Weekly Commentary – 25th August 2023

Top Gainers and Losers in the Equities Markets

• According to the State of the Banking Industry Report (SBIR) 2023 by the Kenya Bankers Association (KBA), the banking sector’s total assets grew by 8.2% to KES 6.5 trillion in 2022. This was mainly driven by a 17.70% growth in total operating income on the back of foreign exchange gains that supported income from loans, advances and investment in government securities. As part of their focus towards reducing debt vulnerabilities in the economy, the industry saw an introduction of banks’ risk-based credit pricing models and the Credit Repair Framework. In terms of outlook, the sector continues to monitor the evolution of emerging risks such as elevated inflation, concerns about public debt sustainability, fragile economic recovery and unstable global financial markets.

• The BRICS (Brazil, Russia, India, China and South Africa) bloc of major emerging countries, focused on economic development and increasing its members’ voice in global forums, held its annual summit during the week. Major deliberations included admitting Saudi Arabia, Iran, United Arab Emirates, Argentina, Egypt and Ethiopia as members effective 1st January 2024. The group now includes six of the nine largest oil producers in the world, further pushing the shift towards de-dollarization. 90% of oil sales are settled in US dollars, with Saudi Arabia, Iran and UAE, being top oil producers, likely to adopt the local currency initiative embraced by the group. The forum’s discussions also entailed unlocking intra-market access to facilitate entrepreneurship and open up new markets through the African Continental Free Trade Agreement (AfCFTA).

• Federal Reserve Chair, this week, further highlighted the need for raising interest rates further to combat inflation and bring it back to the 2% target. The decision would be based on a careful evaluation of inflation indicators, economic performance and the labour market. However, the Fed could keep interest rates steady at its September meeting, pending a comprehensive review of incoming data and evolving market conditions.

• The S&P Global US Composite PMI declined to 50.4 in August 2023, falling short of market expectations of 52.0. This was the weakest upturn in private sector activity since February. The decline was driven by a deepening contraction in the manufacturing sector as well as slower growth in service sector output. Total new orders fell for the first time in six months, and the pace of job creation eased to an over-three-year low. Inflationary pressures remained elevated, with input cost inflation quickening due to greater fuel, wage, and raw material costs. However, selling price inflation eased. Despite the slowdown in activity, US firms were more optimistic in their outlook for output over the coming year. This was fueled by hopes of a stabilization in interest rates, increased client demand, and a moderation in price pressures.

• The Eurozone Composite PMI declined to 47.0 in August 2023 from the previous month’s 48.6, falling below market expectations of 48.5. This indicates a significant deceleration in the region’s private sector since November 2020. This contraction was notable in both the manufacturing and services sectors, with manufacturing output experiencing its second-largest contraction in 11 years after the initial COVID-19 lockdowns. For the third month in a row, new orders declined at an accelerated rate, employment growth slowed, and inflationary pressures rose in terms of average selling prices and input costs. Additionally, companies’ outlook on future output levels for the next year dropped for the sixth straight month, hitting the lowest point since the previous December. The sharp contraction in private sector activity suggests that the eurozone economy is facing increasing headwinds.

• The S&P Global/CIPS United Kingdom PMI declined to 47.9 in August 2023 from 50.8 in July, falling short of market expectations of 50.3. This was the deepest pace of contraction in the country’s private sector since January 2021. The decline was primarily caused by a severe contraction in the service sector, which reached its joint-fastest pace of contraction in 31 months. The manufacturing sector also contracted, extending the current period of decline to six months. New business inflows declined the most since November 2022, and backlogs of work dropped at the fastest pace since June 2020. Private sector employment rose only slightly and at the slowest pace since March. On the pricing front, average cost burdens increased at the slowest pace since February 2021, and the inflation of prices charged moderated to its lowest level in two and a half years. Moreover, business confidence regarding year-ahead growth prospects slipped to its weakest level since December 2022. The sharp contraction in private sector activity in August suggests that the UK economy is facing increasing headwinds.