January 2022 economic update
The rand has strengthened year to date, gaining 3.82% against the greenback in January.
- It has been a bumpy start to the year, with most stock markets ending January in the red. Worries about the consistent rise in inflation and a shift towards tightening monetary policy by many central banks have caused many global stocks to retreat from highs hit last year. The MSCI All Country World Index is down 4.96% in January. The risk-off sentiment has hurt developed markets more than their emerging counterparts as fear of rising interest rates hurt the lofty valuations of many developed indices. As such, the MSCI World Index lost 5.34% as compared with -1.93% from the MSCI Emerging Markets Index.
- Data from the US is pointing to slowing economic activity. The ISM Manufacturing Index fell to 58.7 in December (from 61.1 in November) as record-long lead times, shortages of materials, high commodity prices and logistical issues weigh on the manufacturing sector.
- The rise in omicron infections and soaring price levels have also hurt the retail sector. US retail sales came in a -1.9% for December, the biggest loss since February 2021 and the end of four straight months of strong growth.
- US inflation is showing no signs of slowing as it hit a near 50-year high of 7% (y/y) in December. The largest contributor was, yet again, the ever-rising energy prices which eventually trickle down to affect most parts of the economy. With Fed Chair Jerome Powell officially retiring the word ‘transitory’ when it comes to inflation, it comes as no surprise that they reaffirmed plans to end bond purchases in March and likely hike rates at the same time. Powell also reiterated his pledge to tame inflation.
- Growth in China is also slowing as the troubled property sector and highly stringent Covid-19 regulations weigh on the world’s second-largest economy. This prompted the Chinese Central Bank to cut the one-year and five-year loan prime rates (LPRs) by 10 and 5 basis points at their January meeting respectively. LPRs are the rates at which corporate and households can take out loans in the country and thus were lowered to increase lending and spur growth.
- In the UK, GDP grew by 0.9% (m/m) in November, beating market expectations of 0.4%. This marks the highest reading since June 2021 and shows that GDP has breached its pre-pandemic level for the first since the onset of the pandemic. However, with the omicron variant now the dominant strain in the UK and it spreading quickly one would expect UK economic activity to slow slightly going forward.
- UK inflation rose for the third consecutive month to 5.4% (y/y) in December. The figure beat the market forecast of 5.2% and marks the highest reading in 30 years. The sustained rise can be attributed to the energy crisis, ongoing logistical issues, and a low base effect. This has prompted expectations of another 25 basis point hike by the Bank of England when they meet on Thursday.
- Locally, we had a muted month on the data front. The manufacturing production figure came in at -0.7% (y/y) for November 2021. This beat expectations of a 1.4% contraction and is a big improvement from the -8.9% growth in October.
- Inflation continues its advance, coming in at 5.9% (y/y) for December. This is the highest reading in just under five years and is pushing closer to the South African Reserve Bank’s target range of 3-6%. The rise is predominantly due to increasing fuel costs brought about by a tightening oil market.
- Both local and global inflationary pressures prompted the Reserve Bank to raise the repo rate by 25 basis points to 4% at their January MPC meeting. This means the prime lending rate also rises from 7.25 to 7.50%. The Monetary Policy Committee stated that they see a gradual rise in the repo rate as being sufficient to curb inflation expectations.
- The rand has strengthened year to date as the market continues to price in more rate hikes in 2022, which in turn make South African assets more attractive globally. As such the rand gained 3.82% against the greenback, 4.42% against the pound, and 4.96% against euro.
- South African equities also advanced despite a general selloff globally, with the FTSE/JSE All Share index returning 0.79% and the FTSE/JSE Top 40 index also gaining 1.15%. The indexes were propped up by the Financial and Resources sectors, returning 3.44% and 3.92% respectively.
- One month index movements:
- JSE All Share Index: 0.79%
- S&P 500 (US): -5.26%
- FTSE (UK): 1.08%
Source: Investing.com and Trading Economics