Thoughts For the Week Ahead
The Week That Was
Major US equity indexes finished in positive territory on Friday, influenced by US Federal Reserve Chair Jerome Powell's comments at the Jackson Hole Summit.
The Dow Jones Industrial Average climbed by 247 points, and the S&P 500 along with the Nasdaq Composite saw gains of 0.7% and 0.9%, respectively.
In his remarks, Powell acknowledged the robust economic data received over the summer, indicating that the Fed is ready to implement further rate hikes to achieve its 2% inflation target. However, he also signalled that interest rates are expected to remain stable in September to assess incoming economic data, as well as to evaluate the continually changing outlook and associated risks.
In individual stock movements, Affirm skyrocketed by 28.8%, and Workday leapt by 5.4%, both bolstered by strong earnings and revenue reports. Gap shares ascended by 7.1% following mixed quarterly results, while Nordstrom shares dipped 7.7%, despite reporting favourable outcomes. Marvell Technology's stock took a 6.6% hit after issuing a cautious future outlook.
On a weekly basis, the Dow Jones concluded with a 0.45% loss, while the S&P 500 and the Nasdaq Composite recorded gains of 0.8% and 1.7%, respectively.
On Friday, the JSE All Share Index surrendered its initial gains, closing down by approximately 0.6% at 73 836 points. This decline was largely driven by losses in major technology companies Naspers, which fell by 1.4%, and Prosus, down 0.8%, along with downturns in resource-linked sectors and industrials, both losing 0.8%.
On the domestic front, South African President Cyril Ramaphosa revealed last Thursday, at the end of a three-day BRICS leaders' summit, that the alliance of developing nations will welcome six new members—Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates—starting January 2024.
Additionally, Kgosientsho Ramokgopa, South Africa's Minister of Electricity, announced that the country is in active discussions with fellow BRICS members to address its ongoing power crisis.
Despite Friday's downturn, the JSE All Share Index ended the week with an overall gain of around 1%.
The Week Ahead
As we navigate the final trading week of August, it is clear that the market landscape has been more tumultuous and event-driven than is typically expected for this season.
Looking ahead to September, traders and investors can expect a robust set of economic indicators to be released. In the US, key data such as the Personal Consumption Expenditures (PCE) inflation index, Gross Domestic Product (GDP), and the Institute for Supply Management (ISM) manufacturing survey are on the agenda.
Additionally, the final Purchasing Managers' Indices (PMIs) are slated for release in several major economies including the US, UK, European Union and Japan.
With such a wealth of information on the horizon, market participants should brace themselves for what promises to be an action-packed period ahead.
Key Themes for the Week Ahead
US PCE inflation
Inflation metrics remain pivotal in shaping expectations for monetary policy decisions, thereby influencing global market sentiment. US inflation data commands significant attention, with the Personal Consumption Expenditures (PCE) index standing out as particularly crucial. This is largely because the Fed often relies on PCE as its go-to inflation measure.
The upcoming PCE inflation report's impact could be contingent on the tone Fed Chairman Jerome Powell adopts in his speech at Jackson Hole.
In simple terms, if inflation shows signs of slowing down, the Fed may adopt a less hawkish stance, potentially leading to a weaker US dollar.
In the previous month, we witnessed the annual core PCE rate plunge to a 21-month low, settling at 4.1%—the most precipitous drop since the onset of the pandemic. While it is uncertain whether the data will reflect another substantial decrease in the coming week, the trend deserves scrutiny.
A closer look at the numbers reveals that the services component of the PCE has increased by 0.3% month-over-month in three of the last four months.
Consequently, a figure of 0.2% or lower in the upcoming report would be seen as a favourable development.
US employment data (Nonfarm payroll, ADP payrolls, jobless claims)
Setting aside the Purchasing Managers' Indices (PMIs), the prevailing employment data does not offer compelling evidence to anticipate Fed rate cuts in the near term.
