Weekly wrap – Out of the woods, still in the rough

Written by Citadel Global Director, Bianca Botes


The lower-than-expected United States (US) Consumer Price Index (CPI) reading sent celebratory waves through the market giving investors’ a newfound risk appetite. After the news broke, the increased appetite for risk was evident in emerging markets, but we are not quite out of the woods yet.

Key themes for this week include:

  • US inflation reading, a welcome surprise
  • Renewed risk sentiment sends riskier assets flying
  • Dollar hovers near levels last witnessed in June
  • European Union (EU) natural gas prices reach new highs


While US inflation remains elevated, and well above the 2% target set by the Fed, the market was pleasantly surprised by a lower-than-expected annual rise in consumer prices during July. The data released on Wednesday, showed a decline to 8.5% in July from the four-decade high of 9.1% in June, compared to the market expectation of 8.7%. The decline in inflation, was largely brought on by lower gasoline prices, which offset further increases in food and shelter. While inflation remained flat month-on-month, core inflation was steady at 5.9%, beating expectations of 6.1%, and offering some support to the theory that US inflation has finally peaked.

True to the volatile nature of the recent trading environment, investors moved swiftly to reposition themselves for a less aggressive US Federal Reserve (Fed). Investors believe that that the Fed will now hike interest rates slower and by smaller increments, which sent risk appetite through the roof. Following the CPI release the dollar sank to its lowest level since June, declining by 1.1%. Now, while the market is certainly expressing its relief by piling into riskier assets, one should not make the mistake of thinking that our troubles on a global economic scale are over. If we are lucky, we are out of the woods, but we are still knee deep in the rough, with risks and uncertainty in abundance, including:

  • Inflation is still well above the 2% target, although, as Citadel Investment Services Chief Economist, Maarten Ackerman, recently pointed out, the Fed will, in all likelihood, not be fully against an inflation rate of near the 4% mark, as this will assist the US in diminishing its debt burden in real terms.
  • Geopolitical risks are still abundant. The war in Ukraine rages on, while tension between Taiwan and China remains elevated.
  • Global debt remains at dangerously high levels, reaching a record $303 trillion in 2021, compared to $226 trillion in 2020.

Another key factor that needs to be taken into consideration, is the fact that the US labour market remains robust, with the US seeing near full employment, even as the country enters a technical recession. These factors will make it slightly harder to reign in demand to counter inflation.

When turning to the technical elements at play, the December implied Fed Funds futures rate declined from 3.5% to 3.38% as markets priced in a less aggressive interest rate hike by the Fed at the September Federal Open Market Committee meeting. While markets were biased towards a 75 basis point hike prior to the CPI release, they are now only pricing in a 44% chance of this hike, with expectations now leaning more towards a 50 basis point hike.

The adjustment in sentiment boded well for emerging markets, with emerging market stocks soaring to a six-week high on Thursday, while emerging market currencies also found some welcomed relief, with the MSCI Index extending its rally for the third consecutive day.

Meanwhile, some Fed officials on Thursday afternoon, reemphasised their commitment to robust monetary tightening to ensure a sustained and dramatic turnaround in inflation. Minneapolis Fed President, Neel Kashkari, said that he expects the Central Bank to raise its policy rate to 3.9% by year-end and to 4.4% by end of 2023, while Chicago Fed President, Charles Evans, indicated that US rates will top out at 4% next year.


China’s annual inflation rate rose to 2.7% in July, up from 2.5% in June and coming in below market forecasts of 2.9%. This was the fastest rise in consumer prices since July 2020, mainly due to a surge in food prices, with the cost of pork bouncing back sharply after a cut in production capacity and a strong recovery in demand following COVID-19 lockdown restrictions. China has set a target CPI of around 3% for this year, the same figure as in 2021.

Retail sales in the United Kingdom increased by 1.6% year-on-year in July, rising for the first time in five months, as demand for summer clothing, electric fans and picnic food during the record hot weather helped retailers rebound last month. Helen Dickinson, Chief Executive Officer at the British Retail Consortium, said, “Sales improved in July as the heatwave boosted sales of hot weather essentials.” She then added, “However, with inflation at over 9%, many retailers are still contending with falling sales volumes during what remains an incredibly difficult trading period.” Analysts said the growth was due in large part to inflation, with overall prices significantly higher than the same period last year, while sales volume declined as higher costs continued to weigh on consumers.

South Africa’s SACCI business confidence index rose to 110.3 in July, up from 108.5 in the previous month. It was the highest reading since March, assisted by a rise in trade volumes and new vehicle sales. However, price pressures, a volatile rand exchange rate, and higher interest rates continue to weigh on the local business environment. “The July 2022 BCI (business confidence index) number indicates the business climate is gradually returning to normality,” SACCI said. Meanwhile, manufacturing production in South Africa declined by 3.5% year-on-year, after a downwardly revised 1.8% fall in the previous month, and a sharper decline than market forecasts of a 2.9%. The decline marks the third consecutive month of contraction in manufacturing activity, largely attributed to loadshedding.


All three major US stock indices gained over 1% on Thursday, building on the momentum from the last session’s solid performance, as investors reassessed the outlook for Fed monetary policy, after a softer-than-expected July CPI reading. On the corporate side, Disney jumped almost 10% after the media company beat estimates on both earnings and revenue, reporting better-than-expected subscriber numbers for the last quarter.

