Weekly Wrap: Davos-Growth in focus

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Written by Citadel Global Director, Bianca Botes.

DAVOS-GROWTH IN FOCUS

We kicked the year off with the World Economic Forum (WEF) in Davos. This year’s theme is Cooperation in a Fragmented WorldLeaders are seeking to secure alliances, partnerships and agreements in an environment where large scale dissonance between countries and policies exists, all while facing potential economic recessions in many countries.

Key themes for this week include:

  • Davos in focus
  • Chinese growth beats estimate but misses government target
  • Recession fears send equities in to the red
  • Oil benefits from Chinese demand prospects
  • Slower rate hike forecast by the United States (US) Federal Reserve (Fed) sets the tone for currencies

DAVOS SUMMED UP

The WEF is an annual event that takes place in the Swiss Alps in a town called Davos. It brings together some of the world’s most influential political and business leaders, as well as experts from the fields of science, technology, and the environment. The aim is to discuss a range of global issues, including economic growth, international trade, and climate change. The event also provides an opportunity for the world’s political and business leaders to network and agree on ways to tackle global issues.

In recent years, the topics discussed at the meeting have included the global economy, renewable energy, gender equality, and the impact of technology on society. The event has become increasingly popular in recent years, with more than 3 000 participants from over 100 countries attending this year. With the global economy facing significant headwinds in 2023, the key topics investors and analysts are keeping an eye on include:

  • The cost-of-living crisis, with debates around how far to hike rates to fight inflation, and at what cost to the global economy, remains a key topic of debate.
  • The ongoing war in Ukraine and its effect on the European economy and global supply chain, and the supportive measures by the West to the Ukraine
  • Food insecurity following 2022’s triple threat of food, energy, and fertiliser shortages. Experts are already warning that more people will face hunger in 2023 than in the previous years as food prices soar, shortages increase and livelihoods are decimated.
  • Technology and Innovation, with a focus firmly on what is deemed the fourth industrial revolution, with an eye on solving global issues such as climate changes, cybersecurity and even war.

Some of key take-aways from the event are:

  • The West must support and assist the Ukraine as far as possible to secure a Ukrainian victory. President of the European Commission, Ursula von der Leyen, NATO (North Atlantic Treaty Organisation) Secretary General, Jens Stoltenberg, and Prime Minister of Spain, Pedro Sánchez, called for continued cooperation with Ukraine while the Federal Chancellor of Germany, Olaf Scholz, said Russia cannot be allowed to win the war.
  • Interest rates are expected to remain higher for longer, and recessions in many countries remain a reality, although these recessions are expected to be mild.
  • Geopolitical tensions and uncertainties have given rise to a shift in the global supply chain, with many countries agreeing that a single source strategy should be replaced with a multi-source approach.
  • Alternatives to Russian fuel is of the essence if the world is seeking to overcome a global energy crisis.
  • The world needs to be prepared for the next pandemic, due to various reasons including freedom of travel, growing populations, and climate change. US pharmaceutical giant, Pfizer, announced that it would provide patent-protected medicines on a not-for-profit basis to 45 lower-income countries.

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DATA IN A NUTSHELL

The Chinese economy expanded 2.9% year-on-year in the fourth quarter of 2022, easing from a 3.9% growth in the third quarter but above market estimates of 1.8%. Industrial output increased at its smallest increment in seven months in December, while retail sales remained weak. For the full year of 2022, the Chinese economy grew by 3.0%, missing the official target of around 5.5% and marking the second slowest increase in growth since 1976, on the back of Beijing’s zero-COVID policy. China’s statistics bureau said, “In 2022, the foundation of economic recovery is not solid as the global situation is still complicated and severe while the domestic triple pressure of demand contraction, supply shock, and weakening expectations is still looming.” China’s leaders are set to announce the 2023 gross domestic product (GDP) growth target in March, at an annual parliamentary meeting.

The unemployment rate in the UK was unchanged from the previous period at 3.7% in the three months to November, in line with expectations. The number of people unemployed for up to six months increased, especially amongst 16 to 24 year olds. Those unemployed for over six and up to 12 months increased, while those unemployed for over 12 months decreased. Annual inflation rate in the UK fell to 10.5% in December from 10.7% in November, matching market forecasts. This marks a second consecutive month of slowing inflation and the lowest inflation rate in three months, after a peak of 11.1% in October.

The consumer price inflation in the euro area was confirmed at 9.2% year-on-year in December, down from November’s 10.1% and October’s all-time high of 10.6%. The European Central Bank (ECB) is expected to hike interest rates again by an anticipated 50 basis points as inflation remains well above the 2% target.

