July 2022 economic update

All sectors of the JSE ended the month in the green.
  • Market sentiment improved in July as investors ramped up bets that the United States (US) Federal Reserve would pause its aggressive rate hikes early next year and that the recent decline in commodity prices would help ease inflation. Consequently, the Morgan Stanley Capital International (MSCI) All Country World Index gained 6.9% in July, with developed markets following suit as the MSCI World Index advanced 7.9%. Despite the improved sentiment, there was still a selloff in the emerging markets, with the MSCI Emerging Markets Index losing -0.7%. The disparity is likely because the MSCI China Index, which makes up around 35% of the emerging markets index, lost 10.0%.
  • The US Institute of Supply Management’s Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) fell for the second month in a row to 53 in June, as compared to 56.1 in May. New orders also contracted for the first time in two years, hinting that tightening policy may be hurting demand. The ISM Services PMI fell to 55.3 in June, indicating that, while the sector remains strong, it faces numerous challenges, including supply chain disruptions, a tight labour market, and inflation.
  • US inflation accelerated to 9.1% in June from 8.6% in May as energy and food prices continued to soar. The jump in prices prompted the Federal Reserve to raise the Federal Funds Rate by another 75 basis points at their meeting in July, bringing the target range to 2.25%-2.50%. More importantly, Chairman Jerome Powell stated that if there is evidence that inflation pressures are easing, the Fed may slow the pace of rate hikes.
  • Shortly after, the US released GDP figures for the second quarter, which showed that the economy shrank by 0.9%. This marks the second consecutive quarter of contraction, meeting widely accepted criteria for a technical recession.
  • The Chinese economy shrank for the first time since the outbreak of Covid-19, with GDP (quarter-on-quarter) losing 2.6% in the second quarter of 2022. Persistent lockdowns brought about by their zero-Covid policy are the biggest contributor to the drop-off in economic activity. Their statistics agency also stated that “the foundation of sustained economic recovery is not stable” as the world continues to battle off inflation with higher interest rates as well as the prospect of further lockdowns.
  • Boris Johnson, the prime minister of the United Kingdom (UK), announced his resignation following immense pressure from his own political party to do so. More than 50 ministers had quit prior to his resignation, and many MPs had been pushing for Johnson to step down following a string of scandals. The Conservative Party will now elect a new leader who will need to contend with a nation full of political and economic uncertainty.
  • On the data front, the UK annual inflation rate increased to 9.4% in June, beating forecasts of 9.3%. Despite consumers having to contend with rising food, fuel, and energy prices; the Bank of England governor, Andrew Bailey, has warned that interest rates may have to rise by a further 50 basis points at their meeting in August.
  • Locally, load shedding has caused manufacturing production to fall by 2.3% (year-on-year) in May, marking the third consecutive month of contraction. Glimmers of hope can be taken from President Cyril Ramaphosa’s energy action plan that was announced to address the country’s ongoing energy problems. It is, however, too early to tell if the government will be able to effectively implement the much-needed reforms.
  • Local inflation data also showed a sharp jump to 7.4% in June from 6.5% in May. Of more concern is that core CPI, which excludes volatile items such as food and energy, also increased to 4.4% in June from 4.1% in the prior month. Rising prices, as well as a weak rand, prompted the South African Reserve Bank to raise rates by 75 basis points, the largest hike since 2002. This brings the repo rate to 5.5% and the prime lending rate to 9%.
  • Despite the rate hike, fears of a recession continue to keep demand for the safe-haven dollar elevated, causing the rand to lose 2.3% against the greenback in July. The rand also lost 2.2% against the pound, however, gained 0.3% against the euro due to their ongoing energy problems and the near certainty of them facing a recession.
  • South African equities followed the developed markets higher, with the JSE All Share Index advancing 4.1%. All sectors ended in the green, with industrials returning 5.8%, followed by 3.9% and 0.8% for financials and resources, respectively. South African listed property ended its three-month losing streak and posted a monthly gain of 8.7%.
  • One-month index movements:
    • JSE All Share Index: 4.09%
    • S&P 500 Index (US): 9.11%
    • FTSE 100 Index (UK): 3.54%

Source: and Trading Economics

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Michael Haldane

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