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Equity-market indices marginally better after Fed reassurances
Equity markets spent August drifting higher, supported by loose monetary policy and upbeat earnings. However, concerns of the spread of the delta variant in most parts of the world have presented a headwind, not just to equity markets, but also to global growth.
At its meeting in July, the Fed dismissed concerns of an early end to its QE programme, warning that it needs to see a more sustainable recovery before reducing its stimulus measures. This announcement saw most major equity indices recover slightly in the second half of July, after recording declines since the start of the month. This recovery continued into August and gained further momentum after the Fed reiterated its stance on ultra-low policy rates for an extended period of time.
The Nikkei 225 gained 2,8% in USD terms in August, just behind the S&P 500’s performance of a +2,9% rise over the month. The Eurostoxx500 and the FTSE 100 posted gains of just over 2% in USD terms in August. The JSE All Share Index, however, fell 1,6% over the month.
The Brent crude price was up 1,6% in July, despite a 400 000 bpd increase in supply from OPEC that was effective from August 2021. The market was expecting a strong pace of global growth to support demand for oil, but surging COVID-19 infections in August dented that optimism, with the oil price losing 4,4% in August. OPEC+ reiterated its stance on adding 400 000 bpd in supplies until June 2022. The additional supplies, combined with the expected reduction in demand following a resurgence of infections, have capped the oil price for now.
Source: Bloomberg, IIF, Nedbank CIB Markets Research
Summary of core macroeconomic and market views
Growth
We recently raised our growth estimates to 4,7% for 2021 and 2,3% for 2022, from 3,8% and 2,1%, respectively. However, given the destruction and disruption caused by the recent social unrest, we believe this will reduce our 2021 growth forecast by 20-30bps and raise our 2022 estimate by 5-10bps as the rebuilding process gets underway. Furthermore, a statistical revision of the GDP base by Stats SA, raising the base by about 9,6%, also implies further downside risk to GDP estimates.
Inflation
Over the medium term, we still believe inflation will likely remain contained close to SARB’s 4,5% target, with inflation averaging 4,3% in 2021 and 4,2% in 2022, in our view. Our 2022 CPI forecast was lowered by 20bps as our transport inflation estimate for 2022 was revised lower (to 4,2% yoy, from 5,3% previously) due to the higher base (than previously forecast) for 2021. As the oil price surprised to the upside in recent months, SA transport costs were immediately affected; therefore, the upward revision to transport inflation for 2021 (8,2% yoy, from 6,8% previously). Upside risks in the form of a drought, which may raise food costs further, along with uncertainty over the international oil price, remain risks we (and SARB) will watch closely for any second-round impact on SA CPI.
Monetary policy
In line with our expectations, the SARB MPC kept the repo rate unchanged at 3,50% in July. This decision, like the last one, wasunanimous. However, the tone of the statement was significantly less hawkish than our and market expectations, with SARB’s QPM pushing out the majority of its rate-hike projections to 2022 and 2023. Given that this decision was unanimous and the statement was less hawkish than expected, we believe a hike at its next meeting in September is unlikely. While our baseline forecast remains unchanged for the start of this hiking cycle to occur in November 2021, we are acutely aware of risks that may delay this into 2022.
Fixed income
We maintain our fair-value range for the R2030 at 8,50-9,00% (previously 9,00-9,50%). In the same vein, our fair-value range forthe R2048 is 10,50-11,00%. We see our fair-value range as a three-to six-month view. We believe there is potential for further flattening of the yield curve over this period, as the market expects an improvement in SA’s fiscal metrics by the November 2021 MTBPS due to a tax revenue overshoot and higher nominal GDP growth. Our long-term/structural view remains neutral long-duration bonds, as we believe the fiscal trajectory will likely deteriorate in the absence of structural reform implementation.
