Macro Pulse Episode 24

Hello and welcome to Macro Pulse.

U.S. government remains shut. Many U.S. government workers are not getting paid and are not able to spend money and many key economic indicators are not being released. We’re also seeing more signs of credit market stress in the US, with regional banks and product credit coming under pressure. More headlines about bad loans, high leverage and fraud. We’re also seeing credit spreads widening. However, despite this, equity markets in the US are close to all time highs. As markets take more confidence in the fact that the US Q3 earnings results continue to come in quite strong. The outlook for interest rates remains to the downside, and there’s also some easing of tension between the US and China in terms of its trade relationship.

On the earnings front, we’ve seen in general so far solid results with more than 30% of companies on the S&P 500 reporting, 80% of those have beaten earnings expectations, which is above the long term average. We’re also seeing an acceleration in growth, and many companies are stating that the consumer is actually doing fine on the large cap side, and specifically the Magnificent Seven. There has been some mixed results, with Google surprising to the upside and Microsoft and Meta surprising to the downside despite some solid growth numbers. Now, the key focus in this market remains on these large mega stocks. As they often say, it’s the trend for the index as a whole. As an example, the S&P 500 this year is up about 17%, while the equally weighted index, which downwards those large cap stocks is only up 7%.

So a big portion of the equity returns is still coming from those large cap stocks. Then looking at the relationship between the US and China, after months of negotiations between these two countries, Trump and Jinping have finally agreed to meet in South Korea this week. And we are still awaiting the final outcomes. But we are seeing that the US is willing to cut tariffs on China, distract potentially TikTok deal with the Chinese. While on the Chinese side, there is a commitment to buy soybeans from the US and to defer its export controls on rare earths. So overall, good news, but not the grand bargain that the US administration or the Trump administration were looking for. The, outlook for policy also took a little bit of a knock during the fed meeting this week with, chair Powell cutting interest rates by 25 basis points, as expected, down to 4%. But there is growing signs of the sentiment within the fed ranks. And one of the voters voted for a 50 basis points cut and another one voted to keep rates on hold. This dissension increases the uncertainty around fed policy. Fed Chair Powell also disappointed the market by stating that a December cut is not a foregone conclusion. Before this meeting, the market was pricing in a 100% probability of a cut in December after the fed meeting yesterday. The market is now pricing in only a 70% chance of a cut in December. So still high with a lot of economic data not available. It is hard for economic policy makers to make a judgment on the real strength of the US economy. But what we do know is that the labor market is softening but not falling out, and that the inflation rate is sticky around 3%, and there’s still some risk of that rising above 3% as the effect of tariffs are still working through the economy.

The reason for why the labor market is softening also needs to be interrogated further. Is it because of economic weakness, or is it because we are seeing, less supply of labor into the market? Think about the net immigration that is down and also because of demographics, or is it because of AI job cuts like we’ve seen this week with, Amazon announcing, cutting 14,000 jobs due to AI, the different drivers could have different implications for how the fed will conduct policy in the future.

One last point on the fed is that we got a shortlist of five candidates. That will be the new Fitch when Powell steps out next year in May. This list of five candidates in general should not unsettle markets, apart maybe from Kevin Hassett, who has been a long time economic advisor to President Trump. So the market may see that as not independent enough.

Other than that, we think policy making or the market will be comfortable with the, with the list then coming to South Africa. The good news last week has been that Africa was taken off the Financial Action Task Force grey list. We’ve been on that list since February 2023. And what this means now is that for businesses, foreign businesses, it is less costly and easier to do business with South Africa, which is obviously a positive. And we will see that business confidence increase on the back of this. We have seen already in the fixed income market, our local fixed income market, our sentiment has improved and we’ve seen how the credit risk premium has come down and our foreign investors continue to be strong. Buyers of our local bonds. We’ve also seen the most recent bond auctions continue to be very strong, despite the fact that bond yields. The ten year bond yield in South Africa is not trading well below 9%. So while a lot of the good news we believe is already in the price, November meetings like the medium term, budget as well as the S&P Global Credit Ratings announcement, lighting in November could still provide some surprises to the upside. And so we remain constructive on the local bond outlook.

Turning back to China, we have had the, Chinese policymakers convening last week to set the next five year plan from 2026 to 2030. The overall result has been pretty much as expected. There’s been a continued focus on domestic consumption, boosting consumption by expanding the social safety net and investing in education, health care and in childcare. Economic growth also remains a priority, with GDP per capita, so aim to double over the next ten years will be on achieving this via quality growth, not quantity growth by focusing on innovation and upgrading technology. Where the five year plan did disappoint, wasn’t the fact that there was no specific targets around a nominal growth or around the share of domestic consumption. The authorities are aiming for, as a percentage of GDP. We will get more final results during the two sessions meeting in in March next year.

So there may be some more information around that at that meeting. The other disappointment was that there was less said about the anti involution drive than expected. The drive to curb excessive, competition and excess capacity, that will most likely improve profit margins hasn’t been a lot of emphasis on that during this particular discussion. Whereas all of this levers in terms of markets and asset prices, well, we still remain fairly constructive on local assets, constructive on Chinese exposures. A little bit more cautious on us given high valuations, still high interest rates and policy uncertainty. We believe that the the rands path of least resistance is potentially for more strength. And that the gold price, which took a knock over the last week or so, has now flushed out a lot of the speculative buys that has been driving the price more recently, and that we are now, again, more constructive on the gold price from around these levels. We also think that global bond yields, as well as local bond yields, could potentially still fall a little bit further.

That’s all for this week. Thank you.