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Multivest Market Watch - July 2023



Tighter policy all around


Eyeing higher yields Major central banks tightened policy last week, including unexpectedly in Japan. We see the potential for rising Japanese bond yields to pull global yields higher.

Market backdrop The Bank of Japan tweaked its yield cap, sending local yields to a nine-year high. Developed market stocks hit 15-month highs.

The Bank of Japan surprised markets last week after it tweaked its yield curve control policy again, joining a tightening wave across developed markets (DM). The Federal Reserve hiked rates and said more could come: It may be overestimating the economy’s strength, we think. By contrast, the European Central Bank signaled an end to its tightening bias and a new phase of data-dependency. We see global yields rising with tighter policy all around and favor European bonds in DM.


 

Multivest Chartbook - July 2023

Source: Multivest Research

 

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New food price pressures emerges as more interest rate hikes loom


As expected, major economic regions raised interest rates further, while an end to the Black Sea Grain deal are putting pressure on international grain prices to increase sharply. In addition, China’s proposed economic stimulus may support global economic growth, but might contribute to the Federal Reserve keeping interest rates more elevated for longer. In South Africa indications are for the weakness in the economy to continue, while consumer price inflation (CPI) may be sticky for longer around the 5% mark.


The international price of wheat soared in response to Russia’s decision to withdraw from the Black Sea Initiative and attacking harbors in Ukraine, alleging it is being prevented from adequately exporting its own foodstuffs in contravention of the Initiative. Russia stated it will treat Ukrainian ships in the Black Sea as military targets. In response Ukraine said it will treat Russian vessels as military targets. Ukraine accounts for 10% of the world wheat market, while Russia is at 18% the world’s largest wheat producer. These actions contributed to wheat prices increasing again and might contribute to higher global food CPI. However, Russia stated it will resume the deal once the condition of the initial deal is met.


Although the Federal Reserve in the United States raised interest rates by a further 25 basis-points in July, it might not be the last increase despite CPI decelerating strongly to 3% in June. Federal Reserve Chair, Jerome Powell, said the Monetary Policy Committee (MPC) would like to see a slowing in economic growth and wages before interest rate increases may come to an end. Economic indicators on this front were mixed, however. The first estimate of economic growth for the second quarter of 2023 was 2.4%, exceeding moderate forecasts by far. Also, analysis indicates consumers still have around $500 billion in savings left (accumulated in the COVID-19 period) that may still be used for spending and support economic growth. But wage inflation seems to have stabilized as June’s average hourly wages were up 4.4% compared to a year ago – the same rate as the previous two months. Given a strong slowing in CPI, the Federal Reserve is on a path of engineering the economy towards a soft landing.


The European Central Bank (ECB) raised interest rates by 25 basis points to 4.25%. ECB President Christine Lagarde did not directly state more rate increases are imminent but described a potential interest rate increase in September as a “decisive maybe”. However, the language of the MPC statement was changed to reflect a more data-dependent approach.


In Asia, China’s economy grew just 0.8% in the second quarter of 2023 (quarter on quarter), down from 2.2% in the first quarter. CPI all but disappeared, contributing the authorities to announce 20 stimulus related measures aimed at boosting consumer demand. Chine therefore this year, down significantly from tepid 2.2% growth it registered in the first three months of 2023. Consumer spending has weakened, the housing market has slumped, and the youth unemployment rate has soared to a fresh record of 21.3%. In Japan, the central bank changed its yield curve control policy to be more flexible, meaning a higher tolerance for low interest rates.


The South African Reserve Bank kept the repo rate unchanged as CPI moved into the target bank in June, and forecasts see a move towards the 4.5% target by mid-2024. However, CPI will likely remain sticky around 5% for the next quarter or so, while higher load-shedding stages planned for the summer might negatively affect economic growth in the latter part of the year.

Multivest Economic Division

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