While other employment metrics have fuelled speculation about economic softness, they have not commanded as much influence as one might expect. This is primarily because the Fed tends to base its decisions on lagging indicators, such as the unemployment rate. With an unemployment rate currently at 3.5%, the likelihood of the Fed perceiving this as signalling a recession—and thus cutting rates—is relatively low.
Nonetheless, the upcoming monthly nonfarm payroll report, scheduled for release on Friday, should not be overlooked. There are also other employment indicators on the horizon that could help set market expectations. Should these indicators outperform expectations, traders and investors may attempt to anticipate a stronger nonfarm payroll report, and vice versa. Specifically, job openings data will be released on Tuesday, followed by the ADP payroll report on Wednesday, and weekly jobless claims on Thursday. Each of these metrics can offer valuable insights and potentially sway market sentiment.
ISM manufacturing PMI
According to the Institute for Supply Management (ISM), the U. manufacturing sector reached its peak in early 2021 and has been in a contractionary phase for the past nine months.
While another lacklustre report may not dramatically alter perceptions, a sharp decline could reinforce the subdued data reflected in the S&P Global PMI survey.
On a brighter note, the rate of contraction in new orders has slowed significantly. Therefore, any optimism in the sector would hinge on seeing these new orders approach, or even surpass, the 50-mark, which would indicate potential future expansion
Although flash PMIs typically comprise 80-90% of total survey responses, their final versions are often overlooked, largely because they usually do not deviate significantly from the preliminary figures. However, given the recent trend of declining manufacturing and services PMIs in the UK, Europe, and the US, traders and investors might pay closer attention to the final reports this week.
There is a possibility that the initial estimates were overly pessimistic, opening up the chance for slight upward revisions. On the flip side, the final PMIs could either corroborate the dismal picture painted by the flash reports or, in a more negative scenario, indicate an even faster rate of decline.
While it may not qualify as a headline event, the upcoming GDP data deserves some attention, especially given that the preliminary release notably surpassed market expectations. This dual-edged outcome has implications: it both alleviated concerns about a steep economic downturn and delayed market expectations for Fed rate cuts until deeper into 2024. Thus, the release will clarify whether the US economy genuinely expanded by 2.4% in the second quarter, or if that figure needs a downward revision—potentially heightening concerns of a more severe economic slowdown.
As the second-quarter US earnings season draws to a close, markets still have noteworthy updates to consider.
Forthcoming results from Salesforce, a CRM industry leader, and cybersecurity firm CrowdStrike will be closely watched, alongside earnings reports from computer manufacturers HP and Dell. Significantly, both Broadcom and VMware are slated to report this week, as they advance toward completing their high-profile merger.
Attention will also be directed toward China, with financial updates expected from Ping An Insurance, e-commerce giant Pinduoduo, and electric vehicle manufacturer NIO. Swiss banking titan UBS will similarly be in focus, following its high-profile rescue of Credit Suisse earlier this year.
In the UK, markets will be closed for a bank holiday on Monday. The remainder of the week has a lighter schedule, featuring key updates from distributor Bunzl, insurer Prudential, and oil firm Gulf Keystone Petroleum.
South Africa News
The Western Cape minibus taxi strike in August, called without notice, cost the provincial economy R5 billion and caused reputational damage to the country, Parliament was told on Thursday evening.
The Economic Freedom Fighters (EFF) in Tshwane has threatened to lead a protest in support of the scores of municipal workers who were recently dismissed. More than 100 workers affiliated with the South African Municipal Workers Union (Samwu) lost their jobs for protesting over the city’s refusal to implement a 5.4% salary increase1. The dismissal followed the workers’ continued protest after the city obtained an interim interdict against the strike. While the municipality has a few times said it cannot afford to increase wages, the EFF says the rights of the workers are being infringed upon.
Deputy President Paul Mashatile's spokesperson Vukani Mde has dismissed claims that Indian Prime Minister Narendra Modi was snubbed during his visit to South Africa for the BRICS summit.
In the upcoming economic calendar for this week, several significant events are scheduled to take place.