Currency
We updated our model estimates for the USDZAR. Our ‘extreme-peaks’ model, which focuses on the distribution of the USDZAR around a fundamental trend, suggests that the fair value for the rand is now at 14,90, up from 14,75 in early July. We do not see this move as sizeable enough to adjust our neutral range of 14,50-15,25 for the USDZAR, and as a result, we keep this range unchanged for the time being.
Source: Nedbank CIB Markets Research
Disclaimer – The views and observations in this report represent the analyst’s own and not the Multivest nor Nedbank Group house view.
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Economic Overview – August 2021
Despite a surge in COVID-19 (Delta variant) infections which negatively impacts the performance of the US economy, monetary tightening in the form of bond purchase tapering may happen by December 2021. In his Jackson Hole speech Federal Reserve Chair Jerome Powell echoed the majority view of the FOMC (July minutes) that “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” Powell is optimistic about the outlook for inflation (that it is transitory and will continue to decline) and labor market recovery (a broad-based revival), and is of the opinion that the negative impact of the Delta variant will not materially affect the baseline views of the FOMC. This means the FOMC expected the 1.1% month on month decline in retail sales, driven by a 3.9% drop in car sales and 3.1% drop in online sales, as well as Q2 2021 economic growth of 6.5% (annualised). Going forward, lots of changes must happen for the FOMC to change their views on tapering, inflation and employment.
In China, rising COVID-19 infections, new restrictions on mobility, supply chain bottlenecks, natural disasters (flooding around Henan Province), and decelerating global demand for Chinese exports contributed to slowing economic activity in July. Retail sales and industrial production continue to grow, but at a slowing pace. Retail sales were up 8.5% in July year on year, slower than the 12.1% posted in June. Industrial production increased 6.4% in July year on year, less than the 8.3% of June. Meanwhile, the authorities introduced a significant policy change to promote income equality. The Communist Party vowed to limit the growing power of China’s affluent by regulating their income and factors giving them an advantage. Steps already introduced include limiting the power of technology companies and of private educational companies (seen as providing an unfair advantage to children of the affluent).
Europe’s economic grew by 8.2% (annualised) in Q2 2021, while consumer price inflation seems to be receding as it declined month on month in June. However, the economy of Germany, the powerhouse of Europe, grew slower at 6.1%, while inflation was higher at 3.1% compared to Europe’s 2.2%. Germany’s Bundesbank warned German inflation could soon hit 5%. However, the high inflation should abate as it can be explained by special circumstances such as the reversal of last year’s reduction in VAT, imposition of a new carbon tax, and shortages of key manufacturing inputs. In other countries such as Spain and Italy the economy is growing faster due to easing economic restrictions. In the UK the economy grew by 20.6% (annualised) in Q2 2020, driven by an annualised surge of 32.6% in consumer spending, likely the result of easing economic restrictions. Consumer price inflation declined sharply to 2% in July on technical factors, but the Bank of England (BoE) expects it to rise to 4%. The BoE, however, deems the rise as temporary and said it will likely tighten monetary policy gradually over the next three years.
In South Africa, Stats SA’s rebasing (moving the base year to 2015 from 2010) and re-benchmarking exercise (availability of more sources to more accurately reflect economic activity) meant that the economy was R569 billion (11%) larger in current prices in 2020 and almost 10% larger over the past six years. In real terms, Gross Domestic Product has been restated by 45%. One consequence of the exercise is that the economic contraction of -7% in 2020 was adjusted downward to -6.4%, while changes to the base means that the economy might grow by 4.5% this year – even after accounting for the negative impact of the looting in July. A larger economy, however, aggravated the weak level of inclusivity in the economy as it means a larger GDP could not create more jobs. Indeed, the unemployment rate increased to 44% in Q2 2021, a situation that is untenable and which will cause financial instability if drastic economic reforms are not implemented soon. However, the larger GDP and lower unit labour cost numbers explain the current muted increases in core inflation - and going forward, there is no reason to increase interest rates soon!
Multivest Economic Division
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