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Week in Review: Inflation shows signs of slowing

Core CPI rose 5.9% y/y, replicating June’s gain. The decline in headline CPI was driven mainly by a 4.6% drop in energy prices, along with a 0.1% fall in apparel prices and a 0.4% decline in used vehicle prices. However, other areas of the index remained hot, with food prices increasing by 1.1%. On Thursday, the Fed funds futures curve showed expectations for the Fed to start cutting interest rates as soon as Q2 next year.

Should future CPI prints confirm that U.S. inflation peaked at the end of Q2 and signs of a weakening economy continue, the market will gradually start to position for a less hawkish Fed outlook. However, for now, the consensus view is that the Fed will continue to hike rates into the end of the year. A view which was recently echoed by Chicago Fed President Evans and Minneapolis Fed President Kashkari on Wednesday. 

U.S. consumer sentiment (as measured by the University of Michigan sentiment index) climbed to a three-month high as energy prices abated. The index rose to 55.1 from 51.5, beating expectations, while consumer inflation expectations declined for the year ahead. 

In political news, former U.S. President Donald Trump’s Mar-a-Lago home in Florida was raided by the FBI, reportedly in connection with an investigation into Trump’s handling of classified material. 

The U.K economy (GDP) contracted -0.6% in June, the first decline since the pandemic as household spending softened. The print was better than expected, with economists forecasting a -1.3% contraction. The Bank of England (BoE) expects a recession to begin at the end of the year.

The Eurozone faces fresh woes, after months of drought across Europe have started to severely affect energy production, agriculture and river transport. Germany’s Rhine River, its main transport artery and critical commercial corridor, may soon become unnavigable due to low water levels caused by a record-breaking hot, dry summer in the region. 

China’s July CPI was the fastest in two years, with the index rising 2.7% y/y, short of the 2.9% consensus, while factory-gate inflation slowed more than expected. China’s trade surplus rose to a record USD 101.26 billion in July, beating the USD 90 billion consensus forecast. That’s the highest in data compiled since 1987. Over the week, officials in China reiterated their commitment to reaching the 5.5% gross domestic product (GDP) growth target set for 2022. GDP rose 2% in the first six months of the year, which implies the Chinese economy will need to expand around 9% or more in the second half of 2022 to reach the full-year goal, according to Bloomberg calculations.

Global equities have come back in recent weeks, despite recession fears and signs of slowing growth. The MSCI All Country World Index is up nearly 10% since June, with U.S. technology stocks leading the advance. U.S. equities rose sharply over the week, with the Nasdaq (+3.08%), the S&P 500 (+3.26%) and the Dow Jones (+2.92%) ending higher. Shares in Europe (Euro Stoxx 50) rose +1.38% while the FTSE 100 managed a +0.82% increase. China’s Shanghai Composite gained +1.55%, while the Nikkei 225 rose by +1.32%. Brent oil managed a weekly gain of +3.70% - a trend that could darken the inflation picture if it continues, while gold increased by +1.57%.  

Market Moves of the Week:

In South Africa (SA), both mining and manufacturing production fell more than expected in June. SA June mining production fell -8% y/y (est. -5.0%), down from May’s -7.2% y/y decline, with the biggest contributors being Platinum Group Metals (-9.8% y/y) and Gold (-28.6% y/y) production. This marked the fifth consecutive month of a downturn in mining activity, dragged down by higher input costs, load-shedding and labour disputes in the gold sector. A deteriorating global economic outlook and lower commodity prices have also weighed on mining revenue.

SA June manufacturing dropped by -3.5% y/y following a decline of -1.8% y/y in May. This decline surpassed estimates of -2.9% and notably excludes the impact of July’s crippling load-shedding.  The underperformance of both industries suggests that second-quarter GDP could come in weaker than anticipated.

The rand jumped 2% against the U.S. dollar on Wednesday, along with other emerging market currencies, after news broke out that U.S. inflation rose less than expected in July. By Friday, the rand had strengthened to R16.19/$. The JSE gained 1.74% this week, with Industrials (+1.94%) and Financials (+2.45%) leading the market. Insurers boosted Financials, while Industrials benefited after Mondi plc surged +11.06% after it announced the sale of its most significant facility in Russia.

Chart of the week:

What the chart is telling us:

The multiple rounds of Western sanctions imposed on Russia in response to its actions aren’t expected to act as a deterrent, especially as Russia’s economy is substantially more insulated from financial sanctions than was the case following the 2014 Crimea annexation. Russia has been preparing for this for some time. FX reserves of $430bn (and a further $200bn gold reserves) are enough to cover imports for around 16 months. That said, the implementation of the most severe sanctions in potential future rounds will be challenging given potential spill-over effects to Western economies. Source: Bloomberg, Goldman Sachs 

 

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