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Fed doubles down on tapering, expects at least three rate hikes next year

December 16, 2021by Nicholas Kabaso
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Local Market Commentary

  • The fourth wave of the coronavirus pandemic appears to be taking hold in Zambia when looking at the latest figures. Zambian on Wednesday recorded 573 new cases of covid-19. The cases were detected from 6,446 tests conducted in the past 24 hours and represented at a 9% positivity rate.  This brings the cumulative cases to 212,278, while total recoveries stand at 206,743 following 27 discharges in the past 24 hours.
  • The industrial metals complex focused almost squarely on developments out of China yesterday where data released pointed to slowing economic growth and thus lower demand for metals in general. The 3m LME copper benchmark closed at $9412/tonne its lowest level since early October. It is however worth noting that copper is still up almost 20% this year and although we are certainly off the highs seen in 2021 we do not believe that we are heading back to the lows of March 2020.
  • There are supply concerns underpinning the price action of copper. This morning we have received word that MMG Ltd will be shutting production at Las Bambas copper mine in Peru from Saturday after failing to reach an agreement with the Peruvian community blocking a transport road used by the facility. The facility accounts for 2% of the world’s copper supply and the news has sent the shares of the Hong Kong listed entity lower by 10% on the day.
  • As expected, the Fed announced last night that it would double the pace of tapering its asset purchase programme to $30bn a month. The vote on this was unanimous, while members signalled that they favour potentially raising rates faster than initially expected next year. The projections published show that officials expect three 25bp rate increases through next year, a marked shift from the previous meeting and one of the most aggressive hawkish shifts seen in recent years. The abrupt change results from “inflation developments and the further improvement in the labour market”, with the FOMC dropping any references to inflation being transitory. However, the proviso added that the pace of purchases could be adjusted if warranted by changes in the economic outlook.
  • It was interesting to note the market reaction to the Fed’s decision. Bond yields were well contained, with the 10yr benchmark barely moving. After initially responding very negatively, equity markets rebounded strongly, while the USD started by producing gains, only for those to fully reverse and end the session down. It implies that there was a lot priced in, and a bigger, more sustainable move might’ve been evident had the Fed not matched expectations. However, the open question that remains unanswered at the moment is whether this benign market reaction will persist. Just because something is priced-in does not mean that it will not be influential in driving market behaviour in the future. Tighter USD liquidity conditions will likely pressure higher risk and emerging markets more broadly.
  • Retail sales data released yesterday showed that they increased less than expected by only 0.3% in Nov. Core retail sales dipped 0.1%, although October’s data was revised higher. The subdued retail sales environment did little to deter the Fed from persisting with a more hawkish assessment of the U.S. economy and the need to begin the taper. However, retail sales will be at risk should inflation become more prevalent and constrain disposable income.
  • In the FX markets, the ZMW remained on the defensive for a fourth straight session yesterday, closing north of the 16.300, according to Reuters data. Meanwhile, the initial surge in the USD on the Fed’s hawkish comments quickly gave way and reversed to end the session lower. Immediately after the initial statement, the bid tone appears to have been rotation towards the USD amid widening monetary policy differentials with other central banks. However, as equity markets stabilised and recovered, it became clear that much of this news had been priced in, and the USD lost momentum. A bout of profit-taking on the USD then set the stage for a general reversal of many markets. Whether or not that is sustained remains to be seen. Monetary conditions will become less accommodative and that will likely be more USD supportive than not.

Rand and International FX Commentary

  • South Africa is out for a public holiday so expect regional liquidity to be affected. 

Nicholas Kabaso

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