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05 Jun 2023

This Week: Diverging data

Chris Holdsworth

Chris Holdsworth

Chief Investment Strategist, Investec Wealth & Investment

A weekly macroeconomic overview from Investec Wealth & Investment's chief investment strategist, Chris Holdsworth.

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Global money supply growth continues to slow; US nonfarm payrolls beat expectations

US M2 money supply growth continues to contract, now at -4.6% year-on-year. Money supply growth is slowing elsewhere too – Japan is at 2.5% year-on-year and Europe is at 1.3%. Chinese M2 growth is still elevated, at +12.4% year-on-year.  

The turnaround in US money supply growth is simply astounding. The current growth rate is unprecedented in at least 60 years.

US money supply growth has now been negative for nine months in a row and is down over one, three, six and 12 months.

Europe is down over three and six months too.

The money supply impetus behind growth and inflation is well behind us. While there is a slowdown in money supply growth underway, the growth since pre-covid levels is still astounding though.

US nonfarm payrolls were a massive beat (again). Despite several signs of an impending slowdown in the US economy, the labour market appears to continue to be in rude health. Nonfarm payrolls were up 339,000 in May, well above the consensus forecast of 195,000. In addition, the previous two months were revised up by a collective 93,000. 

There are, however, clear signs of a softening ahead. Wage growth slowed to 4.3% from 4.4% (inflation is currently 4.9%). Wage growth at the low end has slowed sharply. As an example, wage growth for restaurant workers is now at 5% vs a peak of over 16% in March last year.

The monthly change in job openings tends to be fairly volatile but the trend is still sharply down. There are now 10 million job openings in the US, down from a peak of 12 million in March last year.

There is still a sizeable disconnect between the nonfarm payroll numbers and the household survey estimate. Job cuts are still elevated, while small businesses are not looking to hire, nor are they looking to raise compensation.

The ISM manufacturing PMI, at 46.9, points to a material slowdown in nonfarm payrolls ahead too. 

All told the medium-term outlook for the US labour market looks pretty dim. As an aside, it looks like long Covid might finally be behind us. The number of Americans taking sick leave last month was below the pre-covid average for the first time since November 2019. 

European inflation down again; wide dispersion in interest rate trajectories; volatility remains low; tough times for speculative-grade issuers

European CPI is declining rapidly. The preliminary estimate for Eurozone inflation in May came out last week at 6.1%, below the consensus forecast of 6.3% and well below the prior reading of 7%. While the continuing decline in CPI inflation will have eased some concerns at the European Central Bank (ECB), it would likely be more pleased with the turn in core CPI inflation. Eurozone core CPI inflation came out at 5.3%, below the consensus of 5.5% and the prior reading of 5.6%

In the meantime, the Eurozone unemployment rate is at a record low of 6.5%.

The net result is that the ECB still probably feels that it has space to increase rates further. The market is currently pricing in a 0.25 percentage point (25bps) increase at the meeting on 15 June followed by another 25bp increase by September, at which point rates are expected to be kept flat.

There’s a wide dispersion of interest rate trajectories across the globe. The market is currently pricing in nearly 2.3 percentage points (230bps) of cuts from the Fed over the coming three years. The ECB and Bank of England are only priced to cut by around 100bps and Japan is expected to increase rates by 30bps. There is also massive dispersion within emerging market countries too. Market expectations for interest rates in South Africa are among the most bearish of the countries we track.

Volatility is abnormally low.  US government bonds are still much less liquid than normal and are still quite volatile by historical standards.

However, volatility in other asset classes continues to decline. Implied volatility for the euro/US dollar and sterling/US dollar exchange rates is at the bottom end of the spectrum.

Equity market volatility has been declining across the globe too. The VIX is at a post-covid low of 14.6 (increases in the VIX are strongly associated with negative S&P 500 returns).

The disconnect between bond market volatility and equity market volatility is large and unusual.

Realised volatility (rather than implied), is currently 14% for the S&P 500 while it is 10% for a seven to 10-year US government bond ETF.

There have been no daily moves of 2% or more for the S&P 500 and MSCI World over the past 60 days.

Tough times for speculative-grade bond issuers.  Despite the evident slowing of the global economy, S&P upgraded more investment-grade companies than they downgraded in April. In contrast, there were many more downgrades of sub-investment grade companies than upgrades.

S&P now expects 4.25% of speculative-grade corporate issuers to default in the 12 months to March 2024 (up from 2.5% in March this year). Defaults are already high. Corporate defaults in April were up 75% year-on-year and were 25% above the 10-year average.

Credit spreads still seem optimistically priced – especially high-yield credit. 

Soft commodity prices; tough at the bottom end for SA consumers; drought in Panama

Commodities are still soft. Aggregate commodities are down around 30% over the past year. Energy prices are down over 50%.

Precious metals have held up well. The aggregate picture is consistent with a global slowdown – and lower inflation ahead.

It’s tough at the low end for consumers in South Africa. Inflation at the very low end is currently sitting at 11%. Inflation at the top end is at 6.8%. The gap is the largest since 2009.  

A large part of the issue is food price inflation, at 14%, but there is light at the end of the tunnel. Wheat and maize prices have recently been down materially year-on-year.

Despite rand weakness, the rand price of Brent is down materially year-on-year too.

The lower maize price raises the material chance of food price inflation coming in under core inflation over the coming nine months. The Reserve Bank expects core inflation to be 5.2% in Q1 next year – the data above suggests a reasonable chance that headline inflation will be even lower.

Another example of a drought affecting logistics – and inflation. We’ve previously looked at the level of water at Kaub on the Rhine – and how low levels over the past few years have affected supply chains in Germany. Panama provides another example. A drought in Panama has led to falling water levels at Lake Gatun, the dam that is used to feed the locks in the Panama Canal. The Panama Canal Authority is forecasting a record low depth at Gatun of 28.9 metres at the end of July (8% below the five-year average).

Less water means reducing draft levels (how low a vessel can sit in the water). That in turn means reducing the weight that can be taken on the largest ships.

This won’t necessarily lead to a supply crunch like we saw post-covid but it is a reminder that climate change is likely to lead to higher prices – and needs significant investment to counter. 



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