This Week: What SA's trade surplus means

03 May 2021

Chris Holdsworth

Chief Investment Strategist, Investec Wealth & Investment

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

Covid-19 update – global new cases plateau; have we seen the peak of the latest wave? The seven-day average number of new cases across the globe is currently at 820,000 cases/day, flat week-on-week.
 
India still has the largest number of new infections at 371,000 cases/day, up 20% week-on-week. However, as with last week, the vast majority of the other 19 countries and regions with the highest number of new infections saw a weekly decline in the number of new infections. 
 
Europe was down 16% week-on-week at 131,000 cases/day, while the US was down 15% week-on-week at 50,000 cases/day. The median decline across the globe was 10% week-on-week, close to the biggest median decline since March last year.
 
The seven-day average number of new infections in SA is at 1,200 infections/day, down 2.5% week-on-week.
 
7.7% of the global population has now received at least one vaccine shot. The UK is just over 50%, the US is at 43%, Europe is at 21% and Asia is at 4.6%. Using a very simplistic linear model, the US is still on track to vaccinate 75% of its population by the end of July this year

GDP, commodities, inflation

US GDP is close to pre-covid levels. Last week saw the US report Q1 GDP growth at 6.4% (quarter-on-quarter, seasonally adjusted annual rate), a bit above the Refinitiv consensus forecast of 6.1%. It was the fourth quarter in a row that the GDP print had been in line or above the consensus forecast.
 
Year-on-year GDP growth was +0.4% but there are some base effects to consider. Real Q1 GDP was 0.9% below the pre-covid peak. Nominal US GDP is already above the pre-covid peak (by 1.4%).
 
While the recovery has been swift, it has come with some inflation. The GDP price deflator was up 1.9% year-on-year in Q1. The deflator was up 1% quarter-on-quarter in Q1 alone, the fastest quarterly increase since 1990.
 
While real GDP is up 4% year-on-year, total employment is still down 4%. It’s not unusual for GDP to recover more rapidly than employment post a recession, but the scale of the difference this time around is noteworthy.
 
Europe reports Q1 GDP too. As with the US, European GDP growth surprised on the upside. Quarter-on-quarter GDP shrank 0.6% vs the consensus estimate of a contraction of 0.8% and the year-on-year number showed a decline of 1.8% vs the consensus estimate of 2% down. It was the third positive surprise in a row.
 
We’ll get several more GDP prints over the next six weeks or so. So far, China, South Korea, France and the USA are up year-on-year, while the Eurozone is down.
 
Despite European economic data being much weaker than US economic data, Europe has surprised on the upside by more than the US.
 
Chinese data has started to meaningfully surprise on the upside again, but broader emerging market economic data is surprising by more.
 
US core PCE inflation picks up, but is still below 2%. US core PCE inflation for March came out at 1.8% year-on-year, in line with consensus and up from 1.4% in February. Given that core PCE inflation was last at 2% in December 2018, there is some way to go to make up the gap.
 
The post 2018 gap is unlikely to be made up in the next few months at least. However, a reading of 2.8% in August will see core PCE inflation back at the 2% trend post 2018. That will also likely be past the point at which 75% of the US population will be vaccinated and the Fed will be looking to discuss tapering.
 
Getting to 2.8% by August is by no means a given. In any event, it seems the Fed is currently focused on employment, rather than inflation. The consensus view is that the Fed will start to taper in Q4 this year.
 
Inflation expectations continue to pick up, more so in the US. The 10-year US breakeven rate, the market implied expectation of inflation over the coming decade, is at 2.4%, the highest reading since 2013. The German 10-year breakeven rate is at 1.3%, close to the highest reading since 2018. While Japanese inflation expectations have picked up over the past few months, the breakeven rate is still barely above 0, at 0.17%.
 
The market-implied possibility of very high inflation has picked up too. Based on the Minneapolis Fed model, the market is pricing in a roughly 10% chance that inflation will average 3.8% a year over the next five years. In January, the market was implying a 10% chance of inflation averaging 3.3% over the next five years.
 
PMI data on output and input prices show that US companies in aggregate have higher pricing power at this point and are better able to pass on input price increases.
 
Commodities are still on a tear. April saw the Bloomberg spot commodity index up 8.7%, the second biggest mom % change since May 2016 and one of the top 10 monthly increases seen in the past 20 years.
 
The net result is that the broad basket of commodity prices is now 9.5% off record highs and is up 64% year-on-year. However, the slowdown in Chinese credit extension implies less buoyant times ahead for commodity prices.
 
There’s a huge savings pile across the globe. The global excess savings rate, the extra amount of saving compared to 2019, is at 6% of global GDP. In the US, it is at 12% of GDP, at US$2 trillion.  Consumers have a sizeable cushion in aggregate and will presumably further increase expenditure as inflation picks up given still low short rates.

 
Massive upgrades for US earnings as companies continue to beat market forecasts. 303 S&P 500 companies have reported so far, with 87% beating on the earnings line. The beats over the past week were particularly impressive and resulted in the total earnings forecast for Q1 being revised up by around 10%.
 
Total Q1 earnings are now expected to be up 46% year-on-year. On average, earnings releases have beaten the consensus forecast by 23%. Every sector has seen earnings above the bottom-up forecast. Consumer discretionary earnings have been 62% above consensus, while financials have been 35% above consensus.

 
This has been an extraordinary reporting season so far. This week 139 companies are due to report.
              
SA’s trade balance surprises on the upside again. SA’s trade surplus for March came out at a record R53bn vs the consensus forecast of R25bn. In addition, the previous month’s release was revised up to R31bn, from R29bn. That takes the rolling 12-month trade balance to +R336bn.
     
A positive trade balance is not always a positive indicator – sometimes it occurs due to a collapse in domestic demand. In this case that does not hold though. Year-to-date, imports are up 6.6% year-on-year. The massive increase in the trade balance is due to the 26% year-on-year increase in the value of exports.
 
As an aside, much of the increase in exports has been due to the increase in the price of the basket of goods we export, rather than a surge in the volume of exports. As a result, real GDP numbers, which look at the volume of goods, are likely to understate the recovery in SA. Nominal GDP will reflect it and the debt-to-GDP ratio is calculated using nominal numbers. The net result is the massive improvement in the trade balance should benefit the bond market in SA.
 
Finally, Chinese companies are going west. Despite rising tensions between the US and China, Chinese company IPOs in the US have got off to a record start. Year-to-date, Chinese IPOs have raised US$6.6bn, up eight times from 2020 levels and a record high.

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