GISG update | US consumer confidence falls | MPC preview

The GISG score remains at -1

Last week Investec’s Global Investment Strategy Group (GISG) met and kept its risk score at -1. The primary consideration at the meeting was whether the committee should increase the risk score (less risk averse) given recent market moves. The thinking behind this was, given the slight majority that the Republicans have in the House, and the upcoming midterms, that US President Donald Trump will likely be politically constrained from too many more damaging moves.

The US market has already pulled back materially, and volatility is high. All of these are reasons to increase the risk score. However, there are also increasing signs of economic weakness in the US and corporate guidance has been far from encouraging. In addition, even after the pullback, the US remains expensive. While there are signs of economic acceleration outside of the US (China and perhaps Europe once stimulus becomes effective), and these markets are cheap, the US still accounts for the majority of the global developed market index and around half of the all-country world index. The committee decided to keep the risk score at -1. 
 

The S&P 500 takes a bath

Even after the rally on Friday, the S&P 500 is down around 8% from the recent peak, taking it back to the level of around six months ago. Hopefully, there will be a pause in any tariff-related news for a bit.

Europe has rallied, however, and the global drawdown has been much more limited than in the US. Over the same period, gold and a range of other commodities have rallied, with gold breaching $3000/oz on Friday, placing it above its previous high in real terms.  
 

US consumers are getting concerned

With the heightened uncertainty in the US, it is perhaps not surprising that consumer confidence is falling.

And the effect is bipartisan. Consumer confidence has declined among both Democrat and Republican voters.

As a post on X by Renaissance Macro Research points out, the primary concern is the labour market. Labour market expectations are the worst since 2008, and we can expect consumers to save more and spend less.

Uncertainty has real-world effects – the betting market is pricing in a 43% chance of a recession in the US in the next 12 months.

On a side note, it looks as if the UK is becoming an attractive destination for Americans. According to the Financial Times, there was also a 46% rise in applications for Irish citizenship from North Americans with Irish ancestry. 

The US labour force is in balance

A tougher immigration policy in the US has not yet led to a meaningful decrease in the supply of labour, with the labour market remaining broadly in balance. However, the trend decline in labour shortages seen over the three years or so has come to a halt. We will continue to monitor labour market balances in the US as they are key for wages and inflation, while widespread deportations could have a material impact on aggregate demand. 

Global inflation stays steady

So far, 34 of the 50 largest economies in the world have reported inflation for February. Of those, the median inflation rate was 2.8%, in line with the median over the two prior months.

US inflation came out at 2.8%, mildly below the consensus expectation of 2.9% and the prior reading of 3%.

Monthly inflation was 0.2%.  While year-on-year inflation may decline a little over the coming two months, if monthly inflation remains at this level, it will likely then start to tick up and head towards 3%.

The Institute of Supply Management service paid series also suggests US inflation will be around 2.8% in four months.

Even so, the Fed is likely to have been pleased with the result. Core sticky inflation ex-shelter declined to 2.7%.

Shelter inflation declined to 4.2%, while inflation ex-shelter declined to 2%. 

What will concern the Fed, however, is that inflation expectations have increased. It’s worth looking under the hood, though. There is a huge partisan split in inflation expectations, with Republicans expecting lower inflation and Democrats expecting higher inflation. 

The US housing market is unlocking

The US 30-year mortgage rate is now down to 6.7%.

Median home prices have declined too. The net result is the cost of financing a median new home is down around 20% from the peak.

Given the price decline, we can expect to see the US housing market start to unlock. 

Japanese GDP data disappoints, pulling back rate hike odds

The final estimate of Japan's quarter-on-quarter GDP data for the final quarter of 2024 disappointed, coming out at 0.6% vs the consensus estimate of 0.7%.

Of greater concern were the private consumption data which came out flat quarter-on-quarter, less than the consensus forecast. Private consumption is the key leading indicator for the direction of inflation.

Japan’s leading economic index surprised marginally to the downside and remains well below the average level since 2008.

The market has dialled back expectations of a more aggressive interest rate hiking cycle. Around a month ago market expectations were trending towards three rate hikes of a quarter of a percentage point each over the coming 12 months. The market now expects closer to two 25bps hikes.

This was negative for the yen which depreciated following the worse-than-expected economic data. The yen was weaker over the week but still stronger than a month ago. 

Outlook for China improves

The three-month average of total social finance was up 23% year-on-year in February. Total social finance is the key leading indicator for the Chinese economy.

In addition, China announced another stimulus plan on the weekend. The ‘Special Action Plan to Boost Consumption’ is designed to boost domestic demand by ‘increasing incomes and reducing burdens’. The plan mentions stabilising the stock market, increasing the range of bond products, support for tourism, calling for action to boost the incomes of both urban and rural residents, implementing an unemployment insurance policy and establishing a childcare subsidy scheme. It looks like a long-term strategic set of goals, rather than a short-term detailed plan with actual numbers –more detail is probably coming. 

SA Budget is presented – despite opposition

The 2025 Budget was presented by Finance Minister Enoch Godongwana despite opposition from Government of National Unity partners. The Budget included the main contentious point, which was a VAT increase. VAT is now planned to increase by half a percentage point this year and another half percentage point next year. Most of the Budget came out within expectations, with some exceptions.

GDP growth expectations for 2025/26 were revised upwards from 1.7% to 1.9%. That said, average GDP growth is still expected to be 1.8% over the next three years. This is below the minimum threshold of 2% for meaningful employment creation to occur.

National Treasury stuck to its fiscal consolidation guns. The de facto fiscal anchor, the primary surplus, is expected to increase over the next few years, reaching 2% of GDP by 2027/28. However, we remain concerned about the ability of the government to control expenditure.

The debt-to-GDP trajectory was revised upwards marginally and is not materially different from what was presented during the Medium-Term Budget Policy Statement in October. It is not at all certain that expenditure can be sufficiently contained to follow the trajectory. That said, National Treasury confirmed a three-year wage settlement agreement, which should go some way in controlling spending. 

How to fuel the SA growth engine?

GDP growth data released by Stats SA show that gross fixed capital formation (investment) declined by 8% quarter-on-quarter from Q3 to Q4. Quarter-on-quarter real gross fixed capital formation typically tracks business confidence. The release was disappointing since business confidence had at that point risen for three consecutive quarters.

A resurgence in gross fixed capital formation due to improved business confidence should be good for real GDP growth. Over time, there has been a strong link between GDP growth and investment. Fiscal constraints may hinder the extent to which the state can ignite investment though. 

The MPC decides

The Reserve Bank’s Monetary Policy Committee (MPC) is due to make the next rates announcement on Thursday. The current consensus forecast is for no cut. Six of the 17 contributors to the consensus forecast expect a quarter of a percentage point cut. It’s difficult to make an argument against a cut, given low inflation, weak growth and high real rates.