June 2022 economic update
CPI officially broke through the upper limit of the Reserve Bank’s target range, which may lead the central bank to hike rates more aggressively going forward.
- June proved to be another devastating month for stock markets around the globe as sharp interest rate hikes by central banks raised the odds of a global economic recession. The problem is only being exacerbated by lockdowns in China and the ongoing war in Ukraine. Consequently, the MSCI All Country World Index lost 8.6% in June. Both emerging and developed markets have lost ground, with the MSCI Emerging Markets Index and MSCI World Index losing 7.2% and 8.8% respectively.
- Despite theUS showing signs of a slight slowdown, the Institute of Supply Management’s Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) surprised to the upside after rising to 56.1 in May from 55.4 in April and beating expectations for a drop to 54.5.
- The ISM Services PMI, on the other hand, fell to 55.9 in May from 57.1 in April, and below expectations of 56.4. This marks the weakest growth in the services sector since February 2021 as businesses struggle to maintain inventory levels given the shortage in labour.
- Adding to the economic woes was the unexpected jump in US annual inflation to 8.6% in May. Many were hoping that the 8.3% reading for April was a sign that we had seen the top of inflation, however, energy (34.6%) and food (10.1%) prices continue to rise.
- The jump in inflation pushed the US Federal Reserve to raise rates by 75 basis points at their June meeting, marking the largest rate hike since 1994. Officials also stated that they see more steady rises to come and are targeting a rate of 3.4% by year-end.
- China’s economy continues to slug as its zero-Covid policy rattles supply chains across the nation and globe. While the Caixin Manufacturing PMI increased to 49.1 in May it still marks the third consecutive month of a fall in factory activity.
- Some positives can be taken by the fact that China recently announced that quarantine times for incoming travellers will be halved which is seen as a sign that they may begin easing up on its zero-Covid policy. Investors should, however, remain cautious as strict policy still runs deep within the nation and will still likely cause further disruptions to its opening up.
- In the UK, the Bank of England raised rates by 25 basis points at its meeting in June after inflation data showed a sharp jump to 9% year-on-year (y/y) in April. Shortly after, the May inflation figure showed a further increase to 9.1% which likely opens the door for further rate hikes. Continuously rising prices and interest rates continue to squeeze the pockets of UK consumers and have raised the likelihood of a recession to come.
- On the local front, the South African economy managed to expand 1.9% (quarter-on-quarter) in the first quarter of 2022 due to the removal of lockdown restrictions. However, South Africans are now dealing with rolling blackouts as Eskom struggles to maintain generation capacity. Small business owners have openly expressed fear that they may have to close shop as they continue to lose revenue. This coupled with severe flooding in parts of the country, caused manufacturing production to fall by 7.8% y/y in April.
- Local inflation data showed a jump to 6.5% y/y in May, up from 5.9% the month before and marking the highest reading in over five years. The jump is predominantly due to rising prices for transport and food and non-alcoholic beverages. With CPI officially breaking through the upper limit of the South African Reserve Bank’s 3%-6% target range, it is likely that the Reserve Bank will need to hike rates more aggressively going forward.
- The 75-basis-point hike by the US Federal Reserve and the safe-haven status of the US dollar has lifted demand for the greenback. This coupled with the ongoing load shedding, caused the rand to lose 4.1% against the dollar in June. The rand also lost 1.7% against the euro and 0.6% against the pound.
- South African equities followed global peers lower with the JSE All Share Index losing 8.1% in June. The only sector to end in the green was industrials with 1.4%, whereas the resource and financial sectors both lost 17.2% and 13.6% respectively. South African listed property fell for the third month after losing 9.1%.
- One-month index movements:
- JSE All Share Index: -8.14%
- S&P 500 Index (US): -8.39%
- FTSE 100 Index (UK): -5.76%
Source: Investing.com and Trading Economics