The DAX failed to hold onto early gains, dipping nearly 0.2% and underperforming its regional peers on Thursday, as earnings results from big companies disappointed. Technology company, Siemens, was among the worst performers, after reporting a shareholders’ net loss for the first time since 2010 and cutting its full year earnings per share guidance amid an impairment on its investment in Siemens Energy. In addition, vehicle manufacturer Daimler said it will struggle to fill truck orders for the rest of the year. Multinational industrial and technology firm, Thyssenkrupp, lowered its full-year profit forecast although its profit nearly tripled, and Deutsche Telekom lifted its full-year outlook and posted a quarterly profit, but the results missed expectations. Meanwhile, other major bourses in Europe were in the green, with the STOXX 600 adding 0.1%, prompted by expectations the Fed will slow the pace of rate hikes.

London shares were largely flat on Thursday, with the benchmark FTSE 100 hovering near a two-month peak of 7 500, as gains in the energy and financials sectors offset losses in healthcare. Taking a closer look at individual share price movements, soft drink producer, Coca-Cola HBC, and sports betting giant, Entain, were among the top gainers, up 2.5% and 3.7%, respectively, while consumer healthcare brand, HALEON, was the biggest loser on the index, down almost 6%.

The JSE All Share Index rose over 1% on Thursday, alongside its global peers, after slowing US inflation data curbed bets for aggressive Fed hikes. Meanwhile, investors continued weighing global economic risks with higher corporate earnings. On the corporate front, South African mobile operator giant, MTN Group, saw its shares surge over 6% after its first-half earnings surged 46.5% and it had received a $35 million binding offer for its Afghanistan business, moving its exit from the Middle East closer.


Brent Crude futures traded around the $98 per barrel mark, as investors balanced a bullish report from the International Energy Agency (IEA) against a larger-than-expected increase in US oil stockpiles and the resumption of oil flows on the Russia-to-Europe Druzhba pipeline. The IEA has raised its oil demand estimate for 2022, saying higher natural gas and electricity prices will lead to more gas-to-oil switching. Demand for oil will further be fuelled by a near 20% drop in Russia’s oil output by the start of next year when the EU ban takes effect. In contrast, the Organisation of the Petroleum Exporting Countries (OPEC) lowered its global oil demand forecast for 2022 to 3.1 million barrels per day, compared to 3.36 million. Meanwhile, IEA data showed that US crude stockpiles expanded by 5.5 million barrels last week, much higher than the 73 000 barrel increase expected by analysts. In addition, US gasoline demand remained 6% lower over the last four weeks, compared to the same time last year.

Gold prices eased on Thursday, slipping from one-month highs, weighed down by profit taking and hawkish remarks from Fed policymakers. The metal initially jumped on Wednesday to trade at its highest levels in a month, following the release of lower-than-expected US inflation data, before reversing towards the close of trade, after Fed officials reaffirmed their commitment to raising interest rates aggressively, in order to convincingly tame inflation. While gold is widely considered as a hedge against inflation and economic uncertainty, higher interest rates raise the opportunity cost of holding non-yielding bullion.

Natural gas futures linked to the Dutch Title Transfer Facility, which is Europe’s wholesale gas price, traded above the €200-per-megawatt-hour mark, on Thursday. This was not far from an all-time high of €300 hit in March, in the aftermath of Russia’s invasion of Ukraine, and comes as persistent concerns about tightening European supplies continues to hang over the market. A historic drought triggered by an arid summer, which set heat records across Europe, threatens to halt energy shipments along the Rhine River, further exacerbating supply concerns in an already tight market. In addition, Russian gas giant, Gazprom, has reduced flows through the Nord Stream pipeline, citing issues with turbines, and is now delivering only 33 million cubic meters daily, roughly 20% of its capacity, which is jeopardizing the region’s objectives to fill 80% of storage capacity before winter. The rise in natural gas prices brought EU members together to sign an agreement to cut their gas use by 15% over the following months.


The US Dollar Index bottomed out below the 105 mark, closing in on its lowest level since late June, as markets reassessed the Fed’s policy outlook, following further evidence that inflation could be peaking. The dollar declined by 1.1% during trade on Wednesday following the CPI release, shedding 0.8% against the euro and 1.6% against the Japanese Yen.

The Euro bounced to $1.03, a level not seen in nearly a month, on the back of a softer dollar. Bets on rate hikes from the European Central Bank (ECB) for the end of the year were also lowered. Markets are now anticipating a total of 105 basis points of hikes by December, versus the 113 basis points initially expected by Reuters. The ECB is still seen raising borrowing costs by another 50 basis points in September. Despite the gains, the common currency holds close to parity with the dollar, as concerns of a looming economic crisis in Europe persist, inflation showing no signs of peaking, and the energy crisis being far from over. High energy prices are fuelling a broad rally in consumer and producer costs.

The British pound remained under pressure around $1.21, as investors await the UK GDP data for the second quarter today, to see whether the economy is sliding into a recession. Last week, the Bank of England painted a grim economic outlook and projected the UK’s longest recession since the global financial crisis in 2008, while raising interest rates by 50 basis points, its largest hike since 1995. At the same time, while the inflation peak is moving higher, the Central Bank may be forced to slow the pace of rate hikes, as not to damage an already fragile economy even more. The pound has lost nearly 12% against the greenback so far this year, hurt by rising inflation, political uncertainty and post-Brexit disruptions.

The South African rand benefitted from the subdued dollar and the risk rally and is appreciating sharply towards R16.20/$, its highest level since 28 June, and reaching a high of R16.11/$ during trade on Thursday. The local currency however remains at the mercy of the broader global environment, and any shift in sentiment will see the rand tumble yet again.

The rand is trading at R16.25/$, R16.76/€ and R19.82/£.