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Local Market Commentary
- Speaking yesterday, new Mines Minister Paul Kabuswe promised to restore ‘sanity’ to the mining sector. Kabuswe said that the govern-ment would ensure stability and predictability in the mining sector. The minister added that corruption must be stamped out in the sector and said, “we may not do everything in the coming budget, but I can assure you that sanity will be brought back to the mining sector be-fore 2026.” Regarding Mopani Copper Mines and Konkola Copper Mines (KCM), Kabuswe said that President Hakainde Hichilema would oversee the country’s policy on those two critical mines. Recall, Zambia took on $1.5bn in debt to buy Mopani from Glencore in January and is yet to find a new investor for it. Meanwhile, the previous administration handed control of KCM to a provisional liquidator in May 2019, triggering an ongoing legal dispute with its former owner Vedanta.
- Copper continued to shed ground overnight with the 3m LME benchmark closing 1.27% down at $9442/tonne. Aluminium finished the session some 2.29% lower at $2831.00/oz while Nickel closed 0.50% lower on the day.
- The major reason for the pull back in the copper price yesterday was the fact that Chile has trimmed its annual price forecast for the met-al on slowing Chinese demand and the potential for the Fed to ease stimulus. Bloomberg reported The Chilean government’s copper commission, Cochilco expects prices to average $4.20 a pound this year, according to a presentation Tuesday, down from a $4.30 call made three months ago. Prices are expected to average $3.95 next year as the market swings into surplus, Cochilco said.
- US consumer prices moderated for the third straight month in August, suggesting that some of the upward inflationary pressure is begin-ning to wane. Specifically, the consumer price index increased by 0.3% m/m last month following July’s 0.5% m/m rise. The latest reading came in below market expectations that had pencilled in a more pronounced increase of 0.4% m/m. Prices of airline fares, used cars and trucks, and motor vehicle insurance declined over the month, while increases were seen in the cost of gasoline, household furnishings and operations, food, and shelter. On a y/y basis, consumer prices eased to 5.3% in August from a 13-year high of 5.4% reported in June and July, matching market expectations. Core inflation, meanwhile disappointed, coming in at 0.1% m/m compared to 0.3% m/m printed in the previous month.
- Notwithstanding the modest deceleration in inflation, consumer prices remain elevated, mainly reflecting the low base effect caused by the coronavirus crisis, the re-opening of the economy, and continued supply constraints. However, these effects are starting to abate, aligning with the Federal Reserve’s narrative that inflationary pressures are transitory in nature. Following the release, the trade-weighted USD (DXY Index) pulled back, although the move was not sustained. It changes little in terms of taper expectations which could very well still proceed before the end of the year.
- Although the US industrial sector has made massive strides in recent months, manufacturers still face a number of COVID-19 related chal-lenges that are hindering the sector’s recovery. These include ongoing supply chain disruptions, labour restraints, and uneven demand from the US’s main export partners. Having said that, high-frequency PMI data suggest that headwinds are abating. This comes against the backdrop of a solid economic recovery more broadly, meaning the outlook for the sector remains promising even though COVID-19 is a cause for some near-term uncertainty.
- On the back of yesterday’s data, the USD came under some pressure. However, it was not sustained, and it is instructive that it wasn’t. Although slightly softer than expected, the data changed little. Inflation remains well above the Fed’s target and needs to soften. Infla-tion expectations as a result of the recent CPI releases are elevated, and that will be of some concern to the Fed. The FOMC will seek to further moderate the growth in money supply to quell any inflationary episode, which implies a taper. The USD ended the session more or less where it started and holds the potential to appreciate further should an event trigger a fresh rise in risk aversion or the economy appears to be stronger than first thought. Against this backdrop, today’s industrial production stats will hold interest today.
Rand and International FX Commentary
- The ZAR traded through a comparatively wide intraday range yesterday, hurled around by souring risk appetite and US inflation data which came out softer than expected. Major currencies initially favoured the weaker US inflation outlook, as it weighed on the USD, but this proved to be short-lived as the greenback recouped losses to end the day flat. Meanwhile, the ZAR traded with more of an idiosyn-cratic bias, as it led EM currencies weaker through the day. Given the unit’s month-to-date outperformance, now standing at 1.20% and the largest amongst both EM and DM currencies, the ZAR has traded well away from its initial Q3 trend. While the dollar’s rally has tem-pered and allowed for part of this, these moves may be unjustified given the impediments to SA’s economic recovery through Q3 and may thus spark some ZAR selling in the near term as investors book profits on the latest rally.
- Internationally, trade was dominated by US inflation data which, despite the USD recovering from initial pressure, successfully kept any dollar rebound at bay. As for the data, while headline inflation was in line with expectations, core CPI came out softer than expected. This could ultimately temper bets that the Fed will announce any tapering at its FOMC meeting next week and, instead, push this to the No-vember meeting. Should inflation prove to be topping out, as core CPI may suggest, it would ultimately follow the Fed’s narrative that heightened inflation would be temporary, meaning looser-for-longer policy will persist.
- As for domestic data, mining production data made for positive news as it showed mining activity rebounded in July. Specifically, mining production swung from a contraction of -1.6% m/m in June to an expansion of 4.1% m/m in July. On balance, given the civil unrest and lockdown restrictions at the start of July, which would’ve impacted activity in the sector, the July mining production figure was solid and points to favourable terms of trade in the months ahead.
- For how long this will be a tailwind for the ZAR remains to be seen, but it should continue to offer some resilience to the local unit. The day ahead sees an update on the domestic demand front with July’s retail sales figures. SA’s retail sales growth has waned due to a dete-rioration in economic fundamentals and sentiment, which as of late, has stemmed from the Delta variant and civil unrest. Moreover, the decline in credit extensions and money supply, against record-high unemployment figures, suggest that household budgets are being squeezed and consumers are not spending as they were pre-covid.
- For as long as this occurs, import demand should remain depressed in comparison to exports. This would feed the view that SA’s terms of trade will remain supportive in the months ahead. However, on the other hand, ZAR risks remain evident, as are tapering risks in devel-oped markets, with the US taper still likely this year despite the softer inflation print yesterday. For the day thus far, deteriorating risk ap-petite is being noted, with yesterday’s weaker performance on Wall Street filtering into the Asian trading session. Internationally, mar-kets will turn to US industrial production data later in the day, which would likely only cause a change in market mood should factory pro-duction have deteriorated significantly in August.