When good news is bad news

The war in the Middle East escalates again

Over the weekend, Iran fired ballistic missiles at Israel in response to an attack on Beirut and this morning Israel responded with airstrikes. Brent crude is up just over 3% to $96.39/barrel.

It should be noted that China has played a major role in stabilising global oil prices. This is partly explained by high inventories before the war, partly by reduced domestic fuel demand, and partly by a few other technical factors. The net result is a sizeable drop off in Chinese oil imports since the start of the war.

Presumably, this is not sustainable – at some point, Chinese inventories will reach uncomfortable levels. The betting market is pricing in just a 30% chance that traffic through the Strait of Hormuz returns to normal by the end of July.

In other news, South Korea's stock exchange halted trading at one point after the market fell by more than 8%. It has since bounced and, at the time of writing, was down around 5% on the day and 10% over the past two trading days. There appears to be little reason for the move so far. It is an interesting set of stock price moves, illustrating investor jitters after a strong run.
 

US job openings surge despite war and AI

There was a sizeable recovery in US jobs openings in April – rising 731,000 to 7.6 million. Job openings are at their highest level since 2021.

In addition, the past few months of job openings data have been revised up regularly, reversing the trend over the past three years.

The year-on-year growth rate was also elevated, running at its highest rate since 2021. The data are somewhat surprising given the rise of artificial intelligence, current economic uncertainty, rising inflation and potential rate hikes by the Fed.

That said, the rise in job openings was concentrated in professional and business services. That includes some tech-related jobs, too. The combination of other sectors added just 63,000 openings, compared with the 668,000 extra job openings in professional and business services.

The rise in job openings indicates excess labour demand, according to our measure. If the trend persists, this suggests a strong economy with insufficient labour to meet demand. Restricted immigration may well exacerbate the shortage.

The Atlanta Fed's GDPNow estimate suggests another strong quarter in the US as well. 

A strong nonfarm payrolls print

The latest nonfarm payrolls data for May confirmed that the US labour market appears to have turned. The payrolls print came out at +172,000 vs the consensus of +88,000.

The number was good in several respects. The US employment diffusion index indicates how widespread job gains have been. A number above 50 indicates more than 50% of US industries are adding jobs. The latest result was 54.4, up from 49.6 in December. The three-month average is at its highest level since March 2024.

The past two months have been revised up by a collective 93,000. It has been a long time since we have seen such consistently positive revisions to payrolls data.
 

Good news is bad news on the rates front

The job openings data, the nonfarm payrolls data and the Atlanta Fed GDPNow estimate all point to a US economy that is reaccelerating. In general, the 'hard data' numbers have turned the corner.

However, the market reaction to the nonfarm payrolls print was negative, much to President Donald Trump's dismay.

The issue is that inflation is running well ahead of the Fed's target and now that there are signs of economic reacceleration, there are fewer reasons not to hike. Interest rate expectations shifted quite materially post the nonfarm payrolls print. The CME FedWatch indicator shows that the probability of at least one Fed hike by year-end rose by 20% on Friday alone. 

It hasn't helped that momentum stocks have been on a monumental tear relative to low volatility stocks up until now.

More US equity issuance to come?

Outside of a brief period in 2021, net equity issuance (effectively share issuance minus buybacks) in the US has been negative for around 20 years. US corporates have been buying back more shares than they issue. The initial public offerings (IPOs) this year may well change that. Goldman Sachs expects $160bn to be raised in IPOs this year, up from just below $50bn last year. This is not enough to turn net issuance positive, but it is enough to change its level meaningfully. 

Euro area inflation increases

Eurozone inflation increased in May, to 3.2% from 3%, as expected by the market. Core inflation is at 2.5%.

Inflation expectations held steady, with inflation one year ahead expected to be at 4%. The expectation for three years ahead fell from 3% to 2.9%.

Even so, the market is pricing in a rate hike by the European Central Bank this week, with near-certainty of another hike in September. 

We'll get inflation prints for most of the rest of the economies we track over the coming 3 weeks. Given the European numbers, we are likely to see global inflation continue to tick up.

Meanwhile, euro area credit extension is holding steady. Loans to households were up 3% year-on-year in April, holding steady at the same level over the last few months.

Loans to non-financial corporations are also holding up, rising 3.4% in April. We'll monitor how credit extension shifts in response to rate hikes. 

SA business confidence drops

The latest Bureau for Economic Research business confidence print declined from 47 points in the first quarter to 39 points in the second. This is not surprising given the war in Iran. The move resembles what happened around "Liberation Day" last year, when Trump announced a range of tariffs against other countries.

The most optimistic sector in South Africa remains new vehicle dealers. New vehicle sales have been strong for a while, but it's important to note that, while volumes have been robust, growth in the nominal value of sales has been weak – likely due to cheaper new vehicles entering the market.

And even though new-vehicle dealers remain optimistic, confidence declined from the previous quarter. Manufacturers became slightly more optimistic, although off an extremely low base and at a low level on aggregate. 

SA growth outlook deteriorates

The latest ABSA/BER purchasing managers' index also shows signs of moderation in economic activity in South Africa. Even so, the print remains in expansionary territory.

The performance of state-owned enterprises in South Africa has recently declined slightly. This was due to a deteriorating average energy availability factor and weak April numbers for ports and rail in particular. 

Fitch upgrades SA

On Friday, rating agency Fitch upgraded South Africa's rating from BB- to BB, primarily due to the improving debt-to-GDP trajectory. That puts South Africa two rungs below investment grade in Fitch's view. Based on pricing across other sovereigns, an upgrade to investment-grade status would reduce the five-year cost of borrowing in US dollars by around 30bps (0.3 of a percentage point).