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Mid-September economic report

Policy is expected to remain accommodative at the next Monetary Policy Committee meeting on September 23.

The spread of the delta variant has been overshadowed by impressive company earnings, a pickup in the vaccination drive and continued stimulus. As such, global equities continued their advance with the MSCI All Country World Index printing 2.5% (in USD) for the month of August – this makes it the seventh consecutive month of gains. Emerging markets slightly outperformed developed with the MSCI Emerging Markets Index printing 2.6% against 2.5% from the MSCI World Index.

Data coming from the US showed signs of slowing growth with the Manufacturing PMI coming in at 61.2 for August, down from 63.4 the previous month. The services PMI printed 55.2, well below consensus forecasts of 59.5 and marking the third consecutive fall in a row. Although these readings are above the expansionary 50 mark, they are signalling that the economy has reached its peak growth due to the spread of the Delta variant.

The labour market also seemed to take a hit with non-farm payrolls coming in at 235 000 missing forecasts of 750 000 and well below the million jobs created in the previous month. The August Fed meeting showed that they are still predominantly split with regards to when to start tapering asset purchases. Fed Chair Jerome Powell had a more dovish tone at the annual Jackson Hole symposium where he pointed out that tapering could start as early as later this year. He did, however, reiterate that withdrawing support too early could be harmful to the economy and that the tapering of bond purchases should not be seen as a prelude to raising rates.

China’s economic recovery continues to slow due to the spread of the Delta variant, sending the Manufacturing PMI below the expansionary 50 mark for the first time since March 2020. The services PMI also printed in contractionary territory for the first time since April 2020. Chinese policymakers have reacted by easing up on macro-policy measures and have cut banks’ reserve requirement ratio in an attempt to spur lending.

The UK economy remains robust with the lifting of Covid-19 restrictions in August. Manufacturing PMI slowed slightly to 60.3 down from 60.4 in July but can still be seen as a strong reading. The labour market showed signs of continued improvement as 95 000 jobs were added in June and the unemployment rate fell to 4.7%. CPI inflation came in slightly lower for July at 2% as compared to 2.5% in the previous month, however, the Bank of England has still stated plans to pull back stimulus in response.

The SA economy “grew” by 11% after Stats SA revised the GDP data it has on record. This new GDP figure lowers the debt to GDP ratio from 80.3% to 71.1%. Whilst the growth profile remains unchanged this will undoubtedly improve SA’s creditworthiness with the rating agencies. There was more good news with our manufacturing PMI printing 57.9 in August compared to 43.5 the previous month. The labour market is still under strain with the unemployment rate increasing to 34.4% in Q2, this is the highest reading ever recorded since the survey’s introduction in 2008. CPI inflation eased for the second month in a row coming in at 4.6%, in line with market expectations. With inflation near the midpoint of the Reserve Banks’ target range, policy is expected to remain accommodative at the next Monetary Policy Committee meeting on September 23.

In other news, Discovery stock slid following an announcement that they will be scrapping their dividend yet again. The South African insurer has not paid a dividend since the beginning of the Covid-19 pandemic and stated ongoing uncertainty as a reason for withholding dividends. The selloff was further exacerbated when they stated the possibility of raising further equity capital to finance its investment in China’s Ping An. Such a move is taken negatively as it dilutes the current shareholder’s stake.

A dovish tone from the US Federal Reserve lifted the rand off lows following weakness amid the social unrest in July. It appreciated 1% against the greenback, 2.1% against the pound and 1.5% against the euro.

The FTSE/JSE All Share Index turned negative in August printing -1.7% as e-commerce giant Naspers and subsidiary Prosus dragged down performance following fresh rounds of regulations from the Chinese government, as a result, the Industrial sector lost 4.5%. Resources printed -4.8% for the month following weakness in commodity prices dragging down the shares of miners. Financials had a strong month in August advancing 12.3% as well as Listed Property gaining 7.1%. SA Bonds tracked the stronger rand returning 1.7% in August.

Source: Investing.com

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Mauro Forlin

Global & Local Asset Management

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