Internationally, the focus of the past week was on US GDP growth in Q1 and personal consumption expenditure (PCE) inflation data for March. US GDP growth, at 1.6% q/q annualized, was below consensus forecasts of 2.5% and below Q4 growth of 3.4%, largely reflecting an increase in imports and a contraction in inventories.

In SA, the latest Ipsos poll ahead of the May National Election showed that the ANC, with likely support of about 40%, will probably need to form a coalition with smaller parties, while the recently-emerged MK Party appears to have won ground at the expense of the EFF.

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Sylvester Kobo, STANLIB’s Deputy Head of Fixed Income, says as interest rates should normalize this year, the STANLIB Flexible Income Fund has significantly reduced its cash position compared with the same period last year. The fund, which has full flexibility, has shifted some profits from property into longer-dated bonds, but is highly aware of looming risks, such as the approaching local elections and tensions in the Middle East. STANLIB’s partnership with J.P. Morgan Asset Management provides the fund managers with global reach and expertise and an open relationship for sharing views.

In March, SA’s inflation was lower than expected, with headline inflation down to 5.3% y/y from 5.6% in February. However, there are pressures in key administered prices such as water and electricity, medical aid and education, which are unlikely to ease given the infrastructure backlog. This will make it hard for the SARB to achieve its inflation target of 4.5% or less – in fact, the SARB may do well to restrain inflation below 6%.

In the US, data such as retail sales and labour market conditions remain buoyant, while GDP growth expectations have been revised up to 2.2%-2.3% for the year, which is above trend. Inflation surprises over the past three months indicate the US Federal Reserve is not in a position to cut interest rates. A June rate cut is probably off the table and it is possible that cuts may not start this year.

US inflation data for March was higher than markets anticipated, the third successive month of upside surprise, says STANLIB’s Chief Economist, Kevin Lings. US core inflation is nowhere near the US Fed’s 2% target. The main culprits were increases in shelter and motor vehicle insurance costs, but inflationary pressure appears to be broadening out, to, for example, health care and food. All this implies a June interest rate cut is not realistic. Whether there is even a cut this year also depends on whether the oil price surges due to the Middle East crisis.

In this podcast, Amit Parmar, JPMAM International Equity Group vice president and investment specialist, discusses with STANLIB’s Chief Economist, Kevin Lings, how various stocks make their way into the STANLIB Global Select Fund. JPMAM uses fundamental, bottom-up stock selection, as its global team of over 80 analysts seek out companies with great business quality, sustainable earnings and long-term drivers. They apply a valuation framework to determine the price that the fund is willing to pay for each stock. Parmar also explains some of the portfolio’s over- and underweight positions and what factors influenced those decisions.

A range of data in the past week shows the US labour market remains extremely strong. For example, the US gained 303 000 jobs in March, well above market expectations, while the unemployment rate has remained below 4% for 26 months. Given that wage growth is still relatively high at 4.1%, and the recent surge in oil prices could create further inflationary pressure, the US Federal Reserve is likely to maintain a “wait and see” approach towards interest rate cuts. The first US rate may only occur in about September and there could be two, not three, cuts this year.

SA’s inflation data for February surprised on the upside, rising to 5.6% y/y from 5.3% y/y in January. This was due largely to a hike in medical aid costs, as well as a higher petrol price. Increases in administered costs like medical aid, energy and water cannot be controlled by higher interest rates. Arguably, the SA Reserve Bank may have to accept that anchoring inflation around its 4.5% target is impossible and find a way to cut interest rates, or risk triggering a recession.

Around the world, other central banks cut policy rates in March, including Switzerland, Norway, Brazil, Mexico and Czech Republic. The US Federal Reserve held rates but indicated it would cut three times this year, despite elevated inflation. We anticipate the global interest rate cutting cycle will follow the Fed and start around the middle of the year, although a geopolitical or climate event could disrupt the outlook.

In this second podcast of our series, our chief economist, Kevin Lings and Amit Parmar, Investment Specialist at J.P. Morgan Asset Management, delve into the investment philosophy behind the STANLIB Global Select Fund.

US February CPI data was disappointing, showing an increase to 3.2% y/y (from 3.1% in January), with indications of more underlying pressure. It means the US Federal Reserve is unlikely to be able to cut interest rates by June, as widely expected, but only later in the year, which will influence other global central bankers, including in SA.

Transnet’s draft Network Statement published on Friday is a detailed outline of how government will involve the private sector in running numerous corridors. It is more encouraging than the previous draft, which for example limited contract length to two years. However, it will take 3-5 years before any progress becomes evident.

US labour data for February showed more jobs were created than the market expected, but a broader range of data suggests that labour conditions are softening. The unemployment rate is rising, wage growth is slowing and the quit rate has fallen back to the pre-Covid average. At this stage, there is no sign of recession, but the trends may encourage a US rate cut in June.

SA’s Q4 2023 GDP growth of 0.1% was below market expectations, although the country is not in recession. Annual growth of 0.6% is less than the 1.6% annual population growth. There were some encouraging developments in the transport sector, especially airline travel to Cape Town, but consumer spending is declining. Infrastructural renewal is critical to help kickstart growth.