Monthly Market Commentary – April 2024 - Cornerstone Financial Services Group

4 months ago

Monthly Market Commentary – April 2024

Stickier-than-expected inflation and geopolitical tension were the overarching themes for April. The US, UK, and Euro area all saw more stubborn than expected inflation. This was alongside some marginally more positive than expected economic data across major markets, which caused markets to re-evaluate the timing and pace of interest rate cuts by central banks, particularly the US. In the background, further escalation of tensions in the Middle East brought about further uncertainty, market volatility, and higher oil prices. This all led to bond yields rising and thus prices falling. The majority of equity markets fell in sympathy as rate-cut optimism faded. The notable exceptions were UK equities, which benefitted from exposure to large oil companies and dollar earnings, and Emerging Markets, driven by commodity exporters.

South African (SA) equity meaningfully outperformed global equity and was the best-performing asset class for SA investors, driven by a substantial bounce in the resources sector. Global asset classes, in general, experienced a currency headwind as the rand found some support and strengthened over the month. Local bonds followed the path of the rand and had a strong month after a lackluster start to the year. Local property softened slightly whilst global property underperformed all other asset classes.

LOCAL DRIVERS

Inflation Eases

Headline consumer prices in South Africa slowed for the first time in two months to 5.3% year on year in March, below market expectations of 5.4%. Core inflation was also slightly lower, offering some breathing room to the SARB and investors following stickier data earlier in the year. Kganyago, however, reiterated that a sustained downward inflation trend towards the midpoint target is needed before rate cuts can take place.

Eskom Improvements

April was the first month since 2022 to be free of loadshedding. Eskom has seen improved performance from their plants, as they achieved an energy availability factor (EAF) of 65%, last seen in 2021. The benefits to the economy are already evident as the manufacturing sector showed signs of a strong recovery in April, with the Purchasing Managers’ Index (PMI) rebounding to 54.0, up from 49.2 a month ago, indicating an expansion.

Election Polls

A new opinion poll from Ipsos showed that support for the ANC has slipped to the 40% level, while the leftist EFF are leaking votes to MK, a new party backed by former President Jacob Zuma. Support for the main opposition Democratic Alliance, which espouses pro-business economic policies, strengthened slightly to 21.9%, from 20.5% in February. The bond market rallied and the rand gained as much as 1.6% after the poll was published, as investors bet it signals a market friendly coalition will emerge from next month’s election.

ASSET CLASS TOTAL RETURNS – ZAR

GLOBAL DRIVERS

US Interest Rates

The Fed has kept the Federal Funds Target Interest Rate unchanged at 5.25%-5.50% for the sixth consecutive time. Powell’s commentary, however, was less hawkish than expected, especially given the upside surprises to the recent inflation data. While Powell acknowledged the disappointing inflation data, he indicated that “it is unlikely that our next move will be a hike”. This provided some relief to investors who were beginning to worry that a rate hike was becoming a likely option.

US Inflation

Data showed that inflation remained even more sticky in the US. Headline inflation rose to 3.5% in March, up from 3.2% the prior month and above the 3.4% expected. Core inflation remained at 3.8% in March, but was expected to dip a little. Most disappointingly, the Federal Reserve’s preferred inflation measure (Core PCE – which has a lower weight to housing costs) remained at 2.8%, but had been expected to fall to 2.6%.

US Jobs Data

The US labour market showed signs of slowing as job openings fell from 8.8 million in February 2024 to 8.5 million in March 2024. This was below market expectations for a decline to 8.6 million. The US economy added 175 000 jobs in April, below the consensus estimate of 240 000 jobs and the smallest gain in six months. The unemployment rate increased slightly to 3.9% from 3.8% in March, while wage growth eased to below 4% y/y for the first time since mid-2021.