Focus on FOMC as oil prices rise

War update

Over the past few days, Houthi fighters have gained ground in Yemen and now have control over its Red Sea coastline. In effect, they are in a stronger position to shut the Strait of Bab-el-Mandeb, which links the Red Sea and the Gulf of Aden.

In addition, on Friday, the Saudi East-West pipeline was hit by drones and taken offline, removing around 4% of global oil supply. The pipeline was being used to divert oil supply away from the Strait of Hormuz.

Following these developments, crude oil prices are up around 3% this morning, with Brent at $108/barrel and West Texas Intermediate at $103/barrel at the time of writing.            

Chinese oil imports have risen, which is also likely putting upward pressure on global oil prices. 

Crack spreads (the difference between end-product and crude prices) are a problem too, as noted by President Donald Trump, who called on Ukraine to stop targeting Russian diesel facilities. 

 The war has also had an impact on bond yields. Since the start of the US/Israeli campaign in Iran, long-dated bond yields have risen and become more volatile.

The US has announced another intervention in bond markets, tripling buybacks to around US$6bn at the long end of the yield curve. Despite this action, yields remain elevated.

GISG update

Last week, our Global Investment Strategy Group (GISG) met and decided to keep the long-term global risk score unchanged at 0. The current consensus forecast is for global growth to continue at around 3% for the foreseeable future. US growth is expected to continue at around 2%.

Global earnings growth remains strong, particularly in the US. However, earnings growth is set to slow from this point forward, even though at a very elevated rate.

As noted above, bond yields have risen materially, raising the cost of capital.

Valuations are still stretched, with price/earnings multiples in the US and Japan at premiums to their 15-year medians. The premium the US trades at relative to the rest of the world has, however, compressed.

The GISG believes that GDP and earnings growth remain good, but earnings growth is set to slow, and rising bond yields pose a headwind for equity valuations. 

Global growth was stable in the second quarter

Despite the war in Iran, global growth was stable in the second quarter of the year. GDP growth over the last four quarters is 2.4%, approximately in line with the first-quarter reading.

The US economy has grown roughly in line with median country growth over the past year.

US CPI holds steady, at 3.4%

Last week, US consumer inflation (CPI) came out at 3.4%, in line with the consensus forecast.

Month-on-month CPI was 0.4%, in part due to surging energy prices.

However, core inflation was at 2.4%. While better than headline inflation, it is probably not at a level that will give the Fed comfort. That said, even zero monthly inflation will leave year-on-year inflation above 2% by January.

The services prices paid component of the Institute of Supply Management's index points to rising US inflation over the coming months.

Producer inflation suggests upside, too, with the recent print at 5.4%. Typically, producer prices filter through into consumer prices.

There may also be upstream and broadening inflation pressures. The FOMC meets this week, and at this point, approximately half of the contributors to the Bloomberg consensus expect a hike, while the rest expect no change.

Transnet reports a profit amid the transfer of the Durban Container Terminals (DCT) to ICTSI

Last week, Transnet released its latest financial results. There was a sizeable once-off gain from the disposal of a 49.999% stake in DCT to ICTSI, a global port management company based in the Philippines. Transnet retains majority ownership, but management control vests with ICTSI.

The DCT agreement will likely set the scene for the future of private-public partnerships in reforming state-owned enterprises (SOEs) and logistics in South Africa. Port performance has been volatile; however, overall port performance has been trending higher.

Another SOE worth mentioning is PRASA (which handles passenger rail), with monthly passenger rail numbers reaching their highest levels since the pandemic. While materially lower than pre-pandemic peaks, there is growing evidence of a recovery underway. Should the trend continue, some household spending will be freed up for other uses, given that rail transport is typically cheaper than road transport. 

The transport minister, Barbara Creecy, aims to have 600 million passenger journeys a year by 2030, which is not outside the realm of possibility.

Our South African asset allocation committee will meet this week to discuss developments in structural reform. 

SA growth misses

South Africa's GDP shrank by 0.2% (quarter-on-quarter, annualised) in the second quarter, slightly worse than the consensus forecast of a decline of 0.1%. Year-on-year growth was 0.9% vs the consensus forecast of 1.2%. Total GDP over the past four quarters was up 1.6%, compared with the previous four quarters, well below the global median growth rate of 2.4%. The economy is only 3.6% larger than it was in December 2019. 

There was little in the reading to get excited about. Mining, manufacturing and trade were all down quarter on quarter. Nominal GDP was down over the quarter, too, largely due to lower agriculture and commodity prices. Lower nominal GDP does little to lower the debt-to-GDP trajectory. 

Current estimates for growth in 2026 range from 1.1% to 1.6%.

To reach the consensus forecast of 1.2% for the year, the economy would need to grow at 0.4% in the next two quarters, assuming the first two quarters are not revised. It's not an impossible ask, but given high energy prices, there is probably downside risk to growth forecasts.