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Local Market Commentary
- In the monetary policy statement for July through December 2021, the Bank of Zambia (BoZ) indicated that it remains committed to rais-ing its key interest rate should the disinflationary process be slower than expected in returning inflation to within the target range of 6%-8% by the second half of 2023. The BoZ added that it will continue to unwind accommodative monetary policy measures that were im-plemented in 2020 to mitigate against the adverse effects of the pandemic. Meanwhile, inflation is forecast to decelerate faster and edge towards its target range, mainly due to a favourable outlook for the exchange rate and improved prospects for fiscal consolidation. Annu-al inflation is seen as slowing to 19.2% by December, while the economy is forecast to rebound in 2021, with growth coming at 1.6% this year and 3% in 2022. That said, uncertainty surrounding new and more contagious Covid-19 variants remains a key downside risk to the growth projection.
- United States Agency for International Development (USAID) yesterday announced $11.3mn in additional funding for Zambia. The fund-ing is meant for Zambia to strengthen democracy and governance and support small and medium-sized agribusiness enterprises. Of the additional funds, $7.4mn will bolster the Zambian government’s decentralization initiatives and local governance; support independent and new media, freedom of expression, and the protection of human rights; and support tax policy and tax administration reforms. $3.9mn will help grow small and medium enterprises, particularly those that are women-led, with a focus on strengthening job creation and revenue growth. USAID has provided approximately $30mn in new US government funding for Zambia in the two months since the August presidential election.
- Moving over to the US, yesterday’s Fed minutes were a bit of a damp squib in that they offered very little in the way of new information or context. According to the minutes, the Fed could start trimming the size of its monthly asset purchases by mid-Nov. This was well tele-graphed and priced into the market already. The reduction would be in the order of $10bn in USTs and $5bn in mortgage-backed securi-ties. Nothing to alarm the markets here, and if anything, highlights how gradually stimulus will be withdrawn. To reiterate, it is very diffi-cult to describe this as tightening. On the contrary, it is just less stimulation.
- US inflation data released yesterday came in slightly higher than expected. It raised the probability that the Fed would need to start the process of tapering in November. The risk for policymakers is that if left too long without any action taken, inflation expectations will be-come entrenched and will detract from economic activity to a greater extent. Its inflation concerns were flagged in the latest FOMC minutes, and so inflationary pressures will become a big determinant of future policy.
- Today the focus will shift back to the labour market with the release of the weekly jobless claims. The labour market has shown signs of improvement, the latest non-farm payrolls data notwithstanding. Investors will be hoping that the trend of fewer jobless claims remains intact to confirm that the economy is still on a recovery path.
- In the FX markets, the Zambia Kwacha remained on the front yesterday, extending gains to a third straight session. The central bank in-terventions have supported the local unit, and given this week’s tax conversions, the Kwacha may firm further in the coming sessions.
- The USD came under considerable pressure yesterday afternoon despite the inflation data being a little stronger than anticipated and the Fed minutes offering very little new. It may be that there was simply more priced in concerning Fed expectations than was contained in the minutes, or it could also be a case of “buying on the rumour, selling on the fact.” Either way, the USD retreated, although, through Asian trade, it appears to have stabilised. There are still many reasons that would justify the USD heading stronger again, including Ever-grande contagion difficulties in China and commodity prices that are no longer quite as buoyant as they were courtesy of slowdown fears.
Rand and International FX Commentary
- The ZAR rose for the second day running yesterday, driven stronger as the US dollar retreated from a one-year high reached the previous day. With yesterday’s 1% gain for the local unit, it was able to break out of this week’s range-bound trade, ultimately closing at the 14.8000/$-handle.
- While US Treasury yields continued to come off recent highs, limiting the USD’s appeal, yesterday’s stateside data did little to justify those moves. US inflation rose to 5.4% y/y in September, up from 5.3% in August, keeping inflationary concerns alive. Later on, the Fed’s September FOMC meeting minutes showed policymakers are becoming increasingly worried over inflation, with most seeing upside risks to inflation and half seeing the need for rate hikes before the end of next year. While there was no ultimate decision on reducing the Fed’s monthly asset purchases, policymakers did assess that, should the economic recovery progress uninterrupted, a gradual taper pro-cess could be concluded by mid-2022. The minutes did note that if the Fed decides to taper at its November 3rd policy meeting, this will open the door for a mid-November or Mid-December start to tapering. While inflation continues to prompt the Fed to act on policy tight-ening, recent soft labour market gains add to the mix, raising risks of paring policy too soon. Nevertheless, the significance of yesterday’s releases suggests current moves in the USD and Treasury yields are more likely short-term corrections, as Fed policy tightening bets re-main active.
- With the USD dominating currency dynamics at present, the ZAR was able to shrug off weaker retail sales figure yesterday. While retail sales increased 4.9% m/m in August, this was far lower than the 9.5% pencilled in by surveyed expectations and saw the sector potentially several months away from recovery after July’s 11.1% m/m riot-driven contraction. At current levels, retail sales are 1.3% lower than in August 2020, highlighting the effects of the July riots and persistent restrictions on people’s movements. On a broader scale, SA’s retail sales figures have a substantial way to go to get back to levels it may have been at without the pandemic. Compared to linear trend esti-mates, in-house calculations have the sector down R112.3 billion in cumulative sales since the onset of the pandemic. With indications that low structural demand will likely persist for longer, this spells trouble for future tax intake once the cyclical commodity boom sub-sides, raising fiscal risk later down the line and pressuring sovereign bonds and the ZAR.
- As for the day thus far, FX markets have got off to a mixed start in early morning Asian trade. The USD seems to have found some support after yesterday’s drop, while US Treasury yields have similarly ticked higher this morning. Meanwhile, the ZAR has held steady, managing to push slightly stronger alongside several other EM currencies. While investors will continue to digest last night’s FOMC minutes release, cautious trade may be evident in the day ahead as markets await further updates on the US economic recovery due tomorrow in the form of US retail sales and consumer confidence data.