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Local Market Commentary
- The IMF on Tuesday released its latest World Economic Outlook report, with the main takeaway being that the global growth estimate for 2021 was revised marginally lower. The fund expects that the global economy will expand by 5.9% this year, down 0.1pp from the previ-ous estimate. This marginal downgrade does, however, mask some notable downside revisions for several countries, with slow vaccina-tion rates to blame there. Overall, risks are now seen as skewed to the downside amid strained supply chains and rising prices of food and fuel.
- Speaking of prices, the IMF notes that inflation risks are now skewed to the upside over the near term. However, they believe that global inflation will subside to just 2% in advanced economies by the middle of next year. Emerging market economies may, however, continue to face elevated inflation through next year, with the aggregate estimate at 5.5% for this year and 4.9% for 2022.
- The report finally suggests that central banks could look through the transitory inflation and avoid tightening policy until they can gain greater clarity on their economic outlooks. The caveat to this is that they should be ready to act if their economies grow faster than ex-pected or if inflation expectations build.
- For Zambia, the IMF forecasts economic growth to expand by a meagre 1% this year and by 1.1% in 2022, while inflation is expected to average 22.8% this year and decline to 19.2% in 2022.
- Meanwhile, President Hakainde Hichilema yesterday dissolved boards of directors of four state-owned companies. In a statement from the President’s office, Zesco, Zambia Railways, Indeni Petroleum Refinery, and Zambia Telecommunications Company all had their boards removed yesterday. President Hichilema also terminated the tenure of the chairman at ZCCM Investment Holdings.
- Copper continues to focus on soaring energy costs which investors fear has the ability to derail the global economic recovery. That said, the losses seen overnight have been pared as the Asian market chooses to focus on tightening supplies of the metal, with logistical bot-tlenecks taking the copper inventory to historically low levels.
- Adding weight to the move, was the news that the Chinese copper imports have shown their first gain in five months in September. Im-ports of unwrought copper and products amounted to 406016 tonnes in September which was 3% up on the August reading of 394 017 tonnes.
- Reuters reported – Imports of copper concentrate, or partially processed copper ore, were 2.11 million tonnes in September, the highest monthly level since March, customs said. That was up 11.9% from 1.886 million tonnes in August but slightly down from 2.138 million tonnes in September 2020, the second-highest monthly total on record.
- Key in the US today will be the September CPI print as well as the Fed’s meeting minutes. Consumer inflation in the U.S. is expected to have remained unchanged at 5.3% y/y after the recent moderation in July and August. Price pressures within reopening-sensitive sectors have been easing amid persistent concerns over COVID-19, although demand remains robust due to accumulated household savings. At the same time, supply-side price pressure also remains a significant risk, as was highlighted during the recent increase in oil and gas prices. The Fed thus finds itself in a difficult situation, with the labour market recovery showing signs of slowing while the outlook for inflation looks increasingly uncertain. Should inflation prove to be less transitory than the Fed previously anticipated, Governor Powell and Co. may need to tighten monetary conditions more aggressively down the line. Consequently, market agents will closely watch the CPI data as they look to position for the eventual taper and subsequent rate hikes.
- The Fed’s September meeting minutes will be scrutinized for any further insights into the central bank’s policy bias given recent uncer-tainty surrounding the labour market’s slowing recovery in an environment of mounting inflation pressures. Recall that Chairman Powell took on a slightly hawkish tone at the meeting, saying the Fed would begin reducing stimulus “soon”. He likely opted for this vague lan-guage to leave the door open for a later start should the expected improvement in economic conditions not materialize. At the same time, however, there were intimations that the Fed would aim to complete the taper by mid-2022, paving the way for rate hikes soon af-ter. Given these vague signals in the post-meeting communique and prevailing uncertainty due to the weak September employment re-port, the minutes will be examined for clarity.
- In the FX markets, the Zambia Kwacha remained on the front at the start of the week, extending Monday’s gains yesterday. The central bank interventions have supported the local unit, and given this week’s tax conversions, the Kwacha may firm further in the coming ses-sions.
- Although it remains in a clear upward trend, the USD has retreated slightly off its recent highs. Positioning ahead of the CPI data might explain some of that behaviour, but it changes very little. The market is still focussing on the probability of a Fed taper in November, which offers the USD some support. Technically speaking, there are no obvious indications that the USD is about to reverse, while devel-opments in China concerning Evergrande and the general rise in risk aversion will further underpin USD support.
Rand and International FX Commentary
- The ZAR swung earlier losses yesterday as sentiment towards the local currency turned positive. While the ZAR managed to bag a 0.40% gain to close at 14.9500/$, it nevertheless remains well within its recent range around the 15.0000/$-handle. However, the ZAR and a handful of other EM currencies were notably more resilient than most major currencies during intraday trade, as the USD remained on the front foot against its DM counterparts, drawing support from lofty US Treasury yields and risk-off sentiment.
- As investors remain concerned over global inflationary pressures affecting global growth, markets have been quick to price in rate hike risks, with SA notably expected to be next in line. While ZAR sentiment may improve on that front ahead of the SARB’s November MPC meeting, we maintain that the SARB, which remains steadfast in its data-driven approach, would have enough justification in keeping rates on hold this year should the ZAR hold up. Inflation remains a little over the midpoint of the central bank’s target range at 4.9% y/y, while domestic data continues to show an uneven recovery underway.
- As for yesterday’s data releases, mining production fell by 2.4% m/m in August. While output was 2% higher on an annual basis, the data still suggests the sector’s recovery is topping out. With the industry struggling with persistent structural challenges, this is likely to dampen many of the positive effects from the commodity cycle boom, both for the fiscus and the ZAR. On a positive note, the manufacturing sec-tor recovered more than anticipated in August. Output expanded 7.6% m/m, coming from a July contraction of -8.4%, and beat expecta-tions for a 6.1% m/m increase. With the easing of restrictions at the end of July and the revival of supply chains following the July riots, it should be no doubt that the sector was able to post such a significant gain. However, the pace of recovery is likely to be limited going for-ward. The SARB has already noted the post-pandemic recovery has largely been completed, while rising input costs remain a headwind for the sector.
- For the day ahead, retail sales data will conclude this week’s domestic data card and will offer valuable insight into the ongoing recovery of aggregate demand across SA. The easing of restrictions and following July’s riot-driven contraction should have equally lifted retail sales in August. However, subdued consumer sentiment may have dampened sales figures, while persistently high unemployment continues to constrain demand. While a rebound is expected, a softer figure could see the currently priced-in rate hike potential scaled back in trade today, which would put downside pressure on the ZAR. Externally, notable stateside data will steal focus later in the afternoon, with US inflation and the Fed’s September FOMC meeting minutes gracing the data card. Stubbornly high inflation will continue to put pressure on the Fed to begin reducing monthly asset purchases, and when it may do so will be gauged from its September meeting minutes. While the USD has come under pressure in early morning trade, the gravity of these releases could see the greenback continue to trade with an upwards bias going forward should they support Fed tapering bets.