The IMF updates its outlook. The latest edition of the International Monetary Fund’s (IMF) World Economic Outlook (WEO) was published last week. The IMF upgraded its US GDP growth forecast for this year to 2.7% (consensus is 2.4%) from 2.1% but downgraded most other developed markets. The IMF’s emerging market growth forecast did not change materially. Overall, the IMF is forecasting 3.2% global growth this year and next.

Risk to US growth forecast for this year.  The year-on-year change in nominal GDP and personal consumption expenditure tend to move together.

Average year-on-year PCE growth up to February is sitting at 4.7%, which implies nominal GDP growth of 4.6%.

This implies that GDP growth in the US should be around 2% in 2024 if average inflation is 2.5%. Down-trending nominal PCE implies downside risks to growth in the US. March PCE is due this week, so we’ll update our model thereafter.

US retail sales accelerate. Last week we saw a strong retail sales print out of the US (+0.7% month-on-month), well ahead of consensus of +0.4%, but on an inflation-adjusted basis the picture is somewhat weaker. On a year-on-year basis, real retail sales were up just over 0%.

Nominal real retail sales remain above the long-term trend over the sample period from 2001 but remain in line with the trend relative to the post-Global Financial Crisis period. Real retail sales have been flat over the last two years.

US leading indicator declines, credit card delinquencies tick up. After a small uptick last month, the leading indicator has declined again.

The leading indicator is down 5.5% year-on-year, an improvement from the -8% year-on-year in the middle of last year but still at the sort of level that suggests weak growth ahead.

Consumer expectations are also consistent with weak growth ahead.

Credit card delinquencies picked up again in the fourth quarter and are now running at their highest level in at least a decade. There is a large group of US consumers under increasing financial pressure even as the labour market has proved resilient.  

The market changes its view on rates. Given still strong growth in the US and sticky inflation, the market is now pricing in just one-and-a-half rate cuts by year-end, starting in September.

It’s a different picture in Europe where growth has been materially weaker. The European Central Bank is priced to cut three times by year-end.

The market takes a knock. It’s been a long time coming but global equities have finally rolled over, off their record highs. Developed market equities are down around 5%, from their peak. 

It has been an unusual drawdown in that traditionally cyclical sectors – energy, financials, industrials and materials – have so far proven to be relatively defensive.

Weak equity markets have coincided with weak bond markets, as the market has ruled out the Fed coming to the rescue in a meaningful fashion this year. Gold has done the job it’s supposed to though – up nearly 10% over the past month.

It’s not just gold. Metals in general have done well despite the strong dollar and weak risk assets, presumably on the back of strong Chinese demand.

As a side note, cocoa prices are still ripping higher. 

Chinese GDP beats forecasts. Chinese GDP growth for the first quarter came out at 5.3%, well above the consensus of 4.8%. It’s widely expected however that Chinese growth will decelerate going forward. Chinese demand matters immensely for the South African market. 

US reporting season kicks off. So far 70 S&P 500 constituents have reported for the first quarter. Of those, 79% have beaten on the bottom line. Even so, earnings growth is far from strong at +2.9% year-on-year (+5.6% if energy is removed).

There is another way to split it too – according to FactSet, Amazon, Alphabet, Meta, Microsoft and Nvidia are expected to see collective earnings up 64% year-on-year, while earnings growth for the rest of the S&P 500 constituents is expected to be -6%. Meta, Microsoft and Alphabet are due to report this week.

The consensus view is that earnings growth for those five will slow over the coming year while earnings growth for the rest of the market will accelerate.

So far for this quarter earnings beats have seen no market reaction while misses have been punished much more than usual. This week 159 companies are due to report.

SA inflation surprises to the downside. South African inflation in March came out at 5.3%, down from 5.6% and mildly below the consensus forecast of 5.4%.

Food inflation continues to rapidly move in the right direction, coming in at 4.9% (down from 6% in February) despite several headwinds including water infrastructure issues in South Africa and El Niño-driven drought conditions.

We remain optimistic that food prices will continue to trend in the right direction. Our estimates suggest that food inflation should be between 2.8% and 5.3% in nine months.

Fuel inflation in South Africa came out at around 6%, below the year-on-year appreciation in the price of Brent crude. There is typically around a one-month lag between changes in the price of Brent crude and its passthrough into domestic food prices.

The latest inflation print has led to some material changes to our inflation model outlook. We expect inflation to peak at 5.8% in June before declining materially post-September.

Should our inflation forecasts prove correct, this should be a net positive for the interest rate trajectory for South Africa.

A tough five years ahead? There was an interesting chapter in the WEO release covering the outlook for global GDP growth over the next five years. The five-year outlook from both the IMF and consensus has been regularly trending down over the past decade.

It’s not just due to an expected slowdown in a few large economies. The five-year forecast is down from 2008 for nearly every country.

So what gives? Part of the issue is that working-age population growth has slowed across the globe.

Another problem is that investment rates have declined for companies around the world too.

The net result is that short of a massive productivity boost from artificial intelligence, we’re looking at a pretty tepid global growth rate for the next five years. While this will likely be a headwind for aggregate equity performance, there will still likely be opportunities under the surface – i.e. a stock pickers market for some time to come.