| The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions. Market Watch The JSE has reverted to its factory settings for the moment and is tracking sideways but has hung onto the gains we saw post-elections. The UK is on a similar trajectory – but they didn’t hang onto their post-election gains.  The tech-led stock rout in the US is pausing as markets await key inflation data — the last big data point before the Federal Reserve meets this week. Meanwhile, investors have been snapping up less obvious beneficiaries of the AI boom.  The S&P 500 also suffered its biggest drop since 2022 as Tech Stocks cratered. The index fell 2.3% after the disappointing earnings reports from Google’s parent company, Alphabet, and Tesla. The Nasdaq composite fell 3.6%. Investors were expecting perfection from the tech giants’ earnings reports. The sell-off indicates that investors were disappointed by the reports. It appears that investors are negatively reacting to any whiff of softness that we see from these big tech players.  UK economy Some of the UK price indicators that the Bank of England watches closely, for signs of lingering inflation, are flashing a green light for interest-rate reductions as soon as next week. Services inflation has eased more than the headline measure suggests, once volatile parts were dismissed by central bank officials and, unbelievably, the impact of Taylor Swift’s The Eras concert tour are stripped out (yes, it had that much of an impact). That, along with a cooling of wage growth, may be enough to persuade wavering BOE officials that they can reduce borrowing costs from a 16-year high on Aug. 1.  Note: Underlying CPI excludes accommodation services, cultural services, airfares, education and package holidays Inflation is finally back at the BOE’s 2% target, having hit double digits in 2022 in the wake of the pandemic and Russia’s invasion of Ukraine. But the central bank is on guard against prices picking up again. It’s focusing on the giant services sector for any indication of a revival in domestic pressures. While the BOE has been signalling since February that rates will move lower, most of the nine-member Monetary Policy Committee has judged those underlying metrics too hot for comfort. (With all the messy politics around, they are probably going to default to following the FED rather than the ECB.) Services inflation held steady at 5.7% in June, an unexpectedly strong reading that was well above the 5.1% rate predicted in the BOE latest forecasts released in May.  Pay Growth Is Set to Drop Below 5% for the First Time Since 2022 Note: Projection based on June and July maintaining May’s month-on-month growth of 0.27% The BOE played down the significance of some of these prices at its meeting in June as it explained why services inflation had overshot its forecast. “This strength in part reflected prices that are index-linked or regulated, which are typically changed only annually, and volatile components,” the minutes of the discussion recorded. There are also signs that the labour market is cooling. Private-sector wage growth dropped to 3.3% on a one-month annualized basis in May, coming much closer to levels the BOE sees as consistent with inflation staying at its target. If repeated in June and July, it would take headline private-sector pay inflation below 5% for the first time since 2022 with a further slowdown likely.  Trump/Harris and another look at Trump Economics American politics seems to work with glacial slowness and all of a sudden you’ll get a spring melt and there will be a flood of changes – which is what we have seen over the last few weeks. In a stroke of strategic brilliance, Biden announced that he was dropping out of the presidential race and endorsed Kamala Harris only once the Republican Convention was over and the wishy-washy VP pick was announced (Vance, the VP pick is a lightweight MAGA sycophant chosen to suck up to his boss and bolster the base – not for the new status quo). Trump is fit to be tied, and the only insults he can find are to call her the Childless Cat Lady, Laughing Kamala and deliberately mispronouncing her name (it’s pronounced Karma-La). While Kamala’s nomination still has to be ratified by the Democratic National Convention next month, it’s pretty much fait accompli. Obama endorsed her on Friday and her donations are well over $100m for the week (yes, much from cat-ladies and swifties). Interestingly, it appears that the news about Elon donating $45m a month to Trump was nonsense made up by the Wall Street Journal. The odds of Trump winning have narrowed once again – and polls put him neck-in-neck with Harris. But, from an economic perspective let’s keep an eye on what might happen with a Trump 2.0. One thing Trump is focused on is the dollar. Trump has said he wants a weaker dollar (as we had in his first Era (Error)) but the consensus is that his policies will push up inflation, interest rates and hence the dollar. Based on the market reaction after the first debate and the assassination attempt on him, bonds are likely to remain in higher-yield territory. Again, the argument here is his tax cuts and fiscal expansion will push up long-end yields. But that might be offset by the effect of higher tariffs, which are actually deflationary because they squeeze people’s incomes. (Trump always sells Tariffs as if it is something that the exporting country pays (especially China), of course, they don’t – it’s the US consumer). Whoever wins is probably going to inherit a softening economy and the potential start of an easing cycle. (At the start of his first term, the Fed was raising rates.) There’s generally more consensus on what sectors will benefit under Trump, such as banks and oil companies. But these are also cyclical sectors that will be much more affected by the macro backdrop. And even there the translation from Trump love to outperformance is uncertain. He might be more supportive of oil, but will that just increase supply and hurt oil prices anyway? There have been some recent signs the US consumer might be starting to crack. Data on new home sales disappointed. Companies like Whirlpool, PepsiCo., Delta Air Lines and more have indicated demand is slowing. But nothing is terrible just yet. It’s going to be an interesting 100 days ahead.  US GDP The first estimate of Q2 GDP came in at a 2.8%, double the final Q1 print of 1.4% (which was already the lowest print since the technical (pandemic-related) recession in Q2 2022). The hotter-than-expected Q1 print leaves H1 GDP at roughly 2.1%, a step down from the 3.1% pace of 2023.  