The number of Americans filing new claims for unemployment benefits fell by 15 000 from the previous week to 190 000 in the week ending 14 January, the lowest number in four months and well below market expectations of 214 000. The result further consolidated evidence of a tight labour market despite the Fed’s aggressive tightening path last year, challenging market bets that the Fed will change its tightening agenda before reaching the forecasted terminal interest rate of 5.25%.

South African mining production contracted by 9% year-on-year in November, after an upwardly revised drop of 11% in the previous month and worse than market expectations of a 6.85% decline. This was the tenth consecutive month of deteriorating mining activity, as prolonged loadshedding by electricity supplier Eskom continued to weigh on output. South Africa’s annual inflation rate was 7.2% in December, down from 7.4% in the previous month, in line with expectations, but remains above the upper limit of the South African Reserve Bank’s target range of 3% to 6%. It was the softest reading since May 2021.

The Bank of Japan (BOJ) maintained its key short-term interest rate at -0.1% and that for 10-year bond yields around 0% during its January meeting, by a unanimous vote. The Central Bank also kept its 0.5% cap for bond buying, defying market speculation and signaling that policymakers aren’t seeking a looser grip on bond yields after the unexpected tweak of the yield curve control range in December. Meanwhile, in a quarterly outlook report, the board cut its 2022 GDP growth forecast slightly to 1.9% from 2.0%, citing slowdowns in overseas economies and high commodity prices. For the 2023 financial year, the bank slashed its GDP outlook to 1.7% from 1.9%. The CPI readings remained broadly unchanged, standing around 3% in the 2022 financial year and 1.6% in the following year. The BOJ reiterated it would take extra easing measures if needed, while expecting short-and long-term policy interest rates to stay at their present or lower levels.

RECESSION FEARS SPOOK INVESTORS

The US’s Dow Jones index shed over 200 points on Thursday, while the S&P 500 and Nasdaq 100 were down roughly 1%, as investors dumped equities over concerns of an impending recession. The Fed is remaining hawkish in their commentary, even following numerous rounds of dismal economic data, with Boston Fed President, Susan Collins, among the latest policymakers to warn that rates must rise further to bring down inflation. On the corporate side, consumer products giant, Procter & Gamble, fell by 2% after reporting a decline in sales volume.

Shares in London declined for a third consecutive session on Thursday, with the blue-chip FTSE 100 finishing below the 7 800 mark and moving further away from record levels, dragged down by heavyweight energy and materials stocks. Weak US economic data and hawkish remarks from several Fed policymakers fanned concerns about a recession. Online grocery retailer, Ocado, and construction company, Persimmon, were among the biggest laggards on the index, down 6.5% and 4.7%, respectively.

European equity markets ended their six-day winning streak on Thursday, with the benchmark STOXX 600 shedding 1.5% from Wednesday’s nine-month high and ending the longest upward streak since November. The German DAX retreated 1.6%, as investors digested a batch of corporate earnings and hawkish comments from key central bankers. On the policy front, ECB President, Christine Lagarde, reiterated the Central Bank will continue raising interest rates until inflation returns to its 2% target “in a timely manner”, while policymaker, Klaas Knot, said that markets may be underestimating planned rate hikes by the ECB and investors should take its forecast to raise rates in multiples of 50 basis points more seriously. On the corporate front, sanitary product manufacturer, Geberit, and fashion retailer, Boohoo, posted disappointing results, while, shoe manufacturer, Dr. Martens issued a profit warning.

Japan’s Nikkei 225 Index fell 1.44% to close at 26 405 while the broader TOPIX Index lost 1% to 1 916 on Thursday, breaking a two-day rally and taking cues from a negative lead on Wall Street as fears of a global economic slowdown overshadowed optimism about a slower pace of central bank policy tightening. Investors also digested data indicating that Japan recorded another trade deficit in December as import growth outpaced export growth. On Wednesday, Japanese stocks rallied sharply after the BOJ defied expectations of another policy adjustment by maintaining its ultra-low interest rates and leaving its yield control policy unchanged. Nearly all sectors in Japan declined on Thursday, with sharp losses from index heavyweights such as consumer technology company, SoftBank Group, motor manufacturer, Toyota Motor, semiconductor producer, Tokyo Electron, apparel manufacturer, Fast Retailing and financial group, Mitsubishi UFJ.

