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January CPI print headlines domestic data card

January 27, 2022by Nicholas Kabaso
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Local Market Commentary

  • Today, investors in Zambia will contend with the January CPI print and December trade balance data releases. While Zambia’s inflation rate fell to a 14-month low in December, upside risks exist following the scrapping of fuel subsidies that had kept costs artificially stable for two years. The increase in fuel costs followed by a hike in transport fares of 18% to 34% were not reflected in the latest inflation reading as they happened after price data was collected by the statistics agency. That and a 13% increase in electricity prices expected in March, as well as a weaker currency, could boost inflation.
  • In the base metals market, copper managed to book gains of 0.75% overnight however the Asian session has seen investors offload the red metal at a rapid rate as they focus on the impact tighter US monetary policy will have on broader economic growth. There are signs across the globe that tightening is only a matter of time, while emerging markets have become increasingly aggressive in tackling the inflation monster. Chile for example hiked rates by 150 bpts yesterday, the largest hike in over 20 years.
  • Does this mean we envisage copper trading back down to $5000/tonne? No, we do not foresee a collapse in the copper price as aggressive as that given the structural tailwind the metal will enjoy as the world rotates aways from fossil fuels as an energy source. Equally there are still embedded supply issues with Peru experiencing supply disruptions and environmental concerns capping other projects around the globe.
  • The FOMC announcement overnight has shaken investors. After the announcement, the USD surged stronger, U.S. Treasury yields shifted higher, and risk markets, including emerging market currencies, are now on the defensive. The USD index is now looking to re-test the November and December highs as investors once again focus on the monetary policy divergence that will manifest between the U.S. and its major trading partners.
  • Chairman Powell confirmed that the Fed would likely end their Q.E. programme in March and look to lift rates if the conditions were appropriate. After that, he confirmed that the Fed had released a paper that unpacked a set of principles that would allow the Fed to “significantly reduce” their bond holdings over time. This is a bold step indeed and gives the impression that efforts to reduce the balance sheet could be more robust than was the case in the previous instance when the Fed simply allowed maturing bonds to roll off its balance sheet. Furthermore, the Brent crude oil price briefly broke through the $90 pb mark, and Fed Chairman Powell spoke of the Fed’s commitment to a sustained fight against inflation. As a result, Asian stocks are ending their session lower, and Wall St futures are trading deep in the red.
  • Ahead of the FOMC, some believed that the market was fully priced. However, it is now clear that there is still some lagging support for the USD. Data and earnings out of the U.S. yesterday may have also helped to tilt the scales in favour of the USD. Earnings beat expectations to the topside, confirming that corporate America is still expanding and doing well. At the same time, economic data was also strong enough to signal an underlying resilience to tolerate tighter monetary policy.

Rand and International FX Commentary

  • Ahead of the FOMC decision and statement yesterday, the ZAR showed some impressive resilience to appreciate in the face of a Fed announcement that was likely to confirm that the end of the taper would take place in March and that rates hikes would follow. Only once the announcement was made, to confirm what the central bank had been signalling, did the USD surge stronger, placing emerging market currencies on the defensive. The USD index is now looking to re-test the November and December highs as investors once again focus on the monetary policy divergence that will manifest between the US and its major trading partners.
  • While there was some hope ahead of time that the market was fully priced and that the ZAR would take the announcement in its stride, it is now clear that there is still some lagging support for the USD. Data and earnings out of the US yesterday may have also helped to tilt the scales in favour of the USD. Earnings beat expectations to the topside, confirming that corporate America is still expanding and doing well. At the same time, the economic data was also strong to signal an economy that has underlying resilience to tolerate tighter monetary policy.
  • Furthermore, the Brent crude oil price briefly broke through the $90 pb mark, and Fed Chairman Powell spoke of the Fed’s commitment to a sustained fight against inflation. The combination has seen the USD-ZAR surge higher as it now places emphasis on the SARB, which is also facing an inflation episode, but without the underlying strength of the economy or an out-performing corporate sector. The SARB will likely hike 25bp today and signal that there is more to come, but the risk here is that it does less than what it has signalled in its Quarterly Projection Model (QPM).
  • While in the QPM, the SARB forecasts the repo rate back up to 6%, a sluggish economy and a weak credit cycle together with high unemployment and inflation that remains somewhat contained, could still convince the SARB not to press the brakes too aggressively. Much will, of course, depend on the assumptions for oil, the ZAR and global growth. In the previous forecast, the oil price assumption was around the mid-70s. Adjusting that and assuming a weaker ZAR will likely see the SARB persist with a more hawkish message and signal that there will be more to come. That may offer some support to the ZAR, but recent trading sessions show that the more important determinant of direction has been the USD, and for now, the USD is appreciating.

Nicholas Kabaso

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