreciated by 0.27% to the US Dollar, ending Thursday at £1.38/$. The United Kingdom’s Finance Minister delivered his latest government budget which includes a 50% business rates cut for business worst affected by the pandemic and will see government spending increase by 3.8% per year by 2024-2025. The UK’s National Energy Action, a fuel poverty charity, said the budget did not do enough to protect vulnerable households from rising energy costs.
The rand depreciated past the psychological R15/$ market during Wednesday’s trading, losing 1.9% in value against the greenback during the week. Notwithstanding the impact of loadshedding, the rand likely felt the impact of the commodity price weakness.
The rand is trading at R15.17/$ R17.70/€ and R20.91/£.
Written by: Citadel Equity Analysts, Thambo Mthwalo and Zain Ghoor.