November saw a big rally in markets due to positive news around falling inflation and interest rate expectations. Three of the major developed economic areas (UK, US and euro area) all saw their inflation fall more than expected, effectively closing off the chance of further rate rises and potentially paving the way for those central banks to cut rates towards the middle of next year. Needless to say, lower rates also mean less chance of a recession. Markets are now pricing in rate cuts of 1-1.5% in the next 12 months in the UK, US and euro area. This provided a boost to asset prices with bond yields falling, and thus bond prices rising, in anticipation of lower interest rates; and equities buoyed by an uplift in sentiment.
Monthly Market Commentary – November 2023
LOCAL DRIVERS
SA’s Debt Problem
Lower revenues and higher expenditures are adding pressure to an already strained government debt profile. As government seeks to find ways to plug the hole, numerous market participants have recommended using the gains made on the central banks foreign reserve account, mainly attributable to a weakening rand. Currently the reserve account is just shy of 10% of GDP. However, the intricacies of this seem daunting particularly if one considers the independence of the central bank. It is a possible solution but it comes at a cost.
SA Ports Gum Up
The logistics crisis compounded over the month as it was reported that over 100 vessels and 100,000 containers were stuck outside of South African ports with Durban and Port Elizabeth now among the top seven most congested ports in the world. This has direct impacts on numerous businesses which raises risks to jobs and higher prices, both of which the consumer can ill afford.
SA Inflation and Interest Rates
SA inflation rose to 5.9% in October from 5.4% in September notching up its 3rd consecutive increase. However, core inflation decreased to 4.4%, suggesting that the underlying level of inflation remains relatively under control. After receiving this data, the SARB MPC decided to maintain rates on hold at 8.25% but remain on high alert to the risk of rising inflation.
ASSET CLASS TOTAL RETURNS – ZAR
GLOBAL DRIVERS
Inflation Falls
Inflation data out of US and Europe surprised to the downside with the UK, US and euro area all releasing inflation data below expectations. In the UK, headline CPI fell to 4.6% in October, from 6.7% the prior month and below expectations of 4.8%. US headline inflation fell to 3.2%, from 3.7% in September and below the expected 3.3%. Core inflation fell to 4% from 4.1% the prior month, also below expectations. The euro area headline inflation fell to 2.4% in November (expected to be 2.7%), from 2.9% in October; and core inflation dropped to 3.6% in November (expected at 3.9%), from 4.2% in October. This was a great relief to markets and households alike.
Interest Rates On Hold
On the back of cooling inflation, central bankers kept interest rates steady over the month. Markets began pricing in interest rate cuts from mid-way through next year. Central bankers maintained a relatively hawkish tone on inflation in an attempt to not let markets run ahead of themselves. UK, US, and euro rates were held steady at 5.25%, 5.25-5.5% and 4.5% respectively.
US Economy
From an economic perspective, 336,000 new jobs were created in the US in September, almost twice as many as expected. And this was shortly followed by the 2nd estimate for Q3 GDP showing annualized growth of 5.2%, above the 1st reading (4.9%) and above expectations (5%). This strong growth was somewhat at odds with what has been seen in the PMI data, composite PMI was unchanged for November at 50.7 with a small dip in manufacturing offset by a small rise in services
ASSET CLASS TOTAL RETURNS – USD
All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.
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