Thoughts For the Week Ahead
The Week That Was
Equities in the US closed with a mixed performance on the final trading day of the September quarter. Investor sentiment was impacted by concerns about a possible US government shutdown and persistently high-interest rates at levels not seen in decades.
The Dow Jones Industrial Average concluded the day with a decline of 157 points, with notable underperformers including Walmart, down 1.6%, and Chevron, down 1.1%. The S&P 500 experienced a modest 0.3% drop, while the Nasdaq managed a slight gain of 0.1%. This marked the worst month of the year for both the S&P 500 and the Nasdaq.
In corporate news, Carnival's stock took a significant hit, plummeting by 4.9% due to disappointing earnings projections. Conversely, Nvidia and Tesla saw their stock prices rise by 0.9% and 1.6%, respectively, following favourable buy ratings. Meanwhile, Nike experienced a notable surge of 6.7% following an encouraging earnings report.
For the month of September, the Dow recorded a 3.2% decline, while it posted a 2.4% decrease for the entire quarter. The S&P 500 finished the month down by 4.8%, and the quarter ended with a 3.5% dip. The Nasdaq also faced a challenging month, losing 4.9%, and closing the quarter with a 2.9% decline.
The JSE All Share Index concluded the final trading day of September at 72 383, closing slightly lower after a turbulent session. This decline was primarily driven by losses in the financial sector, down 0.7%, and resource-linked sectors, which dipped 0.3%. However, investors found some relief in indications of easing inflationary pressures both in the US and the Eurozone.
Notably, the US Fed's preferred inflation measure reached its lowest level since September 2021, reinforcing the belief that the current monetary policy stance remains appropriate. Turning to domestic economic data, South Africa reported a budget deficit of ZAR 47.33 billion in August 2023, surpassing the ZAR 42.67 billion deficit from the same month the previous year. Meanwhile, the trade surplus narrowed to ZAR 13.3 billion, down from ZAR 15.4 billion in July.
For the week, the JSE recorded a loss of 1.4%, and over the course of the month, it endured a 3.4% decline.
The Week Ahead
The upcoming first week of October holds several key events and data releases that will be closely monitored by investors and analysts across the globe.
In the US, all eyes are on the highly anticipated US jobs report for September. It is expected that nonfarm payrolls increased by a modest 150 thousand, marking the slowest growth in three months. This reinforces the signs of a labour market that is gradually losing momentum. Additionally, the unemployment rate is anticipated to have improved slightly to 3.7%, while wage growth is projected to remain steady at 4.1%. Alongside this, speeches by several Fed officials, JOLTs job openings data, factory orders, foreign trade figures, and PMI surveys from both the ISM and S&P Global will be under scrutiny. The ISM PMIs are likely to indicate continued contraction in the US manufacturing sector and a softer increase in service sector activity.
Turning to Europe, data is expected to reveal a decline in retail sales in the Euro Area for the second consecutive month in August.
In the UK, housing prices reported by Nationwide and Halifax will be on investors' radar.
In Asia, China's PMIs will provide insights into the impact of Beijing's support measures and the potential risks posed by property developers as the third quarter draws to a close.
Japan awaits the release of the 3rd quarter Tankan Large Manufacturers Index and the Summary of Opinions document from the Bank of Japan.
These events and data releases collectively shape the economic landscape for the first week of October, providing valuable insights for global markets and investors.
Key Themes for the Week Ahead
In the US, the critical data can be categorised into two primary groups: employment and business surveys.
S&P Global has recently issued their final revisions of the Purchasing Managers' Index (PMIs), and all indications point towards a downward trajectory, signalling a softer economy. Notably, both the Composite PMI and the Services PMI are on the verge of dipping below the pivotal 50-point mark, which signifies a potential contraction. This trend stands in contrast to the findings from the ISM (Institute for Supply Management) surveys.
While the ISM Services survey reflects an expansion at its swiftest pace in six months, suggesting a robust services sector, the ISM Manufacturing survey reveals a slower pace of contraction and even hints at improvement in the manufacturing sector. This disparity between the two surveys prompts the question: which one provides the most accurate depiction of the current economic situation?
In addition to the business surveys, the employment landscape in the US is also sending slightly mixed signals. Non-Farm Payrolls (NFP) job growth is on a downward trajectory but still remains at a healthy, "expansive" level. Furthermore, although unemployment has edged higher, it is important to note that it remains historically low at 3.8%. Job openings, while experiencing a decline to a 48-month low, are significantly elevated compared to their long-term average. Additionally, while layoffs have increased by over 50 000 in the past month, this figure still pales in comparison to the peak of the Covid-19 pandemic.
In summary, the employment situation in the US remains tight but exhibits a slightly softer trend. To challenge the prevailing "higher for longer" narrative, we would need to witness surprisingly weak figures. Furthermore, if employment remains robust while business surveys show signs of improvement, it could potentially amplify the ongoing bond market turbulence, leading to higher yields and a stronger US dollar.
On Monday, Jay Powell and Philadelphia Fed President Patrick Harker are slated to engage in a roundtable discussion alongside workers, small business owners, and community leaders.
Recent data released on Friday showed signs of progress in controlling inflation, with annual underlying inflation dropping below the 4% mark for the first time in over two years. However, the surge in oil prices, which is pushing up gasoline prices at the pump, suggests that achieving the Fed's 2% inflation target could be a protracted journey.
In their September meeting, the Fed opted to keep interest rates unchanged, but they conveyed their anticipation of one more rate hike before the year concludes, and a reduced number of cuts in the following year, compared to their earlier projections.
Throughout this week, expect to see appearances from other prominent figures within the Fed, including Cleveland Fed President Loretta Mester, Atlanta Fed President Raphael Bostic, and San Francisco Fed President Mary Daly.
Equity markets kick off Q4
The pivotal final quarter of the year has begun following a lacklustre third-quarter performance in the stock market.
During the third quarter, the S&P 500 experienced a decline of approximately 3.6%, the Dow saw a loss of 2.6%, and the Nasdaq recorded a drop of 4.1%. September painted a similar picture with the S&P 500 falling by 4.9%, the Dow declining by 3.5%, and the Nasdaq decreasing by 5.8%.
The surge in bond yields has sent tremors through the equity markets, leading some market participants to express concerns about the soaring valuations of major companies such as Apple, Microsoft, Alphabet, and Amazon, which could potentially be a vulnerability.
Technology and growth-oriented companies, known for their projected substantial profit growth in the coming years, tend to suffer more significantly when yields rise due to the more rigorous discounting of their anticipated future earnings.
As the fourth quarter commenced, another US earnings season looms on the horizon. While the AI sector continues to be of importance, lingering questions persist regarding the ultimate impact on profits.
On Wednesday, Europen Central Bank (ECB) President Christine Lagarde is scheduled to deliver a speech that has investors eagerly awaiting hints about the future trajectory of interest rates. This anticipation stems from the data released last Friday, which revealed that Eurozone inflation had dropped to its lowest point in the past two years.
The data has heightened expectations that the ECB may have already raised interest rates sufficiently to steer inflation back towards its targeted 2%.
Notably, inflation in the Eurozone briefly reached double digits last autumn, driven by a confluence of factors including surging energy costs, post-pandemic disruptions in supply chains, and substantial government spending.
In response to these inflationary pressures, the ECB took the unprecedented step of raising interest rates from a record low of minus 0.5% to 4.0% in just over a year. This marked a significant shift after a decade of pursuing an ultra-loose monetary policy in an attempt to stimulate inflation.
The release of China's PMIs over the weekend takes on added significance as China will be on a public holiday for the entire next week. This data holds particular relevance for market sentiment beyond the region. As has been the pattern with most data coming out of China this year, any noteworthy impact is likely to necessitate an unexpectedly positive outcome for it to truly register as a surprise.
South Africa News
Rand Water has announced its intention to utilize water shifting as a strategic management tool to alleviate the strain on its systems in Gauteng. This decision comes in response to a directive from Minister of Water and Sanitation, Senzo Mchunu, who urged the utility to adopt this approach. Rand Water has provided assurances to the minister that it will engage in load-shifting from less congested water lines.
Minister of Electricity, Kgosientsho Ramokgopa, has expressed optimism that the reactivation of Kusile's unit 3 marks the initial step toward alleviating the burden of load-shedding. During a media briefing on Sunday, the minister provided an update on the progress of the energy action plan.
eMedia, the proprietor of Openview, has publicly disclosed its pursuit of legal recourse in a series of full-page advertisements published in prominent newspapers such as the Sunday Times, Rapport, and City Press. This action is in response to the ongoing dispute with MultiChoice concerning broadcasting rights for the Rugby World Cup.
In the upcoming economic calendar for this week, several significant events are scheduled to take place.