Markets extended their gains significantly in September, following the anticipation and subsequent release of central bank policies. The US Federal reserve cut their benchmark rate by 50bps which was in line with expectations. The South African Reserve Bank followed suit by starting their rate cutting cycle with a 25bps cut. According to the World Bank, over the next 12 months markets expect nominal policy rates to fall by 2% in the United States and 1,75% in the euro area.
U.S. macroeconomic data over the past few months have been mixed. GDP growth in the second quarter was somewhat better than expected at 3%, driven by a pickup in consumer spending, with the strength in goods and services spending persisting into July. This whilst the labour market was cooling; nonfarm payrolls declined from an average of 225K from January to June this year to just 116K during July-August, while the unemployment rate picked up further to an average of 4.3% during July-August.
The Euro Area grew by a mere 0.2% for the quarter. Japan had growth of 0.7%, driven by a rebound in consumption. A lot of Focus currently is on China, as the People’s Bank of China announced several easing measures, including lowering the one-year policy interest rate by 30bps, to 2%, and reducing the reserve requirement ratio for banks by 50 basis points. This has already caused the stock market to show significant gains, finally rewarding investors who have been investing in the extremely attractive valuations for years.
Early in the month the second quarter Economic growth numbers for South Africa was released. It showed some growth, driven mostly by the financial and business service industry. Electricity, gas & water; trade; manufacturing; government; construction; and personal services also recorded positive gains. Most of this was driven by the fact that there was no load shedding through the period.
Mining, agriculture and transport was a drag on growth though, as strike action and lower freight volumes was an issue. The inflation number released for August dipped below the mid-point of the South African Reserve Banks’s inflation target of 4.5% coming in at 4.3% and was the lowest we have seen in 3 years. A stronger Rand and lower oil price translated into a dip in fuel prices which helped, whilst inflation at the factory gate was also down to 2.8%.
Overall, for the month of September, this translated to a gain of 3.9% for local bonds as measured by the All-Bond index, whilst the All-Share index rose over 4%. The Rand strengthened by a further 3.1% against the US Dollar, which meant that global bonds and the MSCI World Equity index reported losses in Rand terms. Looking at other indices such as Emerging markets shows a different story and is much more in line with what we saw locally.
Notable releases in October likely to affect the economy are the public expenditure data for the public sector and a financial overview of higher education institutes which are due close to the end of the month.
Courtesy: Multivest
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