The Week That Was
In a tumultuous trading session on Friday, US equities closed nearly unchanged, marking an end to a significant period of gains. This pause in momentum came as traders and investors processed the latest economic indicators and speculated on the direction of US monetary policy in the future. All major indices concluded the session close to the break-even point, interrupting a remarkable nine-week rally. Notably, the Nasdaq 100 experienced its sixth consecutive day of losses.
December's employment data revealed a robust addition of 216 000 jobs to the US economy, substantially exceeding the forecasted 170 000. This uptick in job growth, coupled with an increase in wages, influenced Treasury yields and moderated the US Federal Reserve's (US Fed) anticipated rate cut trajectory for the year.
In the equity market, technology leaders Nvidia and AMD demonstrated resilience amid the market's fluctuations, each gaining over 1.8%. The airline sector also saw a notable recovery, reversing a seven-day downturn following the Japan Airlines incident in Tokyo. American Airlines, Delta, and United Airlines all enjoyed gains exceeding 3.1%.
However, the healthcare sector lagged, with United Health Group witnessing a 1.5% decline in its shares. Wrapping up the week, the S&P 500 and the Nasdaq registered declines of 1.8% and 3.8%, respectively, while the Dow Jones Industrial Average dipped by 0.7%.
On Friday, the JSE All Share index experienced a slight dip, hovering below the 74 100 mark. Market participants adopted a cautious stance as they awaited the release of the much-anticipated US payroll data, which has the potential to significantly influence the US Fed's monetary policy decisions. Since the beginning of the year, the shifting economic landscape and insights from the Federal Open Market Committee (FOMC) minutes have led traders and investors to temper their expectations for an early rate cut in the US.
Domestically, South Africa’s focus was on the energy sector, with the Department of Mineral Resources and Energy unveiling the draft Integrated Resource Plan (IRP) 2023. This strategic document lays out a comprehensive roadmap to tackle the country’s ongoing energy crisis and aims to put an end to load-shedding challenges.
In the realm of individual shares, notable movements were observed. Gold Fields, Advtech, and Lighthouse Properties were among the top decliners, dropping by 2.9%, 2.2%, and 2.1% respectively. On the flip side, Thungela Resources, Impala Platinum, and Bytes led the gainers, advancing by 2.4%, 2.3%, and 1.9% respectively. For the week, the JSE was poised for an approximate 3.7% decline.
The Week Ahead
In the US, market attention is firmly fixed on the upcoming inflation data, which is crucial for shaping expectations about the US Fed's future monetary policy.
Predictions indicate a modest increase in consumer prices for December, by about 0.2%, a slight uptick from November's 0.1% rise. The core inflation rate, which excludes volatile items like food and energy, is also expected to show a moderate increase of 0.2%, a deceleration from the previous month's 0.3% growth. On an annual basis, headline inflation is projected to climb to 3.2%, up from November's five-month low of 3.1%, while the core rate might soften to 3.9%, the lowest since May 2021.
Other critical US economic data to be released includes producer prices, foreign trade figures, the RCM/TIPP Economic Optimism Index, and the monthly budget statement.
Turning to Europe, retail sales are expected to stagnate in November, consistent with the modest growth seen in the previous month. Additionally, the Eurozone's business survey will provide insights into the economic sentiment in the region.
In the UK, the Office for National Statistics (ONS) is set to update various key metrics including monthly GDP figures, manufacturing production, construction output, and foreign trade data. Following a contraction of 0.3% in October, the UK economy is forecasted to experience a rebound in November.
In Asia, the focus is on China, the world's second-largest economy. The upcoming release of trade figures, price data, and new loan counts for December will offer valuable insights into the economic conditions and trends in China. Key Themes for the Week Ahead
US inflation data
The US is set to release crucial consumer price index data on Thursday, with the producer price index report following on Friday. These releases are highly anticipated by traders and investors, who are keen to gauge the potential direction of interest rate movements.
Recent signs of a gradual easing in inflation have sparked speculation that the US Fed might start reducing interest rates as early as March. This expectation fuelled a vigorous rally in late 2023, propelling the S&P 500 to nearly reach its all-time peak. However, since the onset of 2024, market participants' sentiment has shifted to a more cautious stance as they seek more concrete information on the timing and pace of the anticipated rate cuts.
The employment report for December, released on Friday, tempered expectations for rapid rate reductions. The US economy outperformed predictions in job creation, yet a concurrent report indicating a slowdown in service sector activity in the same month bolstered prospects for prompt monetary easing.
