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Local Market Commentary
- It was a relatively uneventful day in Zambia yesterday amid a dearth of domestic data. On the regional front, Mpho Molomo, a special representative of SADC’s organ on politics yesterday, said that SADC troops helping to fight an Islamic State-linked insurgency on Mozam-bique’s Cabo Delgado province will remain in the country until the situation on the ground is under control. Molomo added that SADC is also planning to add more ground forces to hold onto areas retaken from the insurgents.
- The copper market is having a good run at the moment. The benchmark 3m LME contract is clear through the $10000/tonne mark as we head into the start of the EU session and well on track to have its best week since November 2016.
- The red metal which is often used as a global bellwether for economic growth took comfort in the strong data from the US overnight cou-pled with forecast-beating results for the four largest U.S. consumer banks. Jamie Dimon, the head of JP Morgan was quoted as saying the pandemic is in the rear-view mirror and investors are now looking to front run the potential growth spurt.
- We remain cautiously optimistic on the short term prospects for copper and bullish longer term given the drive for decarbonisation.
- The U.S. economy is recovering, and the data released yesterday in the form of the latest weekly jobless claims alluded to that. There were declines in the outright claims to 293k and in the continuing claims to show that the labour market was gradually absorbing spare ca-pacity. It will only be a matter of time before the non-farm payrolls reflect the same. Further reflecting the improvement in economic ac-tivity and demand were the stronger than expected earnings reports by four of America’s biggest banks. JP Morgan, Wells Fargo, Citibank and Bank of America all beat expectations to the topside on a combination of a recovering economy and the number of corporate deals that are currently unfolding, all signs of a stronger business cycle to come. It also alludes to the need to taper.
- Retail sales and consumer confidence data headline the US data card today. In August, U.S. advance retail sales rose 0.7% m/m, smashing consensus expectations for a 0.7% decline. Excluding the automobile and gas sectors, retail sales rose 2%, suggesting U.S. demand re-mains solid. However, the spread of the delta COVID-19 variant appeared to curb demand for travel and leisure, allowing greater con-sumer spending on goods. Additionally, hospitality services such as restaurants and bars stagnated in the last print, highlighting the ser-vices sector’s risks. Looking ahead, rising inflation presents a clear risk threatening the ongoing recovery should it impact broader con-sumer sentiment and see consumers begin to tighten their budgets. However, should retail sales hold up for another month, this would drive inflationary pressures further down the line, increasing the likelihood we see a Fed tapering announcement before year-end.
- Meanwhile, the US Michigan consumer confidence index unexpectedly rose in the September print, revised higher to 72.8 from a prelim-inary reading of 71. While consumer spending has held up in recent months, stubbornly high inflation has weighed on consumer senti-ment during H2. Consumer expectations for inflation over the next year remained high at 4.6%. Over the next 5-10 years, inflation expec-tations rose to 3.0% from 2.9%. While this may see broader demand held back somewhat, the current economic conditions and future expectations sub-indices rose in the last print, suggesting the August dip may be short-lived. However, inflation expectations well above the Fed’s target 2% level stills presents risks to the U.S.’ post-pandemic recovery and may prompt central bankers to edge away from their views for transitory inflation.
- In the FX markets, the Zambia Kwacha is expected to remain steady next week even as demand for hard currency, mainly driven by agri-cultural imports, outweighs supply. This is so because of the FX liquidity injections by the central bank recently. Meanwhile, As US Treas-ury yields have gone, so too has the USD. Stronger economic data has given rise to speculation that the Fed will taper and normalise poli-cy, resulting in curve flattening, with middle to longer end rates moderating. Add to that the improvement in risk appetite, and the USD has come under pressure, snapping a 5-week appreciation trend. Data due today is unlikely to change the recovery theme, and the USD will likely end the week down, heading into the weekend.
Rand and International FX Commentary
- The USD remained on the back foot in earlier trade yesterday, seemingly pressured by falling Treasury yields. As such, the majority of the EM currency sample was able to advance for another day, with the ZAR securing its third daily gain. However, with no clear basis for the halt in the USD’s bullish trend this week, expectations are for it to prove short-lived. As the USD managed to pare losses through the ses-sion, the ZAR concurrently reversed gains of as much as 0.70% to close the day only marginally stronger at 14.7800/$.
- Providing the USD with some support yesterday, US initial and continuing jobless claims fell further than anticipated, showing the current labour market shortage remains to blame for weak hiring rather than reduced demand for labour. Moreover, Fed speakers yesterday backed bets for sooner tightening of US monetary stimulus. St. Louis Fed President Bullard noted an equally strong case that inflation would not naturally dissipate, while Richmond Fed President Barkin warned that inflation looks more broad-based and sees the need for tapering discussions to begin due to elevated risks. While Barkin stated that the Fed gave an advance warning to limit market surprises, with its September guidance that a reduction in the pace of asset purchases would soon be warranted should the recovery progress as expected, this still holds the potential to drive the USD stronger in the coming months.
- Domestically, deputy SARB Governor Kuben Naidoo noted in a webinar yesterday that SA will need to scale back its own stimulus measures once global financing conditions become more costly due to monetary policy tightening in the US, Japan, Europe and other ma-jor DMs. He noted this would affect the ZAR and domestic bond yields, suggesting that the SARB could need to step in with rate hikes to avoid too much market turbulence. Whether the SARB may do this pre-emptively remains to be seen. Either way, the time is soon ap-proaching that we see a Fed taper, with nearest expectations being for mid-November or mid-December should the Fed announce taper plans at its meeting early next month. On the other hand, the deputy governor also noted that stimulus would need to be scaled back de-spite several large sectors remaining very weak, which could ultimately limit potential growth in the medium to longer term. While he noted a solution would be the better targeting of stimulus measures to specific sectors, it could equally see the SARB erring on the side of caution and opt for a more gradual rate hike cycle.
- Over to the spot markets, rebounding risk appetite has continued to see the USD trade with a downwards bias overnight, as Asian equity benchmarks have tracked higher following gains on Wall Street yesterday. With the ZAR remaining subject to changes in global market sentiment, we should see the unit continue to be buoyed by a falling USD. As for the day ahead, the market will have notable US data to digest, with retail sales and consumer confidence rounding out the global data releases this week. While the data may add some support to tapering bets, it is