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Local Market Commentary
- Inflation data for October will take centre stage today. The Zambian Kwacha’s two-month world-beating rally in July and August helped curb import costs, resulting in inflation cooling in September, coming in at an eight-month low of 22.1% y/y from 24.4% y/y in the month prior. 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 Kwacha is placed among some of the worst-performing African currencies on a month-to-date basis against the USD, down almost 2.0% in October. Despite its recent losses, the Kwacha remains the best performing currency on a year-to-date basis. The Monetary Policy Committee projects that inflation will de-celerate faster and edge closer to the target range of 6% to 8% sooner than expected.
- Aside from the 2022 National Budget which set to presented tomorrow by Finance Minister Hon. Situmbeko Musokotwane, it is worth noting that an update on Zambia’s debt plans is also set to be provided on Tuesday, 2 November 2021.
- In the base metals complex, The 3m LME copper price has regained a footing after shedding 2.49% overnight. The metal is currently trad-ing 0.3% higher at $9575/tonne as we head into the EU open.
- Looking ahead, we expect the volatility in base metals to persist as investors unpack the inventory levels, growth dynamics, trajectory of energy prices and various supply concerns as a result of either logistical bottlenecks of strike action.
- Moving over to the US, President Biden’s spending ambitions need to be funded. His idea of a “billionaires tax” will sit comfortably with many socialists and those on the far left, but it is unclear whether such a tax would be practically possible. Aside from the complicated na-ture of doing so, it is also unclear whether it would generate the requisite revenues and could hold the unintended consequence of dis-couraging further investment into U.S. operations or the U.S. more broadly. Any tax increases will also attract criticism from the Republi-cans.
- Without some agreement on how Biden’s spending initiatives will be funded, Biden could well head to COP 26 without a firm idea of what the U.S. will do and how it will tackle climate change. Central to efforts on promoting clean energy are questions around how it will all be funded. Answering that question in the midst of an economy still struggling with a post-pandemic recovery and high inflation is key. It would appear that resistance to tax increases, even amongst Democrats, remains high.
- In the FX market, the Zambian Kwacha remained on the defensive on Tuesday, moving further north of the 17.000 mark. The local unit remains on the back foot as demand for hard currency continues to outweigh supply. Meanwhile, as investors look to close out the week, the USD looks set to remain consolidative. There is very little in the way of directional momentum to speak of, although that might change with the release of the GDP data scheduled for this afternoon. A stronger than anticipated reading holds the potential to bolster senti-ment towards the USD, but for now, there are serious concerns as to the impact that fresh Covid infections have exerted on Q3 GDP.
Rand and International FX Commentary
- The ZAR weakened shortly after domestic markets opened yesterday, extending past 15.0000/$ for the first time in over two weeks. The local currency led EM FX losses for a portion of the day, with the unit ultimately declining 1% as the domestic mood soured on news that state utility Eskom would need to ramp up load shedding in order to cut 4000 MW of electricity supply to the national grid.
- This ultimately brought one of South Africa’s structural issues to the fore yesterday, which has in recent years and will likely continue to inhibit the country’s economic growth potential. Coming out of a likely third-quarter dip in economic productivity due to lockdown re-strictions and July’s civil unrest, this bodes ill for South Africa’s growth potential into the end of the year and could see dovish SARB MPC members gain the upper hand at next month’s meeting.
- Surprisingly, not even notable USD weakness helped to stem the ZAR’s losses yesterday. Longer-term Treasury yields continued to track lower yesterday while shorter-dated two-year yields edged higher on persistent inflationary concerns. This yield curve flattening comes as investors fret over the US economy’s ability to handle rate hikes as soon as next year following the likely end of the Fed’s asset pur-chases around mid-2022. However, the ZAR was not alone in its decline yesterday as the EM currency basket closed with mixed perfor-mances, while global equity markets similarly turned risk-off.
- As for the day ahead, September producer price inflation statistics graces the domestic data card. Annual producer price inflation in SA appears to have found a base above the 7% mark since May, with input costs continuing to rise rapidly due to a contribution of low base effects and sharp increases in commodity prices, freight costs and materials amid the global shortages. Based on leading indicators, a fur-ther rise in the PPI index is expected, but the acceleration in PPI may be starting to slow. These increasing costs are beginning to weigh heavily on companies’ bottom lines and will be pressuring them to try and pass on more of this increased cost to consumers. As a result, further topside pressure on CPI could be expected in the months ahead.
- Externally, the focus for the day will rest on the ECB‘s policy rate decision, while third-quarter US GDP results also hold market-moving po-tential. Expectations are for the ECB to begin laying the groundwork for more significant policy changes come the December meeting as hawkish debates within the bank grow alongside persistent inflationary challenges for the Eurozone area. As for the Bank of Japan’s poli-cy announcement earlier this morning, the central bank signalled stubbornly low inflation expectations in the years to come, which will likely cause a delay in stimulus withdrawal. Despite this, the Yen has traded up against the USD, suggesting heightened risk aversion is cur-rently playing a role in currency markets. Meanwhile, Asian equity markets have followed losses in Europe and the US yesterday, with EM currencies also struggling for traction despite a broadly softer trade-weighted USD in early morning trade thus far.