Week in Review: Inflation Remains Public Enemy Number 1

The comments were made during the Kansas City Fed’s annual policy forum in Jackson Hole, confirming the Fed’s perceived taming of inflation as the bedrock of the U.S. recovery.

Meanwhile, the 2nd estimate of annualised U.S. GDP for the 2nd quarter of 2022 was revised upwards to -0.6% compared to the 1st estimate which measured GDP at -0.9%. Despite the upward revision, the U.S. remains in a technical recession after reporting two consecutive quarters of negative growth (1st quarter annualised GDP was -1.6%).

At the same time, July new-home sales fell to the slowest pace since early 2016, with properties available for sale now at the highest level since 2008. Business activity contracted again in August, with the S&P Global flash composite PMI falling to 45, the weakest reading since early in the pandemic. One out of six American households (20 million households) have also fallen behind on their utility bills, as electricity prices have surged.

President Joe Biden announced the cancellation of $10,000 in student loan repayments for anyone earning less than $125,000 per year, impacting millions of Americans. Those that received Pell Grants (given to people in financial need) will get $20,000 written off.

Importantly, borrowers will also not have to repay more than 5% of their monthly income. Wednesday’s announcement comes after months of deliberations over the exact structure of the debt forgiveness scheme.

China stepped up its economic stimulus with a further $146 billion of measures to bolster growth and curb the fallout of repeated Covid lockdowns and the crisis in the property market. The State Council, China’s cabinet, outlined a 19-point policy package. In addition, the People’s Bank of China (PBOC) cut two key interest rates, including the five-year loan prime rate (LPR), by 0.15% to 4.30% and trimmed the one-year LPR by 0.05% to 3.65%.

U.S. and Chinese authorities have reached a preliminary deal to allow American officials to review audit documents of Chinese businesses that trade in the U.S. It’s a first step towards avoiding the delisting of about 200 firms from New York exchanges.

The Composite Purchasing Managers Index (PMI) fell to an 18-month low in the eurozone, with a reading of 49.2 in August from 49.9 in July (PMI readings below 50 signal a contraction). Activity in the services industry also stalled as consumers cut spending, while manufacturing activity contracted due to supply constraints.

The Euro Stoxx 600 Index’s valuation has dropped to the lowest level since 2005 against the S&P 500, trading at a discount of more than 30% to U.S. stocks. While both regions are suffering from the impact of soaring inflation and hawkish central banks, Europe also faces additional headwinds including a weaker currency, energy shortages and political uncertainty in Italy and the UK. European benchmark natural gas prices settled at a record high this week, while German power surged to above €700 a megawatt-hour for the first time.

UK business activity also stagnated in August, with a sharp fall in the manufacturing sector. The Composite PMI fell to an 18-month low of 50.9 in August from 52.1 in July. The services sector expanded at the slowest pace in 18 months. The UK regulator announced an 80% increase in household energy bills to GBP 3,549 per year, effective from the end of September, as natural gas imports have become more expensive.

Office availability in central London is at its highest level in more than 15 years, the latest sign of how the pandemic-driven shift to remote working is upending demand for commercial property. Availability was close to 31 million square feet in August 2022, according to real-estate data and information company CoStar. That’s the equivalent of about 60 Gherkin skyscrapers and is up 51% from the 20 million square feet that was available at the end of 2019.

Global equities were under pressure this week. In the U.S., the Dow Jones (-4.22%), S&P 500 (-4.04%) and Nasdaq (-4.44%) were all sharply negative. Similarly, the Euro Stoxx 50 (-3.39%), FTSE 100 (-1.63%), Nikkei 225 (-1.00%) and Shanghai Composite Index (-0.67%) were all weaker.

Brent crude oil advanced above $100 per barrel again after Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said “extreme” volatility and lack of liquidity mean the futures market is increasingly disconnected from fundamentals and OPEC+ may be forced to cut production.

Market Moves of the Week

South African inflation (CPI) increased to 7.8% in July, inline with market expectations and ahead of June’s 7.4% print. Food inflation hit double digits at 10% across all categories, except fruit and the largest increases were in bread and cereal. Electricity and fuel tariffs increased over 7%. Meanwhile, public transport costs rose 6.3% MoM (22% YoY).

Standard Bank’s CEO, Sim Tshabalala said this week that South Africa will very likely be grey listed despite efforts by the Treasury to prevent the country from joining the ranks of nations deemed to have inadequate protections against money laundering and terrorist financing.

The JSE All-Share Index ended the week up +0.65%, with resource (+3.80%) and financial (+0.39%) shares stronger, whilst the industrial sector (-0.73%) ended the week softer. By Friday close, the rand was trading at R16.87 to the U.S. Dollar.

Chart of the Week

Economic activity has weakened from the U.S. to Europe and Asia, reinforcing concerns that soaring prices and the war in Ukraine will tip the world into a recession. U.S. business activity contracted for a second-straight month in August, falling to the weakest level since May 2020. Activity in Asia slumped, and output in the euro zone also fell as record energy and food inflation impacts demand. Source: Bloomberg, S&P Global.