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All eyes on CPI data

January 28, 2021by Nicholas Kabaso0
  • Domestic attention today will be on the CPI and trade readings for January and December, respectively. In December, headline inflation accelerated for the fourth straight month, coming in at 19.2% y/y from 17.4% y/y in the month prior. This was the fastest pace of growth since Au-gust 2016 and was mainly attributed to an increase in food price inflation. Food price inflation rose to 20.2% from 16.8% in the month prior. Non-food inflation meanwhile came in at 18.1% from 18.2% in November. Overall inflation remains elevated in Zambia, and along with deep-seated fiscal challenges, room for the central bank to support an economy struggling amid the coronavirus pandemic is limited going forward.
  • Meanwhile, the trade surplus widened to ZMW 7.2bn in November from ZMW 6.5bn in the month prior. A breakdown of the data shows that the surplus was primarily attributable to a more pronounced increase in outbound shipments than inbound shipments. Specifically, exports rose by 7.0% y/y  while imports rose by 4.7% y/y.
  • Base metals took it on the chin yesterday with Zinc and Copper the standout underperformers in the group. Concerns about US economic growth spurred the selling as Fed Chairman Jerome Powell stated that the US was still a long way away from a full recovery and still short of the unemployment and inflation targets. 
  • This morning we see Zinc remaining under pressure as London inventories continue to surge rising by some 55% in the past two days. Copper has steadied somewhat after yesterday’s pullback however the bulls are non-committal at this stage given the fact that we are heading into the Chinese Lunar New Year period where demand traditionally tapers off.  
  • The Fed has held steady at the first meeting of 2021 confirming that rates will remain unchanged at 0-0.25% with bond purchases constant at $120bn per month, made up of $80bn in traditional USTs and a further $40bn in Mortgage-Backed Securities. The tone was dovish with Fed Chairman Jerome Powell stating numerous times that it is premature for the Fed to think of exiting its accommodative policy stance. “The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most ad-versely affected by the pandemic,” the Fed’s interest-rate committee said in a statement.
  • This stance is broadly what most market commentators predicted. It is unlikely that the Fed would compromise on the economy at a time when the size and timing of the next round of stimulus from the US government is unknown. At its last meeting in December, the Fed categorically stated that it would maintain purchases until there was “substantial further progress” in its twin goals of a stable 2% inflation rate and low unemployment. This implies that the Fed is unlikely to slow asset purchases this year.
  • Data released yesterday showed that core capital goods increased 0.6% in Dec, with shipments up 0.5% and durable goods up 0.2%. New orders for US-made capital goods were up for the eighth consecutive month in Dec which bodes well for an economic recovery once the pandemic has been navigated and vaccines have been sufficiently deployed to allow for the unfettered opening up of the US economy.
  • In other news, New York has eased some restrictions to alleviate the pressure on the NY economy, but clearly with new variants doing the rounds, high levels of vigilance are needed. The US is now embarking on studies to determine whether the vaccines are indeed effective against the new strains of the virus. Modern has indicated that theirs, is.
  • An equity market sell-off yesterday has triggered a rise in risk aversion and consequently a rotation to the safety of the USD. The USD gained ground as a result, with the Fed’s commitment to persisting with easier monetary policy doing little to detract from the USD’s performance. The ZMW, therefore, came under renewed selling pressure and closed on the back foot. Whether the USD can gain any traction from here remains to be seen. It might require a deeper correction in stock markets for this to materialize. For now, the bias as reflected in the speculative positions in the CFTC data remains against the USD.

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Nicholas Kabaso

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