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Local Market Commentary
- A quiet start to the week in Zambia saw the attention fall on regional and global developments. Given Africa’s dependence on food imports from around the world, the continent is highly sensitive to the global food supply crisis. A new study conducted by Oxford Economics found that soaring international food prices will hit Africa the hardest. In addition to the continent’s dependence on food imports, African countries have heavier weightings of foodstuffs in their respective consumer price index baskets.
- The impact of higher international food prices and mounting supply chain pressures will result in more than just higher inflation as calls for food subsidies, such as those in Egypt, will be heeded, putting pressure on the fiscus, or disregarded, resulting in social unrest. History shows that during periods of elevated food prices, social unrest/fatalities of terrorism have spiked.
- Higher fuel prices and shipping costs, soaring fertilizer prices, and other supply chain bottlenecks like a shortage of truck drivers and shipping containers on the back of extreme weather conditions are pushing food prices to record highs. According to the UN’s Food and Agriculture World Food Price Index, international food prices were buoyed at the second-highest level on record in April.
- On a year-on-year basis, the FAO World Food Index was up almost 30% in April, driven in part by supply issues related to the ongoing war in Ukraine. The expected loss of exports from the Black Sea region has exacerbated the already tight global availability of staple foods such as wheat. Oxford said in its report that Kenya and Egypt are providing support despite concerning fiscal trends. Tunisia and Ghana are unable to provide significant fiscal support, running the risk of social unrest.
- The report noted that there has been an increase in social unrest in South Africa, Morocco, Tunisia, and Ghana, while the fear of unrest has guided policy in Nigeria and Egypt. Oxford Economics highlighted that governments are taking extraordinary measures to cushion the economic blow, adding that fiscal consolidation has taken a backseat. Egypt and Nigeria have delayed plans to scrap food and fuel subsidies. Kenya has extended fuel subsidies, while South Africa has temporarily cut fuel levies and has extended social grants. These measures will undoubtedly have a negative impact on fiscal dynamics in these respective countries.
- Base metals have applauded the news that China has set out a roadmap for the end of the painful lockdown in Shanghai which has crippled economic dynamism in the region. It is hoped that the city will be fully operational by the 1st June 2022. This has resulted in an upbeat mood for metals traders who have had a gloomy few weeks. Equally, there has been a pullback in the greenback which is supportive and allowed the gains to solidify into the EU open.
- Moving over to the US, retail sales data headlines a fairly busy domestic calendar. March’s data showed that US consumers are still spending but at a slower rate than in February and a year ago. Consumers maintained their ability to spend in the face of record-level inflation, supply chain issues, and geopolitical unrest. It must be noted that though soaring prices are reducing consumers’ purchasing power, rising wages are helping to cushion some of the hit from high inflation. Another buffer from inflation has come from the savings accumulated during the coronavirus pandemic. With inflation likely having reached a high-water mark in April, price pressures are expected to simmer down a bit in the coming months, and the retail sector might find support. That said, higher interest rates amid aggressive Fed tightening could cap spending.
- The overnight retreat in the USD has played a material role in bolstering currency markets, especially EMs. As the USD retreats from a near twenty-year high, one needs to debate whether this is the end of the USD rally or whether there is more to come. There is certainly a lot priced into the USD as it stands, and it is currently considered heavily overbought against most of the majors with an overvaluation of some 20% or more. The risk in the future is that the Fed cannot match its monetary policy tightening guidance and that investors need to reassess their positioning. The more the USD rallies, the more asymmetric the risks. Both the EUR and the GBP have made modest recoveries in the past two days with the EUR back above 1.0450 and the GBP back above 1.2350.
Rand and International FX Commentary
- Yesterday proved to be yet another failed attempt by the USD-ZAR to punch through 16.2500 and sustain those levels. As the USD started to retreat, so the ZAR staged a recovery. Technically speaking, the longer this continues, the greater the chance that the ZAR will fail to nudge much higher. The general direction in currency markets continues to be taken from the USD’s movements. So, the trade-weighted USD retreat has offered the ZAR a reprieve as it backs away from 20yr highs.
- Another factor determining direction of the ZAR will be the upcoming SARB decision. Consensus expectations have around 60% of the market anticipating a 50bp increase, while the remainder expects the SARB to move 25bp. Therefore, there is a decent chance that the SARB hikes by less than what the market has priced in. The expectation of a 50bp hike was driven predominantly by the Fed’s guidance and commitment to hike by 50bp for the next two meetings. However, while that may be appropriate in the US, whether such substantial hikes are appropriate in SA is questionable.
- The two economies are extremely different. The US had conducted very aggressive monetary stimulus through the pandemic, supported households using fiscal means, has an unsustainably tight labour market, has exceeded pre-pandemic economic activity levels and inflation which rose to multiples of its target. SA, by comparison, has record-high unemployment, is far from pre-pandemic economic levels, has inflation that remains within its target band and structurally weak growth that is hampered still further by the resumption of load shedding.
- Drawing a straight-line conclusion that the SARB must move 50bp when it acted pre-emptively and has far less stimulus to unwind than the Fed is not helpful and oversimplifies matters. Protection against ZAR’s weakness could be a valid argument, but the ZAR is currently only 5% undervalued by internal valuation models, hardly a crisis. The risk is that the SARB only hikes by 25bp, and the ZAR reacts negatively. That would explain the reluctance of the ZAR to stage a meaningful recovery. It also offers a clear perspective on why the USD-ZAR may consolidate until after the SARB’s decision on Thursday.