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Zambia Market Watch – Friday’s US payrolls number revealed a huge miss

September 6, 2021by Nicholas Kabaso
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Local Market Commentary

  • Zambia’s Markit/Stanbic PMI ticked higher in August, coming at a 4-month high of 49.8 from 49.4 in the month prior. Survey results show that were signs of encouragement for the Zambian private sector in August. Specifically, new orders returned to growth while firms ex-panded their workforce numbers for the third month running. Although output decreased, anecdotal evidence suggested that this was largely due to a pause in activity during the election period. Meanwhile, there were signs of waning inflationary pressures, with both in-put costs and selling prices rising at the slowest rates since Q1 2021. Confidence in the year-ahead outlook for business activity strength-ened but remained much weaker than the series average. While the PMI index remains below the 50-point neutral market, suggesting private sector conditions remain difficult, the recent appreciation of the Kwacha and easing of inflationary pressures is seen as potentially improving conditions in the coming months.
  • On Friday, National Assembly clerk Cecilia Mbewe told lawmakers that Nelly Mutti had been appointed as the first female parliament speaker in Zambia. Mutti, a lawyer, was elected unopposed and had been chairwoman of the Anti-corruption commission until 2006
  • Data from the Chinese Ministry of Commerce showed that trade between China and Africa rose  40.5% y/y in the first seven months of 2021, reaching a record high of $139.1bn. Chinese Vice-Minister of Commerce Qian Keming said that African products have enjoyed in-creasing recognition in the Chinese market, with imports from Africa increasing 46.3% to $59.3bn during January-July. In addition, imports of agricultural products such as rubber, cotton, and coffee doubled over the same period last year. Keming also reported that foreign di-rect investment in Africa rebounded. Specifically, China’s industry-wide FDI IN Africa reached $2.07bn in the first seven months, exceed-ing pre-Covid 19 levels in 2019. Meanwhile, the contract value of newly signed projects and the volume of contract business by Chinese enterprises in Africa increased by 8.2% and 7.8%, respectively, during the January-July period.
  • Investors’ expectations going into the release were bearish on the USD, and rightfully so. The U.S. economy added 235K jobs in August, the lowest in 7 months and well below forecasts of 733K. The latest reading compares with an upwardly revised reading of 1053k in the month prior.  In contrast, the unemployment rate dropped to 5.2% in August, the lowest since March last year and in line with market ex-pectations and below 5.4% in July. Still, the rate remained well above the pre-crisis level of about 3.5%.  The mixed performance in the la-bour market does not correlate with the course of the economic recovery following business reopening in the U.S., but instead, labour supply shortages and concerns over the lingering threat of a COVID-19 resurgence. However, it may be enough to cause the Federal Re-serve to delay tapering its $120bn monthly bond purchases.    
  • The initial market response was to price out the prospect of a taper this month. Investors took that as a sign that the economy would be stimulated for longer and stock markets found further support. However, there is a risk that financial markets run too far ahead of the economy. The spread of the delta variant and various lockdowns across the globe continue exerting a restraining effect on the economy. With valuations high, stock markets will be vulnerable to a correction from current levels if the disappointing performance in the data does not prove temporary. This will have far-reaching implications for the USD and for risk assets more generally.
  • After last week’s important data releases, there will be a distinct lack of important data for most of this week, to leave investors to specu-late on the outlook for the economy and the necessity for the Fed to start tapering this year. Already market talk suggests that has been pushed out towards November. Later this month, further clarity will be gained on how the Fed is interpreting the current disappointing data phase.
  • Shifting to the FX markets, following the payrolls number last week, the USD took a beating. However, it struggled to sustain the retreat and closed only marginally down from its open. This morning, those losses have been fully recovered, with the Chinese authorities re-portedly buying up USDs vs the CNY to try and weaken their currency. The fact that the USD did not come under more selling pressure than it did, despite the shocking payrolls numbers, will leave investors wary that the USD retreat may have run its course for now. Coinci-dentally, the USD index has also run into tough support around Friday’s lows to offer further downside protection.
  • Locally, the Zambia Kwacha is expected to hold onto gains against the greenback this week amid positive sentiment driving inflows non-resident investors in government bonds.

Rand and International FX Commentary

  • The ZAR remained on the offensive at the end of last week following a one-day pause as markets traded more cautiously ahead of an an-ticipated US labour market report. The official us employment report ultimately corroborated private payrolls data seen earlier in the week, with the headline nonfarm payrolls print showing 235k jobs were added during August, well below the 733k expected according to analysts surveyed by Bloomberg.
  • With softer than expected US hiring dynamics in August, this favoured bets that the Fed would not be too quick to reduce its policy sup-port, while it also points to a more extended timeframe for a full labour market recovery. As such, the USD remained on the back foot in-to the weekend, of which the ZAR took full advantage with a 1% gain on the day to lead emerging market currencies. The local unit also led the weekly advance as it closed roughly 2.8% stronger against the USD, just above the 14.3000/$-handle. However, with last week be-ing its second strong run of gains, this does expose the currency to some weakness once the dust settles on the dollar’s ongoing bear run. The ZAR’s outpacing of other EM currencies amid the USD decline has highlighted its nature as a higher-beta currency. Having greater sensitivity to broader market developments, in addition to an arguably overstretched rally, ultimately increases the impact and probability of a pullback once risk appetite deteriorates.  
  • As for the first trading session of the week, market sentiment has had a mixed start. Asian stocks have been buoyed this morning in reac-tion to Friday afternoon’s US payrolls report, which has fuelled hopes that extremely accommodative stateside monetary policy will be maintained for longer. Meanwhile, emerging market currencies have been less buoyant than the end of last week, with the USD trading slightly firmer in the early morning hours. While nothing new has come in the way of the greenback’s slide, riskier assets and EM curren-cies may be held back by the US Labour Day holiday for the session ahead, which sees stateside markets shut. 
  • Domestic markets will also be gearing up for SA’s second-quarter GDP print due tomorrow, in addition to a slew of local data releases this week. While estimates will need to have been made for delayed mining production data, the headline GDP print will still be viewed for in-sights into SA’s ongoing economic recovery. This will unlikely have persisted, however, given the riot-fuelled hit to GDP at the start of Q3, as well as persistent COVID-19 containment measures affecting certain sectors more than others. Externally, central bank policy rate deci-sions will be in focus this week with the Australian, Canadian and European central banks all deciding rates. The latter will be watched for any indication of a scaling back of its huge asset purchasing programme, which could affect risk appetite towards the end of the week.

Nicholas Kabaso

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