Inside Insights 7 June 2010

Investment Intelligence|Inside Insights

A weekly, in-depth yet concise report on the most important recent market movements and economic developments.

Added on 07 June 2010 @ 10:13 AM

Jobs, Jobs, Jobs and the lack thereof

After heavy losses in the month of May where MSCI’s developed markets index lost 9.5%, the emerging markets index 8.8%, and the JSE All Share 5.11% in rand terms, most world markets seemed to be stabilising in the first week in June, partly due to bargain hunters entering the market. However, US jobs data dented sentiment towards the end of the week. Fortunately, for once, there was no specific new bad news from Greece and its fellow PIIGS during the week (not that there has been any improvement on that front).

In terms of economic news, manufacturing data from around the world was mostly positive (see below). More data from the US, eurozone and UK released during the week all showed that the services sector – which is more important to advanced economies than manufacturing - was in expansionary territory in May. However, as has been the case for the eurozone recently, there was a divergent performance between the recovering ‘core’ eurozone countries such as Germany and France, and those on the fringes whose economies are still struggling. Eurozone retail sales fell 1.5% year-on-year in April, confirming that consumer confidence remains very weak, which is hardly surprising given record high unemployment as well as the more recent uncertainty over the future of the euro.

On the other side of the Atlantic, data from ADP Employer Services showed that the US added 55,000 private sector jobs in May, slightly below expectations. More encouragingly, April’s numbers were upwardly revised to 65,000 from 32,000. Non-farm payrolls, which include government positions, increased by 431,000 in May, also below expectations. And many of these jobs are temporary posts related to the census. So while the overall unemployment rate dropped to 9.7%, this was not enough to turn around sentiment. Given the importance of consumer spending to the American economy, and by implication the world’s economy, job creation numbers in the US remain one of the most important economic statistics for market watchers. Finally, while there are many legitimate concerns over the economic recovery (or potential lack of it) in the eurozone, and joblessness in the US, emerging economies continue to grow strongly. Looking at India’s economic growth rate of 8.6% in the first quarter (year-on-year), some of the current pessimism over the global economy might be unwarranted.

Manufacturing still expanding, but at slower rate

The first week of the month is when countries around the world release purchasing managers’ indices. Manufacturing PMIs slipped in May and the JPMorgan Global PMI fell to 57.2 from 57.8 in April. However, it remains close to the all time record of 57.9 set in 1998. Indeed, the index’s resilience shows that confidence among the world’s manufacturers has not taken a huge knock from the eurozone sovereign debt crisis. Even the eurozone’s PMI remained above the 50 points level that separates expansion from contraction for the eighth consecutive month, though it declined to 55.8 in May from 57.6 in April. The US PMI (ISM) slipped to 59.7 but came in above expectations of 59.0. The ISM index has been above 50 for ten consecutive months. China’s PMI has been in expansionary territory for 15 consecutive months, but here too the pace of growth slowed to 53.9 from 55.7 in April. This data points to a measure of success in the Chinese authorities’ aim of cooling the robust economic growth rate and subduing inflationary pressures.

In South Africa, the PMI also slipped back, to 51.1 from 55.2 in April. The disruptive strike at Transnet will probably have contributed to sentiment in the manufacturing sector slipping, but the index nonetheless points to ongoing, if more modest, recovery in the sector. This is consistent with our statement last week that the initial sharp post-recession rebound in economic activity will probably peter out until the consumer makes a stronger comeback over the next 12 -24 months. That said, new data from the Reserve Bank shows that consumers still have little demand for credit. Private sector credit extension fell in April on a year-on-year basis by 0.86%, the eighth consecutive month of annual declines. The largest segment of the credit market – mortgage advances – did show modest positive growth (3.64%), but corporate credit contracted by 4.58%, suggesting that businesses are still wary of investing in extra capacity.

The Week Ahead

• The Reserve Bank releases gold and foreign exchange reserves for May on Monday. This figure is closely watched for any signs that the Bank has been intervening specifically to stop the rand from appreciating too much. If the Reserve Bank was trying to weaken the rand, which it has always denied doing, recent capital outflows due to the recent wobble in global market sentiment, would have done this work for them.

• The Bureau for Economic Research releases the second quarter business confidence index, sponsored by RMB, on Tuesday.

• StatsSA releases mining and manufacturing production data for April on Thursday. Manufacturing production increased by 6.3% year-on-year in March, and the consensus forecast is for an acceleration to 7.1% in April. However, with the PMI having trended down over the last three months, this view might be a bit optimistic.

• Globally, this week sees the release of German and Chinese industrial production and Chinese inflation data. The European Central Bank and the Bank of England announce monetary policy decisions, with no change expected. Finally, the US Federal Reserve releases the closely-watched ‘Beige Book’ on current economic conditions on Wednesday, while key US May retail sales data come out on Friday. If anything is going to turn around the current negative mood on markets, it will be these last two indicators.

• The Fifa World Cup kicks off on Friday, focusing the attention of the entire world on South Africa for a four-week period.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights