Week in Review: Higher Inflation

World stocks ended the week lower as rate hike guidance from the European Central Bank and the release of hotter-than-expected U.S. consumer price index (CPI) data for May took its toll on financial markets.

U.S. inflation reaccelerated in May, with prices rising 8.6% from a year ago, topping consensus estimates of an 8.3% gain, the Bureau of Labor Statistics reported Friday. Surging food, gas and energy prices all contributed to the gain. The so-called core CPI, which strips out volatile food and energy prices, rose 6%, also above an estimate of 5.9%. Major U.S. indices’ ended the week sharply lower with the S&P 500 and Nasdaq Composite down 5.05% and 5.60%, respectively.

The European Central Bank’s (“ECB”) Governing Council said on Thursday that it intends to raise key interest rates by 25 basis points at its next meeting, in July, and also downgraded its economic growth forecasts. The ECB expects a further hike at the September meeting, but said the scale of that increment would depend on the evolving trajectory of the medium-term inflation outlook. Policymakers face the challenge of reining in inflation without compounding the economic slowdown resulting from the war in Ukraine and the associated sanctions. Annual consumer price inflation across the 19-member euro area hit a record high of 8.1% in May.

In local currency terms, the pan-European STOXX Europe 50 Index ended 4.88% lower, while the UK’s FTSE 100 Index slid 2.86%. British Prime Minister Boris Johnson saw off a challenge to his leadership, winning 59% of votes in a ballot held by the members of parliament of his Conservative party.

In the Ukraine, non-stop fighting rages on in Severodonetsk, the focal point of Russia’s advance in the East. Although still suffering tactical defeats. Russian forces continue to advance in its battle for control of the Donbas region.

Stocks in Japan registered moderate gains for the week, with the Nikkei 225 Index rising 0.23%. In China, cautious hopes of regulatory easing on tech firms amid hopes for looser monetary policy lifted stocks, despite news that the cities of Beijing and Shanghai were back on Covid-19 alert. The broad, capitalization-weighted Shanghai Composite Index gained 2.8% for the week.

Market Moves of the Week

South African gross domestic product (GDP) expanded by 1,9% in the first quarter of 2022, representing a second consecutive quarter of upward growth. The size of the economy is now at pre-pandemic levels, with real GDP slightly higher than what it was before the COVID-19 pandemic.

Data released this week showed that South Africa’s total mining output fell by 14.9% year on year in April, while manufacturing output dropped 7.8%. A further data release from the central bank showed that SA’s current account surplus widened to 2.2% of gross domestic product (GDP) in the first quarter from 2.1% of GDP in the final quarter of 2021.

In company news, South Africa’s oldest private airline Comair will stop operations permanently after its bankruptcy protection lawyers on Thursday filed an application to liquidate the company which had failed to secure funding to stay airborne after being impacted severely by global pandemic-related travel restrictions. The airline operator accounted for 40% of airline capacity.

The JSE's All Share Index was 4.39% weaker on the week, along with its global peers as investors digested European Central Bank’s (ECB) hawkish stance and the higher-than-expected US inflation print. The rand ended the week down over 2%, to trade at R15.87/$ at the close.

Chart of the Week

May’s headline U.S. Consumer Price Index (CPI) reaccelerated to 8.6% year over year, back to a 40-year high. Prices surged, year on year, in essential spending areas: energy (+34.6%), gasoline (48.7%), and food (+10.1%).