Additionally, the upcoming week offers several opportunities for insights from US Federal Reserve officials. Key speeches are expected from John Williams, President of the New York Fed, and Raphael Bostic, head of the Atlanta Fed, potentially providing further clarity on the central bank's outlook.
US bank earnings
The earnings season in the US is set to commence with major banks including JPMorgan Chase, Bank of America, and Citigroup scheduled to announce their fourth quarter and full-year results this Friday.
In 2023, these top financial institutions experienced an upswing in interest income, thanks to the US Fed's rate hikes. This increase in revenue has been instrumental in compensating for a noticeable downturn in the earnings from their Wall Street dealmaking operations.
The spotlight is also on consumer finances, which have remained relatively robust post-pandemic. However, there is a growing trend of financial strain among lower-income consumers, with an increasing number starting to miss payments.
This earnings season is poised to be a crucial gauge for the heightened expectations surrounding corporate profits. Analysts are forecasting an 11% increase in S&P 500 earnings for 2024, a significant jump from the modest 3% growth observed in 2023, as per data from LSEG reported by Reuters. This period will be pivotal in assessing whether these optimistic projections hold true.
Turbulent waters Market analysts are closely scrutinizing oil prices as a potential indicator of escalating global inflation in the wake of the Israel-Hamas conflict. However, the expectation of abundant supply suggests that oil prices alone may not fully encapsulate the economic impact of the situation.
A significant development is the diversion of shipping routes away from the Red Sea by transport companies, a move reminiscent of the major disruptions faced during the COVID-19 pandemic in 2020. This shift in maritime logistics is poised to affect retailers significantly, potentially leading to the most substantial shipping turmoil since the freight industry was hampered by the pandemic.
As a consequence, Western retailers might experience delays in receiving goods from China, with potential shortages likely to drive up prices, according to trade analysts. The British Retail Consortium has expressed concerns that this could lead to an end of the recent trend in moderating grocery price inflation.
While the market's attention has been primarily on the relatively stable oil prices, the impact on Red Sea shipping has yet to trigger substantial concern among investors. However, it is advisable for traders and investors to keep a close watch on freight costs, as they could be a critical indicator that the fight against inflation is far from over.
Bitcoin ETF optimism
Bitcoin has kicked off the new year on a high note, showcasing significant gains fuelled by optimistic expectations for the potential approval of exchange-traded spot bitcoin funds by US regulators.
The leading cryptocurrency by market capitalization surpassed the $45 000 mark for the first time since April 2022, driven by traders and investor bets on the Securities and Exchange Commission (SEC) possibly greenlighting applications for bitcoin ETFs soon.
Market insiders suggest that the SEC's decision could be on the horizon, potentially opening the doors for a surge of new capital into the cryptocurrency sector. This anticipation contributed to Bitcoin's impressive performance in 2023, where it saw annual gains exceeding 155%.
However, Bitcoin has seen some reduction in its recent gains, amid uncertainties regarding the actual demand for a potential bitcoin ETF and questions about whether its approval has already been factored into its current price.
On Friday, the UK is set to release its GDP data for November, with analysts anticipating a slight recovery following the decline in October, largely attributed to a significant drop in manufacturing activity.
Recent data, pointing to a resurgence in Britain’s service sector in December, suggests that the economy might just steer clear of a recession. This resilience is being observed despite the challenges posed by high inflation and borrowing costs, which are at their highest in 15 years.
Amid these economic conditions, the Bank of England has been facing pressure from business leaders to reduce interest rates, in a bid to bolster the economy. The investment community is beginning to anticipate a potential cut in interest rates as soon as May.
Additionally, Bank of England Governor Andrew Bailey, along with other key policymakers, is scheduled to address Parliament regarding financial stability on Wednesday. Their testimonies are eagerly awaited for further insights into the central bank's strategies in navigating the current economic landscape.
South Africa News
South Africa is bracing for potential diplomatic repercussions from the US and European nations as it confronts Israel at the International Court of Justice (ICJ) this week. The proceedings revolve around allegations of genocide by Israel during its conflict in Gaza. This move by the South African government could lead to strained relations with some of its key international partners.
Law enforcement officials in Gauteng are expressing alarm over a recent surge in criminal activities, including robberies, aggravated assaults, fraud, and theft, particularly during the festive season.
The recent draft of the government's energy strategy indicates that power outages are likely to persist for at least another decade, despite previous assurances from the ANC to put an end to the rolling blackouts.
In the upcoming economic calendar for this week, several significant events are scheduled to take place.