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Headline inflations edges down to 22.7% y/y in April

April 30, 2021by Nicholas Kabaso
  • Data from ZamStats yesterday showed that headline inflation in Zambia slowed for the first time in April, albeit the decline was marginal. Spe-cifically, headline CPI came in at 22.7% y/y from 22.8% y/y in March. A breakdown of the data shows that food inflation decelerated to 27.2% y/y from March’s record high of 27.8% y/y, while non-food inflation came in at 17.5% y/y from 17.0% y/y.  While inflation slowed in Zambia, it nevertheless remains elevated above the Bank of Zambia’s (BoZ) 6%-8% since April 2019, and upside risks exist in the coming months amid persistent Kwacha weakness and a worsening fiscal position. For context, the Kwacha is down by over 5% on a YTD basis and is currently trad-ing at record lows as demand for hard currency, driven by factors including debt servicing, continues to surpass supply. The BoZ is therefore expected to remain cautious in its approach to monetary policy at next month’s meeting.
  • Meanwhile, Zambia’s trade surplus narrowed further to ZMW 7.3bn in March from ZMW 8.1bn in the month prior. The surplus compares with a surplus of ZMW 359mn in the corresponding month of 2020. According to ZamStats, exports increased by 10.7% to ZMW 18.4bn in March from ZMW 16.6bn in the month prior, while the increase in imports was more pronounced, coming in at 30.7% to ZMW 11.2bn.
  • A two-day Zambia mining indaba started yesterday aimed at reviewing the operations of the sector, with the government promising to ad-dress the challenges that have affected it over the years, including an unstable tax regime. Vice-President Inonge Wina said that there was a need to develop a simplified but efficient tax administration that allowed for a win-win situation and that the “government’s desire is to create an inclusive economy that promotes investment and competitiveness.”
  • Stateside, yesterday saw the US economy report back on Q1 GDP and the outcome was impressive, with growth of 6.4% annualised recorded vs expectations of 6.1%. Fiscal support was a leading driver of the strong performance leaving the economy just 0.9% off pre-covid economic activity levels. This rebound is stronger and sharper than anticipated with the full effects of the fiscal and monetary stimulus not yet in the da-ta. Expectations are that H2 2021 will be an extremely strong half, characterised by robust growth, a modest rise in inflation and improvement in labour dynamics. Under these conditions, the Fed will take advantage and seek to taper its asset purchases, something that will likely be fur-ther exacerbated by the extended fiscal stimulus that the Biden administration still seeks to implement, with another $1.8trln package being proposed.
  • Given the sensitivity of global markets to inflation dynamics at the moment, all eyes will be the US core PCE reading today. The combination of loose monetary and fiscal policy, elevated commodity prices and returning demand as economies are opened up has underpinned rising infla-tion expectations the world over. Core personal consumption expenditure, which the Fed uses as its favoured measure of inflation, is ex-pected to have accelerated in March even as the world’s largest economy battled the second wave of the pandemic. With the US economic recovery gaining pace and significant progress being made on the vaccination front, inflation risks in the US are tilted to the upside. That said, investors should be cautious of looking too deeply into the inflation readings from March onwards, given the low base effects of last year.
  •  Although the USD has recovered marginally off its lows, the bias is overwhelmingly bearish for the USD with technicals highlighting how there is no obvious inflection point in the charts just yet. Some technical support will be found towards the 90.0 index level, but it is clear that inves-tors do not believe that another fiscal stimulus package amid ongoing monetary stimulus will do the USD any favours. That said, momentum does appear to be slowing. On a mean reversion basis, the USD remains 5% overvalued and still has some room to moderate before it heads into undervalued territory. So even on a fundamental valuation assessment the USD has room to depreciate further
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Nicholas Kabaso

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