Anchor’s coffee table economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s thoughts and opinions on various ad-hoc economic data and related events globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.
GLOBAL
Dovish central bank guidance and a robust US economy
The three major central banks (US Federal Reserve [Fed], Bank of England [BoE], and the European Central Bank [ECB]) recently raised their policy interest rates to the highest levels since before the 2008/2009 global financial crisis (GFC). Despite further tightening, global stock markets rose through most of the past week as traders/investors had a dovish interpretation of the guidance on the interest rate trajectory. The ECB all but promised to deliver another 50 bps hike in March, but the BoE and the US Fed were more hesitant to commit and signalled that their tightening cycles were close to peaking. If we consider the ECB specifically, our sense, after working through the statement, is that the Governing Council will deliver a 50-bp rate rise in March, followed by one (probably final) 25-bp increase in May. However, for this to materialise, we will need to see clear evidence of inflation falling away more quickly than the ECB staff had predicted in December 2022 and some signs that the tightening in monetary policy starts to bite in the labour market, not just in bank lending. By the European summer, the arguments for a policy pause may start to stack up, but a less restrictive policy stance might need to wait until early 2024.
With regards to the BoE, although the latest forecasts present a lacklustre economic outlook, with inflation below target by the middle of the forecast horizon, this has to be balanced against the clear concern on the part of the committee that inflation could prove to be more persistent than its forecasts would suggest. Moreover, the minutes themselves say that a more significant weight has been put on the recent strength in the labour market and inflation data and “relatively less on the medium-term projections”. As such, assuming this approach applies moving forward, we would be of the view that this is not the end just yet, and collectively the BoE’s Monetary Policy Committee (MPC) has one more 25-bp hike left in March, taking the terminal bank rate to 4.25%.
The dovish slant from the Fed, with Fed Chair Jerome Powell pointing to a “disinflationary process” underway in the US, boosted stocks as traders increased bets about the possibility of rate cuts later this year. However, blockbuster US jobs data on 3 February threw a spanner in the works – the consensus-beating print led to a sell-off in US bonds and caused equity markets to move lower as a robust labour market could mean high(er) interest rates for longer. A far more realistic consideration.
The US job market … not only about tech …
Despite the seemingly endless announcements of mass layoffs (particularly with regard to the tech sector,) Americans have not been this employed in more than fifty years. The Bureau of Labor Statistics stated on 3 February that the US added a whopping 517,000 jobs in January, and the unemployment rate dropped slightly to 3.4% — its lowest level since 1969. There are currently 11mn job openings across the US, an increase of c. 7% MoM. This means that for every unemployed worker in the US, there are 1.9 job openings available. The jump in new hires was almost triple what experts predicted and amounts to the biggest monthly gain since July 2022.
The sectors with the most job creation were leisure and hospitality (128,000), professional and business services (82,000), and government (74,000), with the last figure partially due to formerly striking state university employees returning to work. The news of the January jobs bonanza comes on the heels of a Department of Labor report that said over 11mn jobs were open at the end of 2022.
Hence, while tech giants like Alphabet (Google), Meta (previously Facebook), and Amazon have laid people off, many workers may be getting severance packages AND job offers. The IT sector was still looking to fill 109,000 job openings as of December 2022, and tech workers were wanted at companies like PwC and Northrop Grumman.
The bottom line
So, why is this latest round of data so surprising? Well, as we know, the US Fed raised interest rates for the eighth time since March 2022 in February. As any first-year economics textbook will tell you, the Fed’s moves are likely to drive up unemployment and threaten to tip the economy into a recession (which economists, myself included, have been warning for the last few months). However, this round of job data suggests that we must live in an alternate universe where the fundamental laws of economics do not apply – job growth keeps on trucking while inflation has been slowing (thus far, at least).
The robust employment data have dampened hopes that the Fed will stop raising interest rates over the next few months. Still, on the positive side, such a strong US labour market will help ease fears around an impending deep recession. With numbers like these, the US may yet still skirt one altogether – thus, we find it difficult to see any US rate cuts happening this year.
Is 2023 the year that gold makes a comeback?
For the longest time, gold has been regarded as the standard safe-haven commodity that investors and governments use to safeguard their wealth. Typically, there is a direct correlation between the price of gold and the US dollar since gold is mostly traded globally in US dollars. In 2022, record-high inflation and slow global economic growth were expected to send gold to new record highs. However, gold’s performance against the greenback was impacted by rising US interest rates, which pushed the US Dollar Index to a 20-year high. As a result, while the metal posted a small gain in 2022 for investors in the US, it notably recorded significant gains against other currencies. Almost every other currency worldwide declined against the dollar in 2022, and investors outside the US looked towards gold as a hedge against inflation. While US investors saw a 0.4% gain from gold in 2022, the metal posted over a 10% return against the Indian rupee, pound sterling, Japanese yen, and the Turkish lira.
Looking ahead
Several analysts are projecting record highs for gold in 2023 as the US Fed is forecast to slow the pace of rate hikes. Given that gold is a non-yielding asset, it tends to benefit amid lower rates as it reduces returns on other assets, such as government bonds and the dollar. In addition, gold’s price is also expected to be supported by increasing demand from central banks looking to diversify foreign exchange holdings and reduce their exposure to the dollar. Furthermore, gold bullion (physical gold of high purity often kept in the form of bars, ingots, or coins as tradeable tender) should remain in high demand thanks to an economic rebound in China, the biggest gold-consuming market in the world. According to Goldman Sachs, the gold price is expected to hover around US$1,860/oz towards the end of 2023.
Türkiye’s troubles continue
Türkiye’s stock exchange suspended trading for the first time in 24 years on 8 February, following a selloff that erased US$35bn from the value of its main equities gauge in the wake of the recent devastating earthquakes in that country. The benchmark Borsa Istanbul 100 Index has lost 16% from 6 February to 8 February, erasing almost US$35bn from the value of its member stocks, in the aftermath of two deadly earthquakes that struck Türkiye’s southern region. Consequently, Turkish equities, which are this year’s worst performers globally, entered a technical bear market on 7 February after falling more than 20% from their January high.
The bottom line
We do not believe this will have much contagion effect on the broader EM complex, given how isolated Türkiye’s financial market has been from the rest of the world in recent times.
SOUTH AFRICA
The money market partly discounts another short-lived rate hike
The local money market is now attaching a high probability of another 25-bp rate hike at the next SA Reserve Bank (SARB) MPC meeting in March, with a ‘pause-and-hold’ scenario from thereon out and rate cuts within a year from now. As per our previous note entitled Rate-hiking cycle starts to slow amid the SARB’s uncertainty around economic prospects, dated 26 January 2023, this remains our base case for now as well. At this point (ceteris paribus), we only foresee modest easing from early-2024 onwards. Still, we maintain our view that it is doubtful that the SARB will cut rates below its estimate of neutral in the foreseeable future (premised on the prevailing general expectations for growth and inflation).
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