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CPI, GDP and Trade data in focus

March 31, 2022by Nicholas Kabaso
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Local Market Commentary

  • There are several macroeconomic releases on tap today. These are CPI,  GDP and Trade balance readings. Regarding the former, inflation has slowed for the past seven months and supports the Bank of Zambia’s view that inflation is trending downwards. This may persuade policymakers to keep the policy rate unchanged at the next meeting if sustained. That said, it is worth noting the upside risks exist. These include adverse weather conditions, supply chain bottlenecks, surging energy prices, an anticipated increase in power tariffs, and a weaker Zambia Kwacha (ZMW).
  • Regarding growth dynamics, while the Q4 GDP print is dated, it will give insight into the state of the economy and will allow investors to extrapolate forward their understanding of how the economic dynamics will play out for 2022.
  • The base metal counters are focusing heavily on developments in China and how the country responds to the worst outbreak of the COVID-19 virus since early 2020. The official reading of the Chinese manufacturing and services production contracted in March, this is the first time they have contracted simultaneously since February 2020. Reuters reported – The official manufacturing Purchasing Managers’ Index (PMI) fell to 49.5 from 50.2 in February, the National Bureau of Statistics (NBS) said, while the non-manufacturing PMI eased to 48.4 from 51.6 in February
  • It is not surprising to see 3m LME Copper falling by 0.6% at the time of writing to $10306.00/tonne, while the Shanghai benchmark also contracted by 0.4% to trade at CNY73,360 a tonne.
  • On the regional front, Wednesday saw another bold move from an African central bank, with the Bank of Mozambique announcing a 200bps rate hike. Yesterday’s move from the Bank of Mozambique saw its benchmark MIMO Rate rise from 13.25% to 15.25%, a level not seen since 2018. The aggressive rate hike came on the back of a substantial upward revision from the central bank to its inflation forecasts for the short and medium-term.  
  • The Monetary Policy Committee said in its statement that the sharp upward revision to inflation reflects the materialization and exacerbation of risks, especially the escalation of the geopolitical conflict in Europe and the natural disasters that struck the centre and north of the country. The inflation forecasts point to an acceleration in headline and core inflation, reflecting the direct and indirect impact of rising fuel and food prices despite the Metical’s stability.
  • Shifting to the FX markets, the USD has retreated this week which is quite telling given the hawkish tone of the Fed and the upcoming labour market data, which is only likely to strengthen the resolve of the Fed to act. But it seems that risk appetite has recovered at the margin, and the safe-haven bid that the USD enjoyed has eased. The USD is trading heavy and save for a fresh catalyst to prompt a rotation back into USDs; it seems that most currencies will continue to enjoy a reprieve against the USD. On a purchasing power parity basis, the USD remains 10-15% overbought and remains vulnerable to a deeper retreat, especially as the flattening tone in the yield curve continues and markets debate the risk of recession. The EUR has held on to its recent gains, trading above 1.1160 this morning, while the GBP consolidates just above 1.3100. The JPY has also consolidated the recovery off its lows but remains vulnerable to any further improvement in risk appetite.

Rand and International FX Commentary

  • After a week of impressive gains, the ZAR has given back some of its advances and traded back above 14.5000 at the time of writing. Whether this marks an inflection point in the rally that has characterised the ZAR since early December remains to be seen. Looking at some of the drivers of the ZAR suggests otherwise. SA’s terms of trade remain supportive, its carry attractiveness amongst the best, even amongst emerging markets, ETM’s ZAR Sentiment Indicator is comfortably positive, and valuation studies show that the ZAR is not yet expensive from a purchasing power parity perspective. Any short-term bounce in USD-ZAR may therefore prove fleeting.
  • Local data released yesterday in the form of M3 Money supply growth surprised to the upside in February, bucking the decline seen over the last two months. Specifically, money supply growth quickened from its slowest pace of growth in three months of 5.65% y/y in January to 6.44% y/y in February. In February, private sector credit demand growth also jumped, rising 3.62% y/y, following a revised figure of 3.1% y/y in January. This marked the eighth consecutive month of acceleration in PSCE growth and is the strongest growth since August 2020. Although both money supply and PSCE growth accelerated, they remain below historical trends, reflecting SA’s tight monetary dynamics that should help to keep the ZAR supported and inflationary pressures contained relative to other countries with high growth in money supply and inflation.
  • Government finance stats released yesterday were also ZAR supportive in that South Africa’s fiscal dynamics improved in February, reflecting a revenue windfall from the rising global commodity prices. Specifically, the budget deficit compressed from a shortfall of -R65.9bn in January to a minor deficit of -R3.4bn. The latest print is lower than a deficit of R12.8bn recorded during the corresponding period in 2020, which is unsurprising due to the reopening of the economy, boosting revenue collection this year. This data serves to further de-risk SA as an investment destination and could support more inflows into bonds.
  • Today all eyes will turn to the latest round of trade data. It is expected to produce another bumper surplus. If the trade data match market expectations of a surplus of R20bn, it would explain, in part,  where much of the support for the ZAR came from. It implies that the current account remained in surplus for a while longer and that there is little need to fund such a deficit by borrowing from foreign investors. In summary, the data so far this week has lent support to the view that the ZAR still enjoys some tailwinds. It reinforces the point that the ZAR might still appreciate further before finding its ultimate inflection point and that a sustained break of 14.5000 remains likely.

Nicholas Kabaso

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