- Business conditions in Zambia deteriorated further in February as the coronavirus pandemic, a lack of money in circulation, and currency weakness hampered operations. Specifically, the Stanbic/Markit PMI index fell to a 5-month low of 47.1 from 47.7 in January. This was the third straight month the index has fallen and according to survey results, output, new orders, and employment all dropped during the month. New orders decreased at a sharper pace, with new business now having fallen continuously for two years. Employment continued to decline in February, albeit at the slowest pace in a year. Meanwhile, the weakness of the Zambia Kwacha led to a further rise in purchase prices. Com-panies, therefore, passed on higher purchase prices to customers, resulting in a seventh successive increase in output charges. Although business conditions deteriorated to a greater extent, sentiment for the future rose to a 4-month high. Hopes that conditions would improve following the end of the pandemic supported confidence, with 17% of respondents signalling optimism.
- On the base metals front, copper continued to pull back with the LME 3m benchmark shedding around 0.1% to $9094/tonne by 04:56 CAT time. This is more a USD play at present with many investors waiting on the sidelines for the confirmation of the US Stimulus package before boost-ing long positions.
- Stateside, following on from the ADP data yesterday, the weekly jobless claims will come into focus today. The labour data is still showing a sluggish normalisation. But the pace of improvement will likely pick up strongly through Q2. A similarly sluggish recovery will be evident in the non-farm payrolls data, although when one pulls back the lens, it is clear that there has been a steady improvement. The quality of the hiring is steadily improving, confidence levels are gradually returning and the vaccination drive will allow for H2 2021 to produce a strong recovery in underlying growth.
- Later today, Fed Chairman Powell will take to the podium and speak about the US economy and its outlook. Expectations are that he will hold the Fed’s narrative of needing to reflate the economy while being mindful of the impact on inflation. By the Fed’s own account, the US econ-omy has gotten off to a sluggish start this year and still requires some assistance. That assistance is however evident and powerful. The Federal government will very soon announce the $1.9trln stimulus plan, while the Fed continues with its ultra-loose monetary policy.
- All still looks on track for the Senate to vote on the stimulus plan next week. Votes will follow party lines and VP Harris will likely draw on her casting vote to pass the bill. Republicans still hold the view that it is outsized and holds many negative consequences, but those consequences are worth the risk. They have the support of Fed Chairman Powell, although the Fed may soon have a headache of its own to contend with, as bond yields continue to rise and raise speculation of the need for yield curve control.
- Shifting to the FX markets, a broader bearish bias remains entrenched on the Kwacha with local unit continuing to struggle against the USD. A shortage of dollars, deteriorating fiscal dynamics, and deeply negative real rates are some of the factors that have weighed on the Kwacha. Ul-timately, unless debt is restructured and better managed, weakness may continue.
- A modest recovery overnight has accompanied a rise in bond yields and a wobble across equity markets. As sentiment oscillates, so too does the performance of the USD. There is no clear medium-term direction on the USD that has been trading in a broader range since the start of the year. There simply is not enough underlying directional momentum to drive the USD one way or another. The upper limit on the topside of the USD Index is at 91.5 and on the bottom around 90.0, offering a 2% range. It is unclear what the catalyst for a breakout will be, but funda-mentally speaking, the probability is higher that the break will be to the downside given the massive twin deficits being fuelled by US policy. Speculative positioning in the futures market remains overwhelmingly against the USD.
Please click here to access the full Market Watch