The JSE FTSE All Share index closed 0.5% lower at 79 505 on Thursday, down slightly from record highs the day before, mainly dragged down by resource-linked sectors and tech stocks. Woolworths however, gained almost 5% after the South African food and fashion retailer raised its profit growth forecast, saying it now expected half-year earnings to jump as much as 80% on strong Black Friday sales and festive demand. Market sentiment across global markets was dented by renewed recession fears after recent weak economic data from the US and hawkish comments from Fed officials. Meanwhile, investors continued to monitor the earnings season and the ongoing WEF. Locally, concerns over the energy crisis persist, with 200 days of loadshedding expected for 2023..

OIL CHEERS CHINA’S REOPENING

Gold held above $1 900 an ounce on Thursday, hovering near its strongest levels in nine months, on firm expectations that the US Fed will slow the pace of its interest rate hikes, even as markets anticipate that rates will remain higher for longer. Meanwhile, the metal came under pressure in the previous session amid hawkish remarks from Fed officials who backed further rate hikes, though weaker-than-expected US retail sales and producer inflation data, that fueled recession fears tempered rate hike concerns. Markets are currently expecting the US central bank to downshift to a smaller 25 basis point rate hike in February, after delivering a half-percentage point increase in December.

WTI (West Texas Intermediate) crude futures stabilised around $80 per barrel on Thursday, close to levels not seen since early December, as investors grew optimistic about a recovery in global demand as the Chinese economy reopens. The International Energy Agency said that with China pivoting away from its strict COVID-19 restrictions, demand for crude is likely to hit a new record high this year, while price cap sanctions on Russia could dent supply. The Organization of the Petroleum Exporting Countries (OPEC) echoed a similar view in its monthly report, which was released earlier this week, The report stated that demand for crude will rise by 2.22 million barrels per day, or 2.2%, in 2023.

Copper futures rose past the $4.20 per pound mark in the third week of January, their highest level in seven months, underpinned by evidence of low supply and expectations of increasing demand. Stronger-than-anticipated growth in China during the fourth quarter added to projections of higher industrial demand, as the world’s second-largest economy transitioned away from its strict zero-COVID policies. In addition, industry players warned that worldwide production cannot keep up with the demand as countries shift to copper-heavy renewable energy sources. Top producer Chile forecasted its output to contract by nearly 6% in 2023, while inventories at the London Metals Exchange and Shanghai Futures Exchange warehouses fell to under 186.4 thousand tonnes, only enough to support global consumption for just over two days..

CURRENCIES REACT TO GROWTH CONCERNS

The dollar index traded steadily above 102 on Thursday after dipping briefly to an over seven-month low of 101.53 in the previous session, as investors digested weak US data and hawkish remarks from Fed officials. The dollar has come under renewed pressure this year as the annual inflation rate in the US slowed for a sixth straight month to 6.5% in December, its lowest reading since October 2021, raising hopes that inflation peaked at 9.1% in June. The data cemented expectations that the Fed will downshift to a smaller 25 basis point rate hike in February after delivering a half-percentage point increase in December.

The euro continued to extend gains in January to trade at $1.08, its highest level since April last year. The currency is benefitting from a softer dollar, as investors expect the Fed to slow the pace of rate increases. Meanwhile in Europe, preliminary estimates showed price pressures eased more than expected, with the annual inflation rate in the eurozone hitting a four-month low. At the same time, an ECB survey of consumer expectations showed inflation prospects over the next 12 months eased for the first time since May 2022. The ECB, however, is unlikely to change its monetary policy path for now, with another increase in borrowing costs expected next month.

The British pound rose above $1.23 for the first time since 14 December, after Britain’s Consumer Price Inflation (CPI) report showed the inflation rate slowed to 10.5% in December, moving further away from October’s 41-year high. Still, the core CPI rate was unchanged at 6.3%, not far from the record high of 6.5% struck in October, and the prices of food and beverages rose at the fastest pace since 1977, suggesting inflation will remain high for some time. The Bank of England is likely to raise interest rates again to 4% next month, following nine consecutive rate hikes. Markets are split on how much further rates will rise after that, while they see the bank rate peaking at around 4.5% by the middle of this year.

The South African rand traded above the R17.00/$ mark, on Thursday, holding close to its weakest level in over a week, amid heightened concerns over South Africa’s power crisis, which prompted President Cyril Ramaphosa to cancel his scheduled trip to the WEF. Power cuts have worsened during the second week of January after struggling state utility, Eskom, responsible for generating more than 90% of the country’s power, resolved to continue implementing its worst-ever outages until further notice. On the monetary policy front, the South African Reserve Bank is expected to maintain its hiking cycle, keeping sync with the US Federal reserve, at a slower pace, after raising interest rates by 350 basis points since November 2021.

The rand is trading at R17.25/$, R18.70/€ and R21.33/£