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BoZ set to deliver its latest verdict on the policy rate

February 16, 2022by Nicholas Kabaso
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Local Market Commentary

  • Central bank policymakers are set to meet for the first time this year to decide on the policy rate today. Policymakers are likely to vote to keep the policy rate unchanged after inflation slowed to an almost two-year low in January. Policymakers may want to assess the impact of a 50bps rate increase in November and the removal of fuel subsidies the following month, suggesting there is room to keep borrowing costs unchanged. That said, it is worth noting that inflation in Zambia remains above the Bank of Zambia’s 6-8% target range with upside risks to the outlook present. A continued depreciation in the Zambian Kwacha (ZMW), the removal of fuel subsidies, and an anticipated 13% increase in power tariffs are factors that are likely to place upward pressure on prices in the coming months.
  • Base metals with the exception of aluminium all closed higher yesterday as the news of a partial Russian retreat spurred risk sentiment. The reason for aluminium’s fall is that it has been bolstered by the threat of higher energy prices which would curb aluminium supply should sanctions be imposed on Russia.
  • This morning we have the 3m LME copper benchmark trading flat at around $9980.00/tonne as we enter the start of the trading day. All eyes are on the Ukraine and how the tensions play out from here. Equally important was data out of the US namely PPI which increased by the most in eight months showing inflationary pressures intact. Tightening of monetary policy in the US is a certainty, the question is by how much and what the impact will be on economic dynamism and thus commodity prices going forward.
  • It will be a busier data and events day out of the U.S. today with retail sales, industrial and manufacturing production all scheduled for release ahead of the FOMC minutes this evening. All this takes place against the unfolding drama in Ukraine and so there is much for investors to consider through the trading day.
  • U.S. retail sales sank in December, with the biggest decline seen since February 2021. This was also the first decline in four months due to rising Covid-19 cases and a surge in inflation. However, the consumer spending slowdown is expected to be short-lived, with virus cases having already peaked. At the same time, robust gains in labour income will continue to support healthy gains in consumer spending as the year progresses. However, rising prices and increasing input costs are being passed on by retailers to consumers, which could have a noticeable impact on sales in the future.
  • The minutes from the January Fed meeting are unlikely to have all that much market-moving potential, given what has been priced in over the last few weeks with regard to Fed tightening as a result of soaring inflation. However, what will be of interest is any hints in the communication that a 50bp rate hike could be considered for the March meeting, given that the market has now priced this probability at around 50% after last week’s CPI figures. Any signs that the Fed would be open to this could further entrench speculation that such a hike is coming.
  • As tensions ease in Ukraine and investors price out the prospect of a war, the safe-haven bid that has kept the USD well supported gradually dissipates. The greenback retreated through yesterday’s trading session, and while the authorities may be cautious and sceptical of the Russian troop withdrawal from Ukraine’s border, the VIX has retreated, equity markets have rallied, and market sentiment has improved considerably. The USD looks set to retreat a little further, especially if the FOMC minutes scheduled for this evening dampen expectations of a 50bp rate hike in March.

Rand and International FX Commentary

  • Early indications that Russia is softening its stance and starting to withdraw some of its troops gave markets something to cheer. There was very little for Russia to gain for going to war, economically, geopolitically or otherwise. However, President Putin has achieved to render Russia more relevant in geopolitics. He has brought NATO to the negotiating table from which he may indeed secure some concessions. The impact on financial markets has been swift and powerful and will hold implications for emerging markets more broadly.
  • Global stock markets led by Wall St posted some solid gains. The VIX, otherwise known as the fear factor index, declined and the USD turned more offered as the safe-haven bid gradually dissipated. The ZAR was in two minds through the trading session. On the one hand, it wanted to respond to improved risk appetite, but on the other, it had to contend with commodity and gold prices retreating. In the end, despite the vastly improved news, the USD-ZAR ended the trading session only slightly firmer than it ended on Monday.
  • Today, the focus will turn to the geopolitical developments in Ukraine for further evidence that Russia is indeed retreating and that investors were correct in pricing in improved risk appetite. Furthermore, it is a much busier data day with domestic inflation for Jan scheduled for release, followed in the afternoon by some key US data in the form of Jan’s latest retail sales figures and the industrial and manufacturing data after that. However, given the obsession with the Fed’s monetary policy path, the FOMC minutes may attract the most attention as investors look for further insight into the FOMC collective and whether a 50bp rate hike in March is even possible.
  • For the ZAR in particular, the release of so many market-moving data and events taking place on the same day will likely keep the USD-ZAR range-bound, and investors should not anticipate any strong directional momentum to follow. There is simply too much to digest. Ultimate direction will likely be taken from broader themes, and a better understanding of just how much of the recent rally in commodity prices like gold were from natural demand or speculative demand related to geopolitical tensions in Ukraine. On balance, the ZAR may still have a little further to appreciate as EMs come back into favour and the USD loses ground. A sustained break back below the 15.0000 handle remains distinctly possible.

Nicholas Kabaso

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