The increase in real GDP primarily reflected an upturn in inventory investment, nonresidential fixed investment, and an acceleration in consumer spending. These movements were partly offset by a downturn in housing investment. Meanwhile, the core PCE index fell to 2.9% y/y from 3.7%, but higher than the 2.7% consensus. The headline gross domestic purchase prices increased 2.3% in the second quarter, below the 2.6% estimate, after increasing 3.1% in the first quarter.  Chinese interest rates China’s central bank on Thursday last week cut a key interest rate, in Beijing’s second move that week to try to offset a weakening economy and a housing market crisis. The unexpected action came as stock markets fell sharply across most of Asia, in an echo of Wall Street’s sharp drop the day before. Market indexes fell roughly 1 to 3 per cent in Australia, Japan, South Korea and Hong Kong. Share prices were down by less in Shanghai and Shenzhen. That could reflect a favourable response by investors to the central bank’s rate move, or a sign of intervention by the Chinese government, which plays an extensive role in the country’s stock markets. As markets opened in China on Thursday, the People’s Bank of China, the central bank, reduced its interest rate for one-year loans to commercial banks to 2.3 per cent, from 2.5 per cent. It was the biggest cut to that rate since a similar reduction in April 2020, when the Chinese economy was struggling because of a nearly national lockdown in the early days of the coronavirus pandemic.  Can economics fail or save us? When he won the Nobel Prize for economics, Friedrich von Hayek accepted the 1974 award but was uncomfortable with calling the field a science. Natural sciences tend to move within the confines of the laws that govern them but not economics which is often called the dismal science. Ultimately, he believed that the field of economics require judgement calls rather than clean hard data which points to the treatment of a specific economic problem. Take the prediction failures of the most recent past and many will feel that economics have failed them. The post-pandemic world was supposed to play out in a really long recovery akin to a hard slog. But rather, the recovery was one of the quickest and sharpest on record. Many commentators pointed to the 1930’s and that the era of Covid would be similar. None of this happened. The inflation regime as a direct result of the Russian/Ukrainian war coupled with a return in demand post-Covid led inflation to spike from 1.4% in 2020 to 7% in 2021 with the resultant rise in interest rates. Commentators likened this to a similar period in the 1970’s but this is not how it turned out at all. Inflation steadily dropped to 3% and the market now awaits a drop in interest rates. These same high interest rates market watchers pointed out will cause widespread defaults. Anyway yes, we did see some mid-size banks in trouble in the US, but if you were betting on all of this spilling over into an emerging market crisis this certainly did not happen. And then what happened to everyone that predicted the US would be in a recession? They found similar data points in the past to predict this and invariably the hard landing/soft landing debate has now all but disappeared and there was no recession in 2022 or 2023. As a matter of fact, the US economy is actually growing. Much of these narratives live in headlines. And headlines sell newspapers (or the electronic version of it). Most decision-makers will start with the headlines and will wait for fair weather or at least the prediction of such before investing. If this is an investor’s decision-making framework, they would never invest, and if they do, don’t be surprised if they are too late to the party. We tend to ignore economics when times are good but when we require a prediction about the future, we turn to the dismal science in the hope that it could cast some light on how we should behave financially. The reality is that if a shock is going to occur that will influence asset prices they tend to occur quickly often without warning. Policymakers will then go into overdrive to fix these. Apart from these, many economic issues today are anticipated and in part mitigated by policymakers. That is what the FED has been attempting to do in the US economy by pushing rates up in the last 2 years. They have their critics, but remember that they are attempting to save the economy from large errors rather than all errors. Also, consider that the US economy has seen a structural shift to services which is less volatile than the industrial or agricultural economy. Also, consider that the business cycle has lengthened as the US has found that it can support an economy from a monetary perspective. For all of the reasons above, investing is best done from a valuation perspective. Yes, this also requires interpretation, but good quality assets tend to rise over time as these companies make more profits. If your entry point proved to be wrong, you will be saved by rising earnings over time. The bigger challenge is finding those assets which will have accelerated profits due to their own development or because the environment favours them. And perhaps this is here where economics can shed some light. If you’re wrong at least earnings will still save the day. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R18.35 ( R17.95, R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09, R18.68, R18.99, R18.76, R18.72, R19.15, R19.30, R18.97, R19.03, R18.80, R18.78, R19.03).  The Rand/Pound closed at R23.60 ( R23.32, R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62, R23.61, R23.93, R23.90, R24.06, R24.18, R24.47, R23.61, R24.03, R23.87, R23.86, R24.15.)  The Rand/Euro closed the week at R19.92 (R19.58, R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35, R20.25, R20.56, R20.43, R20.47, R20.71, R20.93 R20.38, R20.51, R20.38, R20.40, R20.72.)  Brent Crude: Brent closed the week up again at $ 82.37 ($85.03, $83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39, $90.87, $86.58, $85.33, $81.80, $83.80, $83.40,$83.14 $80.91, $77.36, $83.66, $78.33.) The rising oil price and the R/$ exchange rate indicate we might get a small rise at the pumps next month.  Bitcoin closed at $67,917 ($59,760, $56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135, $68,804, $64,681, $69,078, $68,340, $62,315, $54,649, $52,510, $47,195, $ 42,897, $41,608, $41,680). Articles and Blogs: Should you change your investments with changing politics? NEW Taking a holistic view of your wealth Why do I need a financial advisor ? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |