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Local Market Commentary
- Given the Zambian Kwacha’s two-month world-beating rally in July and August, all eyes were on the CPI stats for September to see whether the rally has helped cool inflation. Headline inflation in Zambia slowed further in September, coming in at an eight-month low of 22.1% y/y from 24.4% y/y in the month prior. Inflation in Zambia slowed for the second straight month after food price inflation deceler-ated from a record high, and the currency’s two-month world-beating streak helped curb import costs. Specifically, food price growth slowed to 29.6% from 31.6% in August while non-food inflation fell to 13.6% from 16.3%.
- With inflation slowing down for a second straight month, this may ease the pressure on policymakers to tighten and provide it with some room to support the economy’s recovery when returning Governor Denny Kalyalya chairs his first meeting next month. Note, the Mone-tary Policy Committee projects inflation will decelerate faster and edge closer to the target range of 6% to 8% sooner than expected.
- However, it is worth noting that Zambia’s inflation has remained above the 8% upper limit for more than two years now, and risks to the outlook are tilted to the upside given higher energy costs and a weaker Kwacha. The Zambian Kwacha was the worst-performing African currency against the USD, down by around 5% in September. The Kwacha halted its two-month rally, which had in part been supported by expectations that the Hichilema administration will be able to put the country back on a sustainable debt trajectory. Despite September’s loss, Kwacha, however, remains the best performing currency on a year-to-date basis. Shifting to next week, the Kwacha is expected to remain on the back foot as demand for hard currency stays higher than supply.
- Meanwhile, Zambia’s trade surplus rebounded in August, coming in at ZMW 3.9bn from ZMW 3.6bn in the month prior. The August read-ing compares with a surplus of ZMW 5.3bn in the corresponding month of 2020. Despite all the headline driven volatility seen of late, the outlook for copper is viewed as remaining bullish and this should support Zambia’s trade balance going forward.
- Staying with copper, the red metal had terrible session yesterday shedding just shy of 2.5% driven largely by fears of a slowdown in eco-nomic growth out of China. The bearish tone has continued this morning in Asia with the benchmark 3m LME contract trading 0.5% lower, changing hands at $8992.00/tonne. We would like to point out that liquidity has been lower than normal in the Asian session given that China is out for a public holiday.
- The World Health Organisation (WHO) said that about 70% of African nations missed a target of vaccinating one of every ten people against Covid-19 by the end of September. WHO added that the delivery of shots needs to double for the continent to meet the next tar-get of inoculating 40% of the population by year-end. According to WHO, half of the 52 African countries that have vaccination programs have inoculated less than 2% of their population. A slow rollout and vaccine hesitancy in many African countries suggest that economic re-covery prospects may be derailed.
- Moving over to the US and today investors will be able to turn to the busy data session, safe in the knowledge that a government shut-down has been averted, at least temporarily. President Biden signed off on a bill that raises the debt ceiling for now but will need to be revisited on the 3rd of December. However, it offers Congress enough time to debate and polish up the $1.0trln bi-partisan infrastructure bill. The challenge is to get the “progressive” Democrats to back away from linking the $1.0trln spending package to the $3.5trln social spending package, which the Republicans are dead against. Even within the Democratic party, some are baulking at the sheer magnitude of the spending bill, which will need to shrink if it is to pass.
- Ahead of some key data, the USD remains on the front foot. It has enjoyed a strong week of appreciation. The unfolding troubles across the globe mean that investors will be in no hurry to rotate away from the USD heading into the weekend. Evergrande has missed interest payments, China’s energy crunch exacerbates its slowdown, stock markets are correcting, central banks talk of tightening against a back-drop of potential stagflation, and the global recovery is losing its momentum. A firmer USD will detract from commodity prices and will of-fer an avenue for safety.
Rand and International FX Commentary
- The ZAR was whipsawed between gains and losses yesterday, reflective of the broader emerging market currency sample that lacked clear cut directional momentum yesterday. Despite losing ground to most major currencies, the US Dollar appeared to settle near 10-month highs with gains against the euro keeping the greenback supported yesterday. While EM currencies traded mixed, the ZAR ulti-mately snapped back with a 0.55% gain to close at 15.1100/$.
- Some positive sentiment was derived domestically from remarks by newly appointed Finance minister Enoch Godongwana that govern-ment needs to shift its focus and prioritize energy security over fixing loss-making state power utility Eskom. Godongwana said that the electricity supply industry must be completely overhauled, adding that SA must reduce its dependency on Eskom. Without a doubt, unre-liable electricity supply has been a significant inhibitor of South Africa’s potential growth in recent years. While these comments should be encouraging for investors, they are unlikely to shift the overall pessimistic outlook for SA’s future growth until there are clear signs that government has shifted its focus from saving the drowning state-owned power utility to energy security.
- While the Finance Minister’s comments and an unexpected rise in August’s trade balance in data released yesterday may have supported the ZAR in mixed trading conditions, this did little to stem the currency’s monthly losses. Having begun September at 14.5000/$, the ZAR depreciated over 4% against the USD as concerns over China’s economic growth, and potential spillover effects from indebted developer Evergrande weighed heavily on emerging markets. Furthermore, the US Fed now looks set to announce a November start to tapering as-set purchases, with Fed Chair Jerome Powell recently stating that the US could see a longer period of high inflation given persistent sup-ply-chain bottlenecks.
- While the Fed’s forthcoming reaction to potentially less transitory inflation will keep emerging markets tetchy, SA may encounter its own inflation and growth problems in the near future. Higher producer price inflation remains the trend, with yesterday’s data showing PPI ac-celerated 7.2% y/y in August. On the other hand, SA’s growth prospects going forward have not improved, with the SARB noting last week that the post-pandemic rebound is mostly done while downgrading its 2022 GDP growth forecast. While higher producer inflation has yet to fully filter through to consumer prices, with domestic demand remaining weak, the SARB may find itself battling against higher inflation and weaker growth once this does occur. Should the SARB opt for lower interest rates for longer, we should see the ZAR remain-ing highly sensitive to developments on global monetary and growth dynamics going forward.
- Over to the markets, it will be a heavy end to the week in terms of data with global manufacturing PMI’s offering updates on factory ac-tivity and relative performances of economies across the globe. Domestically, the ABSA manufacturing PMI and NAAMSA vehicle sales are up for release, both of which are expected to have dipped in September. In the spot markets, the ZAR has struggled to follow through with overnight gains, despite domestic lockdown restrictions being eased by President Ramaphosa last night, with the USD cur-rently dictating almost all FX movements amidst souring market sentiment during the Asian trading session. The day ahead sees Eurozone inflation as well as US PCE core, the Fed’s preferred measure of inflation, where a rise in either should bolster bets of sooner withdrawal of central bank stimulus and see emerging markets remaining on the back foot.