China’s Economic Recovery on Track

China’s first quarter 2023 GDP growth beat estimates, rising 4.5% q/q vs 4% q/q est. Although retail sales outperformed expectations, surging by 10.6% y/y - the fastest pace in two years, industrial production fell short of consensus, recording a gain of 3.9% y/y in March. While the positive Q1 GDP print provided some relief, industrial output, fixed asset investment, and property data were below estimates. However, the overall surge in GDP growth is a sign that activity is returning to normal and puts the country on track to achieve its growth target of 5% or greater for the year. In related news, The People’s Bank of China kept its benchmark one-year lending rate on hold at 3.65% during its April meeting, as expected.

The relationship between China and the United States is deteriorating even further as recent reports suggest that U.S. President Joe Biden is preparing to sign an executive order aimed at limiting American businesses' investment in China. This order is expected to be signed during the upcoming Group-of-Seven summit on May 19 in Japan, which will increase pressure on other members to support the action.

In the U.S., first-quarter earnings reporting is underway with about 17.5% of the constituents of the S&P 500 Index having reported for Q1 2023. FactSet Research data indicates that blended earnings per share (which combines reported data with estimates for companies that have not yet reported) decreased by 6.3% compared to the corresponding quarter a year ago. In contrast, sales saw an increase of approximately 2.3%.

The latest U.S. weekly jobless claims report, released on Thursday, revealed signs of increasing weakness in the labour market. However, investors seem to be divided on how to interpret this development. While some viewed it as good news, as it may prompt the Federal Reserve to reduce rate hikes, others considered it to be concerning evidence of an impending recession. In housing news, existing homes sales fell, and year-over-year home prices dropped -0.9%, the largest decrease in 11 years.

S&P Global’s gauges of current economic activity, released Friday, surprisingly suggested that multiple regions’ activity is recovering. According to S&P Global analysts, the S&P Global U.S. Composite Purchasing Managers' Index (PMI), which measures both services and manufacturing activity, increased to its highest level in almost a year, reaching 53.5. The eurozone, UK, and Japan posted composite PMIs of 54.4, 53.9 and 52.5 respectively, topping estimates. The data indicates that developed economies are on track for robust growth in the second quarter. As a result, several central banks may decide to proceed with rate hikes next month, despite the recent turmoil in the banking sector.

In the UK, March’s headline inflation came in under estimates, rising 10.1% y/y from 10.4% in February. Energy, food and other goods and services were the primary drivers. The UK remains having the highest inflation rate among G7 countries, which creates doubt over whether the Bank of England (BOE) will pause rate hikes soon, as they have been suggesting. The probability of a 25-basis point hike at the BOE’s May meeting rose following the inflation print.

Eurozone inflation eased to 6.9% y/y in March from 8.5% y/y in February. The sizable drop can be attributed to declining energy costs, as natural gas prices continue their decline from their surge a year ago on Russia’s invasion of Ukraine. Core inflation, however, increased slightly from 7.4% y/y to 7.5% y/y, which has kept European Central Bank policymakers hawkish, with the group stating that interest rates will still need to keep rising.

On the market front, global indices ended the week mixed. The S&P 500 Index (-0.10%) was flat on the week, while the Dow Jones (-0.23%) and the Nasdaq index (-0.42%) also remained near last week’s close. Shares in Europe gained +0.41% (Euro Stoxx 50) over the week as positive inflation data and an improved economic outlook boosted investor sentiment. The FTSE 100 managed a +0.54% rise, despite stubbornly high inflation.

As a result of Biden’s planned executive order, Chinese equities fell on Friday, as investors assessed the impact of escalating geopolitical tensions with the U.S. and took profit accordingly. The Shanghai index ended the week down -1.11% as a result. In Japan, the Nikkei 225 gained +0.25%. Gold dipped -1.07% while Brent Oil tumbled -5.83% over the week.

MARKET MOVES OF THE WEEK

Inflation in South Africa quickened faster than expected in March, with headline inflation rising 7.1% y/y (expectations: 6.9% y/y) from 7% y/y in February. Core inflation, however, remained unchanged at 5.2% y/y. Higher than expected food prices pushed the index higher, with food and non-alcoholic beverages rising by 14% y/y, contributing 2.4% to the total. This represents the largest annual increase since the 14.7% rise in March 2009. Outside of food, other supply-related categories within core inflation were more adverse than the market had expected (including regulated education, alcohol/tobacco and imported durable goods prices).

After inflation rose unexpectedly in March, traders increased their bets that South Africa’s Reserve Bank will continue its interest-rate hiking trend next month. By using forward-rate agreements to speculate on borrowing costs, traders are now fully pricing in a quarter-point increase in the repo rate. There is also a possibility of a larger 50-basis point move on May 25 when the monetary policy committee announces its next decision.

President Cyril Ramaphosa is under mounting pressure to delegate authority to his new electricity minister, who can take necessary measures to prevent more severe blackouts during the upcoming peak winter demand. Kgosientsho Ramokgopa was appointed to the position two months ago, but Ramaphosa has not yet specified which responsibilities he will transfer from the energy and public enterprises ministries to the new office. In other Eskom news, the state power utility has proposed a 3.75% raise to its employees, yet the National Union of Mineworkers is advocating for a 15% salary hike along with other incentives.

In political news, President Ramaphosa signed the Electoral Amendment Bill into law on Monday which will pave the way for independent candidates to contest national and provincial elections.

The JSE (-1.22%) fell over the week, as investors searched for conviction. Positive Chinese data sent Platinum Group Metals shares higher, however, a lower gold price sent heavy-weight gold mining stocks lower, forcing the Resources (-1.21%) sector into the red. The rand held up against the U.S. dollar over the week to end at R18.07/$. 

CHART OF THE WEEK

In the last few days, crude has wiped out all its gains after the surprise OPEC+ oil cut at the beginning of April. The cut led to concerns of a widening deficit in global markets as the year goes on and raised fears of the benchmark price surpassing $100 once again. However, increasing perceived risks of a U.S. recession have recently overshadowed the move, sending oil lower. Source: Bloomberg

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

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