Markets Daily: Advanced economies central banks problems will soon be in emerging markets

The growth in annual Consumer Price Inflation (CPI) accelerated to 3.2% y/y in July 2020, from 2.2% y/y in June 2020 slightly ahead of market expectations of 3.0%, buoyed by higher fuel prices and the annual electricity tariff hike earlier in the month. On a monthly basis, the CPI increased by 1.3%. The main contributors to the uptick in the headline were food and non-alcoholic beverages; housing and utilities; and miscellaneous goods and services categories, which increased by 4.3%, 3.2% and 6.7% y/y respectively. Collectively, these categories added 2.6 percentage points to the total. Annual transport inflation moderated to zero percent following a 0.9% contraction (up by 4.8% m/m), driven by the increase in the purchases of vehicles, despite subdued demand, as economic activity continued to reopen. Core inflation, that which excludes alcoholic beverages, fuel and energy, remained unchanged at 3.2%.

Though the rise in inflation only puts it a touch into the inflation target, it has important implications. First, that call for quantitative easing must end and certainly, the SARB has highlighted that deflation will have to be a big risk, and it is not. Second, policy rates are likely to remain unchanged for longer, at best there could be a 25 basis point cut in rates, but it will not achieve any meaningful boost to the economy.

Bailout and recapitalisation of state-owned companies have cost the taxpayers R187.4bn between 2000/2001 fiscal year to 2019/2020. That’s according to the Finance Minister based on data from the Estimates of National Expenditure.

Who are we reading

Bloomberg editorial board says the US Federal Reserve needs to rethink monetary policy due to the new normal of interest rates making its job of keeping inflation at 2% target much harder. The fed Chairman Jerome Powell is expected to provide a review of monetary policy this week, which comes at a time were advanced economy central banks have taken extremely unconventional policies as the structures of the underlying economies are changing. Too low interest rates make it difficult to deal with the next crisis, and it will surely come. QE has diminishing effectiveness and the last decade showed us that it results in asset price inflation which can create financial instability through bubbles. Forward guidance too and indeed negative interest rates may soon lose their effectiveness. 

These issues appear to be in advanced economies, which, over time will be an issue in emerging markets. High inflation was a global phenomenon, then it reduced in advanced economies before emerging markets also achieved price stability. QE started with advanced economies now emerging markets have joined, though it remains QE light in that they are doing it for liquidity purposes. Zero lower bound interest rates is in advanced economies; it will soon become an emerging market issue too as inflation continues to structurally fall. Emerging markets like South Africa need to watch how the US revamps its monetary policy to deal with low inflation with the declining effectiveness of current monetary policy tools.    

While you were sleeping:

·       Hurricane Laura is reported to be landing in the western US Gulf today and has grown to a Category 4 storm, the worst ever to hit the region and could result in fatalities and US25 billions of damage.

·       Global equities were up: MSCI ACWI (+0.9%), MSCI World (+1.0%)

·       US markets were up: S&P 500 (+1.0%), NASDAQ (+2.1%)

·       European markets were Euro stoxx (+0.9%), UK FTSE 100 (+0.1%), France CAC 40 (+2.4%), German DAX (+2.3%)

·       Asian markets were mixed: China Shanghai composite (-1.3%), India Nifty (+0.7%), Japan topix and Hong Kong Hang Seng were both flat.

·       Latin America markets were down: Brazil, Mexico and Chile were all down between 0.5% and 1.0%.

·       JSE was up 0.8%: Top40 (+1.0%), Large cap (+1.1%), mid cap (-0.5%), small cap (0.3%), basic materials (+1.2%), mining (+1.4%), gold mining (+4.0%), platinum and precious metals (0.9%), industrials (1.2%), general industrials (-2.9%)

·       Commodities were mixed: Brent crude oil (-0.5%%), gold (-0.1%), copper (+0.4%)

·       Sovereign risk as measured by credit default swaps spreads (CDS) was mostly flat in emerging markets.

·       In currency markets, the US dollar index (DXY) was flat along with a number of emerging markets barring the Brazilian real (-1.8%). 

Data out today:

·       South Africa Producer Price Inflation (PPI) expected to rise to 1.3%y/y (0.8%m/m) in July from 0.5% (0.5%m/m) in June.

·       The second estimate of US GDP expected to print -32.5% for Q2 2020 from a first estimate of -32.9%.

·       US initial and continuing jobless claims expected to decline.

·       US pending home sales for July expected to stall to just 2.0% from 16.6% growth in the previous month.

Best regards

Isaah