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Week in Review: ECB Makes Historic Independent Rate Cut

Advice and Comments

10 Jun 2024

U.S. manufacturing activity declined for the second consecutive month in May, driven by the sharpest drop in new goods orders in nearly two years and an unexpected decrease in construction spending the previous month. On Monday, the Institute for Supply Management (ISM) reported that its manufacturing Purchasing Managers' Index (PMI) fell to 48.7 in May from 49.2 in April. A PMI below 50.0 indicates a contraction in the sector.

 

In contrast, the stronger-than-expected services reading countered Monday's ISM report on the manufacturing sector. According to a survey published on Wednesday, the U.S. services sector rebounded into growth mode in May after a brief contraction in the prior month, with business activity registering the most significant improvement in three years. The ISM reported that its non-manufacturing Purchasing Managers' Index (PMI) surged to 53.8 in May from 49.4 in April, marking the highest reading since last August


In May, the U.S. economy added a significantly greater number of jobs than anticipated, mitigating concerns about a slowdown in the labour market and potentially reducing the Federal Reserve's inclination to lower interest rates. According to the Labor Department’s Bureau of Labor Statistics report released on Friday, nonfarm payrolls expanded by 272,000, compared to 165,000 in April. Job gains were concentrated in the healthcare, government, and leisure and hospitality sectors, which added 68,000, 43,000, and 42,000 positions respectively, accounting for over half of the total gains. Additionally, average hourly earnings surpassed expectations, increasing by 0.4% for the month and 4.1% from a year ago. However, simultaneously, the unemployment rate rose to 4%, marking the first time it has surpassed that level since January 2022.


The European Central Bank (ECB) cut interest rates for the first time in five years on Thursday but kept its plans undisclosed due to rising uncertainty over inflation after a significant slowdown in the past year. The ECB reduced its record-high deposit rate by 25 basis points to 3.75%, aligning with other central banks such as those of Canada, Sweden, and Switzerland. Notably, this is the first time the ECB has cut rates without a prior move by the Federal Reserve since its establishment in 1999. Despite the rate cut, the ECB revised its end-2024 inflation forecast upward to 2.5% from 2.3%, while increasing the eurozone growth outlook to 0.9% from 0.6%.


In May, Eurozone business activity experienced its fastest expansion in a year, driven by the growth in the services industry, which outpaced the contraction in manufacturing. According to a private survey, the Hamburg Commercial Bank (HCOB's) composite Purchasing Managers' Index (PMI) for the currency union, compiled by S&P Global and considered a reliable indicator of overall economic health, rose to 52.2 in May from April's 51.7, marking its highest level since May 2023.


Meanwhile, a survey released on Wednesday indicated that growth among Britain's services businesses in May eased from April's 11-month high, while inflation pressures dropped to their lowest in three years. This development potentially paves the way for a Bank of England rate cut later this year. The S&P Global UK Services Purchasing Managers' Index fell to a six-month low of 52.9, down from April's 55.0. Additionally, the composite PMI, which includes the manufacturing PMI released on Monday, decreased to 53.0 from April's one-year high of 54.1. S&P stated that the data was consistent with a gross domestic product (GDP) growth rate of 0.3% in the second quarter of 2024, half the pace of the first quarter, although it marks an improvement from the shallow recession in the second half of 2023.


China's exports exceeded expectations in May, rising by 7.6% from the previous year, compared to a growth of 1.5% in April. However, imports grew by a weaker-than-expected 1.8% in May, slowing down from the 8.4% rise in April. Consequently, the overall trade surplus increased to USD 82.62 billion, up from USD 72.35 billion in April. Despite robust overseas demand driving China's exports amid tariff threats, analysts highlighted that the disappointing growth in imports indicated sluggish consumer spending domestically.


Simultaneously, the private Caixin/S&P Global survey of manufacturing activity in China inched up to 51.7 in May from April's 51.4, marking the seventh consecutive month of expansion. Additionally, the Caixin Services Purchasing Managers' Index (PMI) exceeded expectations, reaching 54 in May, up from 52.5 in April. This private Caixin survey, focusing on smaller and export-oriented firms, contrasted with official data from the previous week, which unexpectedly showed a contraction in manufacturing activity in May.


The major indexes concluded the week with a mixed performance, as investors grappled with conflicting data from the week's busy economic calendar. In the US, the S&P 500 Index and the technology-heavy Nasdaq Composite registered gains of 1.32% and 2.38%, respectively. The Dow Jones also saw a modest increase of 0.29%. In local currency terms, the pan-European STOXX Europe 50 Index closed 1.36% higher following the ECB’s decision to cut interest rates for the first time in five years on Thursday. Conversely, the UK’s FTSE 100 Index slipped 0.36%.


In Asia, the Japanese Nikkei 225 Index saw a rise of 0.51%. Conversely, the Shanghai Composite Index experienced a decline of 1.15%, while in Hong Kong, the benchmark Hang Seng Index surged by 1.44%.


 

Market Moves for the Week



South Africa’s economy experienced a slight contraction in the first quarter of 2024, according to data released by the statistics agency on Tuesday, primarily due to a downturn in the mining and construction sectors. Gross domestic product (GDP) shrank by 0.1% in quarter-on-quarter seasonally-adjusted terms. On a year-on-year basis, the economy grew by 0.5%. Six out of ten industries tracked by Statistics South Africa contracted in the first three months of the year, with construction and mining experiencing declines of 3.1% and 2.3%, respectively.


The Absa Purchasing Managers' Index (PMI), a key indicator of confidence in South Africa's manufacturing sector, revealed a significant decline in manufacturing activity for May. According to the survey released on Monday, the seasonally-adjusted PMI fell to 43.8 points in May from 54.0 points in April, dropping below the 50-point threshold that distinguishes expansion from contraction. Respondents attributed this decline to uncertainties related to last week's election and weak demand. The PMI has remained in contractionary territory for three out of the first five months of this year, indicating volatility in the manufacturing sector during the election period.


South Africa's African National Congress (ANC), under the leadership of President Cyril Ramaphosa, has announced plans to invite other political parties to participate in forming a government of national unity. This decision follows last week's election, in which the ANC lost its majority for the first time in South Africa’s democratic era. President Ramaphosa unveiled the plan on Thursday after extensive negotiations within the ANC and between major parties. There had been speculation about whether the ANC would attempt to establish a grand coalition government with its closest political rival, the Democratic Alliance, to control parliament, or if it would seek to collaborate with uMKhonto we Sizwe, led by former President Jacob Zuma, whose electoral gains came at the expense of the ANC.


Throughout the week, the JSE All-Share Index experienced a modest increase of +0.19%, primarily driven by significant gains in the property sector (+3.11%), the industrial sector (+2.02%), and the financial sector (+0.52%). Conversely, the resource sector ended the week with losses, declining by -3.06%. At the close of trading on Friday, the rand strengthened against the U.S. Dollar, trading at R18.86, marking a weekly depreciation of -0.62%.


 

Chart of Week



On Thursday, the European Central Bank made a significant departure from its usual practice by independently cutting rates for the first time in its 25-year history. This decision marks a notable shift away from its previous reliance on the Federal Reserve's actions.

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