Local Market Commentary
- President Hakainde Hichilema is set to meet the IMF and World Bank in Washington as the country tries to secure a lending program. However, the statement, issued from New York by President Hakainde Hichilema’s spokesman Anthony Bwalya, did not say when the meetings would take place. Note President Hichilema is in the United States for the United Nations General Assembly. With the presi-dent and his administration having pledged to reduce the fiscal deficit, restore economic growth, review mining policies, and secure an IMF program, the outcome of the talks with the two lenders will be eagerly anticipated as they will likely provide the latest indication of how close Zambia maybe to securing a deal to address its debt situation.
- Meanwhile, data released by the Bank of Zambia showed that Zambia’s current account surplus narrowed in Q2 to $752.6mn from $863.2mn in the prior quarter. The overall balance surplus meanwhile rose to $213.7mn, the highest since Q3 2015.
- In the base metals complex, the copper market had a stellar session yesterday as investors focused on the news that Evergrande agreed to pay interest on an outstanding bond which lifted risk sentiment. Equally the payment of the interest calmed fears of contagion risk throughout the Chinese economy. Analysts are in broad agreement that this is not China’s “Lehmans moment” and Beijing will prevent any disorderly market uproars.
- There has been some paring of the gains achieved overnight with the benchmark 3m LME contract priced 0.4% lower at $9247.00/tonne at the time of writing.
- At the much-anticipated FOMC meeting, the Fed suggested that moderation in asset purchases may soon be warranted and suggested that rate hikes could come as early as next year. The announcements were fairly hawkish, and the Dot Plots showed that the 18 members are now evenly split on a rate hike next year. The suggested tapering of asset purchases is still contingent on progress towards the Fed’s employment and inflation goals, but the statement noted that progress towards reaching these goals is still as was initially expected. In terms of forecasts, the Fed sees the benchmark policy rate at 1.00% by the end of 2023, but only forecast rates at 1.8% by 2024, suggest-ing that members aren’t expecting an accelerated series of rate hikes. Either that, or they have lowered estimates of the terminal rate or the rate at which the hiking cycle ends. In terms of growth and unemployment, GDP forecasts were revised lower for this year to 5.9% from 7%, while the jobless rate is seen at 3.8% this year and 3.5% in 2022. However, with all that was priced in already, market reaction was relatively muted, with the USD inching lower. The UST curve, however, flattened as front-end yields climbed.
- Concerning today’s data, the preliminary PMI readings for September are expected to show that growth in the U.S. economy is starting to moderate, with manufacturing and services indices both forecast to tick marginally lower. Despite expectations that these will signal slightly slower growth, the U.S. economy continues to push through this recovery phase, with last week’s strong retail sales figures high-lighting the resilience of the consumer. After last week’s data, any topside surprises from the PMIs will drive bets that the Fed may need to begin tapering its monetary policy relatively soon in order to prevent the economy from overheating.
- Looking to next week, attention is starting to turn to a Senate vote that will unfold next week concerning the lifting of the debt ceiling. It appears that the budget reconciliation process may not permit the Democrats from raising the debt ceiling as part of their efforts to raise social spending. The Republicans want nothing to do with the social spending bill and have told the Democrats to raise the ceiling them-selves. In theory, the Democrats can, but then they would need to forgo some of their social spending measures. Once again, party poli-tics are at play, and again there is a high probability that raising the debt limit again goes down to the wire, even though the Democrats have a majority they can rely on.
- In the FX markets, consolidation was the order of the day as the Zambian Kwacha closed little-changed. Meanwhile, after the initial knee-jerk reaction to the Fed statement, which nudged the USD higher, it has since retreated and lost some of its upside momentum. Con-cerns over the Fed are now behind us and the focus can shift back to underlying economic fundamentals. Much of what had already been priced in has come to pass. Furthermore, Evergrande appears to have placated some concerns and reduced overall levels of risk aversion. Equity markets are generally firmer and that should make for a weaker end to the week for the USD.
Rand and International FX Commentary
- The ZAR strengthened for the first day in seven yesterday as riskier assets received a much-needed boost from easing concerns over Chi-nese property developer Evergrande’s ability to make upcoming debt payments. Advancing 0.50%, the ZAR was able to pare weekly loss-es as it closed at the 14.7500/$-handle. However, yesterday’s main event keeping markets on edge was the Fed’s FOMC statement deliv-ered last night.
- Coming as a surprise to markets, Fed Chairman Jerome Powell’s speech ultimately adopted somewhat of a hawkish stance. While no date was set for the commencement of tapering to central bank asset purchases, the Fed noted that this might soon be warranted. Additional-ly, FOMC board members believe tapering could conclude midway through 2022, allowing for rate hikes thereafter. As a result, the USD has strengthened overnight, broadly pressuring other currencies. The ZAR, meanwhile, swung overnight gains from 14.6700/$ back to the 14.8000/$-handle at the time of writing.
- Domestically, yesterday’s inflation release showed CPI accelerated in August to 4.9% y/y from 4.6% in July. However, base effects remain at play as month-on-month inflation decelerated sharply from a 12-month high of 1.1% in July to 0.4% in August, with a similar trend oc-curring for core CPI. Details from the CPI report published by StatsSA showed that the acceleration in annual headline inflation was driven by increased costs for food and non-alcoholic beverages, transport, housing and utilities and miscellaneous goods and services. As such, supply-side factors alongside higher global commodity prices and freight costs continued to underpin the increase in consumer prices.
- It is a full calendar for the day ahead, kicking off with Eurozone PMI stats followed by US PMI readings later in the day, both of which should show progress on their respective economic recoveries. However, today’s news flow will be dominated by central bank meetings once again, the first of which being the Bank of England’s policy decision followed by a domestic update from the SARB. The SARB is not expected to hike rates until at least next year, barring substantial ZAR depreciation into the end of the year, which could force the MPC’s hand. Nevertheless, the SARB’s outlook may be the source of some market volatility, depending on how MPC members wish to grapple with potentially increasing inflation versus a persistently weak economic backdrop that was provided with a further setback by July’s riot-ing and looting.
- Should the SARB ultimately maintain its accommodative stance and show no hints of any greater potential for rate hikes in the near term, the ZAR will likely come under further pressure into the end of the week. As it stands, the ZAR has remained on the back foot in early morning trade. While Asian equity markets have continued to push ahead on positive news from Evergrande, the USD remains supported near one-month highs after the Feds hawkish tilt.