The Week Ahead

  • US unemployment hits a generational low point

    By virtually any gauge, the US economy is showing good sustained growth. US nonfarm payrolls for Apr which came out last Fri 3 May easily beat the expected 187k consensus, coming in at 263k. Unemployment is now at a generational low point of 3.6%-the last time unemployment was this low was in Dec 1969, when it hit 3.5%. The economic growth period in the US that started in Mar 2009 is now only a few months away from being the longest in history. Unsurprisingly, US Federal Reserve chairman Jerome Powell gave a reasonably upbeat assessment of the US economy last week with no hint of any further rate hikes this year or even next year.

    With almost 80% of S&P 500 companies having reported their Q1 figures by last week, ¾ of them have reported a positive earnings surprise and 60% have reported a positive revenue surprise. The forward one year PE ratio for the S&P 500 is 16.8x, which is above the 5-year average PE of 16.4x and the 10-year average of 14.7x. Thus while the S&P 500’s valuation is certainly not cheap, it is reflecting continued optimism in the growth of the US economy.

    From a global perspective, growth still remains reasonable but there are numerous pitfalls around, notably in the form of potentially higher crude oil prices and heightened geopolitical tensions. While the US is confident that its recent decision to indirectly cut Iranian oil exports to zero will have only a limited impact on prices, much depends on the degree of compliance that China observes with respect to Iranian oil sanctions. If China decides to ignore or only partially implement the US’s removal of the oil sanction waiver on Iran, the price impact will likely be negligible. This is because China is the largest importer of Iranian crude oil. Additionally, both Saudi Arabia and the UAE have committed to filling in gaps in oil supply caused by decreased Iranian supply. This will not be difficult, as the Gulf states have significant spare capacity at present. Of course, by soaking up excess Gulf capacity, this also means that global oil supply at the margin becomes ever more vulnerable to shocks from highly unstable oil-producing states such as Libya and Venezuela. Thus the oil market currently is in a high state of flux and crude oil prices will reflect that volatility, at least in the short term.

    Emerging markets (EMs) are still attracting their fair share of investment flows despite heightened political uncertainty in countries like Argentina and Turkey. The South African General Election on 8 May has significance not just for SA but for the whole EM asset class.  Markets are currently pricing in a comfortable majority for the governing ANC (comfortable being defined as between 55% and 60%) but a recent opinion poll by the SA Institute for Race Relations (SAIRR) last week gave the ANC a significantly reduced share of the vote at around 51% (assuming a voter turnout percentage of 71.9%). The SAIRR has an excellent track record in forecasting election outcomes, so this should be taken seriously. If the turnout is much lower than 71.9%, it will likely take the ANC’s share below 50%, a situation that would not bode well for the ZAR or equity markets. Markets like certainty and an election outcome that results in no overall winner in parliament would inject significant uncertainty into the South African political situation.

    The Bank of England’s Monetary Policy Committee struck a somewhat hawkish tone last week, hinting that although interest rate hikes in the UK may be delayed until 2020, the pace and scale of hikes thereafter may increase significantly, as inflation risks pick up.

    Embattled British prime minister Theresa May’s Conservative Party suffered a humiliating thrashing at the local council elections in England and Wales, losing  over 1 300 councillors. At the half-way stage in any UK parliament, the governing party traditionally loses some support but the scale of this electoral defeat was breathtaking. Mrs May attempted to interpret the result as an indication that that English and Welsh electorate were tired of the whole Brexit debate and now just wanted to move on but that seems like a completely mistaken analysis. The fact that the pro-Remain Liberal Democrat Party won over 700 council seats with the pro-remain Green Party also doing extremely well suggests that the electorate has decided that the referendum vote in Jun 2016 made a wrong decision and that in light of  all of the new information that has come to light about the consequences of leaving the European Union, a new, confirmatory referendum should take place. This just adds more political uncertainty into the mix and may result in heightened volatility in sterling next week.  

    The JSE All Share Index continued its painfully slow upwards trajectory, closing the week 0.8% higher at 59 336. It is now 3.8% below its all time high achieved on 25 Jan 2018.  

    Economic related events this week;

    Mon 6 May                                                                  Standard Bank PMI Apr

    Wed 8 May                                                                  SA General Election-Final results expected Sun 12 May

    Thu 9 May                                                                   SA Mining Output, Manufacturing Production Mar