Equity markets recover despite interest rate threats
Despite the risk of yet another US Federal Reserve interest rate hike next week, share prices across the globe started to recover sharply from last Wednesday supported by the almost doubling of new jobs created in America.
Economists and investors now believe that the US economy is unlikely to move into a recession, that interest rates may not be paused and that the global economic will recover by the end of the year.
On the JSE, the all share index was down by 2% during the first two days last week, it improved strongly by 2.1% on Thursday and Friday. The index is now 1.25% higher since the Monetary Policy Committee of the SA Reserve Bank increased the repo rate by 0.5% recently. The Top40 index gained 1.44% in the past seven days and trades 5.6% up for the year to date. The Industrial 25 index performs the best of the major indices on the JSE, gaining more than 16% since the beginning of the year.
The rand exchange rate also started to recover since last Thursday, with the rand/dollar trading around R19.48 - an improvement of more than 50 cents last week as foreign buying of South African shares and bonds returned. On the capital market the government 10 bond improved last week by 0.3% and by 4.3% over the last month.
In the US the non-farm payrolls for May surprised the market. The US economy unexpectedly added 339 000 jobs in May, the most in four months, and way above market forecasts of 190 000. Despite this, the sharp increase the unemployment rate rose sharply to 3.7% in May 2023, from 3.4% in April 2023. This is the highest increase per month since 2020 at the high of the Covid-19 pandemic.
Share markets throughout the globe reacted positive on this news as it indicated that it may lead to the Fed to pause and not increase interest rates next week. On Wall Street, the Dow Jones industrial index rose by 2.2% on Friday after the news and is now 3% higher than the previous week.
The S&P500 index gained 1.5% on the day and shot up by 3.04% over the past five days. For the year to date the index already improved by 12% showing that despite the big increase in interest rates, equity prices in the US still increased sharply.
This coming week all eyes will be on the release tomorrow of South Africa’s gross domestic product (GDP) growth rate for quarter one 2023. Expectations are that the economy has grown by only 0.2%. This is much lower than the 0.9% recorded during quarter four, 2022, and will indicate that the economy is on its way to moving into a recession during quarter two and quarter three of this year.
On Wednesday the SA Reserve Bank (SARB) will also release the latest level of South Africa’s foreign exchange reserves. Currently at $61.7 billion (R120bn), it is expected to have increased marginally to $62bn. This figure is important in showing if the Bank will be able to support the rand from depreciating further. The SARB will also publish its quarterly bulletin on Wednesday.
The market is awaiting the release of the current account balance of the balance of payments. It is expected that the account recorded a deficit of R172.5bn, indicating the importance to attract foreign capital inflows to finance the deficit. If not one can expect that the rand is likely to depreciate further.
On global markets the US will publish its latest balance of trade numbers, the EU will release its third estimate of the area’s GDP growth rate for quarter one, 2023, and the UK will announce its latest unemployment data on Thursday.
We expect that the rand, global and domestic equity markets, and bond rates to recover on the back of the US unemployment rate. Equities, the rand, and bond rates may, however, move negatively on Tuesday on the announcement of the low economic growth rate for the first quarter of 2023.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT