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Local Market Commentary
- Headline inflation in Zambia slowed to 24.4% y/y in August from a near-19 year high of 24.6% y/y in the month prior. On a m/m basis, infla-tion rose to 0.4% from 0.3% in July. A breakdown of the data from ZamStats showed that food price inflation accelerated to 31.6% in Au-gust, compared with 31.2% in the prior month, while non-food inflation decelerated to 16.3% from 17.3%, largely driven by a drop in the prices of vehicles, such as the Toyota Hilux and Nissan Almera.
- Note, headline inflation in Zambia slowed for the first time since April as a rally in the Zambian Kwacha (ZMW) also helped rein in inflation. The ZMW was Africa’s best-performing currency against the USD in July, gaining around 18%, and has extended those gains in August so far following opposition United Party for National Development (UPND) leader Hakainde Hichilema’s Presidential election win on August 12. The ZMW rally making it Africa’s best-performing currency on a YTD has been underpinned by expectations that Hichilema will rein in public debt and the budget deficit while restoring the nation’s credibility following a default on its foreign loans.
- While inflation slowed down in July, it has remained above the Bank of Zambia’s upper limit of 8% for more than two months now. That said, the ZMW’s appreciation should further help cool inflation. A sustained slowdown in inflation could ease the pressure on the BoZ to raise the policy rate at the next meeting on September 1.
- Meanwhile, Zambia’s trade surplus narrowed 13-month low ZMW 3.6bn in July from an upwardly revised ZMW 5.7bn (prior: ZMW 5.3bn) in June. The July reading compares with a surplus of ZMW 4.57bn in the corresponding month of 2020. While, the surplus narrowed in Ju-ly, a still positive fundamental outlook for copper suggests that the trade account will remain supported in the coming months.
- Speaking at a weekly briefing yesterday, WHO Regional Director for the continent Matshidiso Moeti noted that the third wave of corona-virus infections in Africa appears to have stabilized, though cases remain high with almost 248k reported in the past week. According to Moeti, some 24 countries are experiencing a resurgence and deaths, are rising in eight of them, including in Botswana and Ethiopia. At the same time, an estimated 13mn vaccine doses have been administered across Africa over the past week, triple the previous seven-day pe-riod. Moeti added that the rollout in the continent has trailed much of the rest of the world, partly due to supply and procurement issues. That said, WHO remains hopeful that 10% of people in Africa can be vaccinated by the end of September.
- The narrative for copper remains the same this morning. The red metal has drifted lower this morning in the Asian session with the mar-ket expressing an element of wariness ahead of the Jackson Hole symposium this weekend. The jury is out as to what tone Fed Chairman Jerome Powell will adopt when he addresses the virtual meeting but any confirmation of a taper by the end of the year will pressure metals across the board.
- Concerns surrounding the Chinese economic recovery have also surfaced again this morning. Earnings at Chinese industrial firms have slipped for the 5th consecutive month which points to a slowing momentum. Extreme weather conditions resulted in stretched supply chains, while outbreaks of COVID-19 did its part to create friction in the trading and manufacturing process.
- By far and away, most of the focus today will be on Fed Chairman Powell’s comments at the Kansas City Fed’s Jackson Hole symposium that will take place virtually this year. Investors are particularly interested in the guidance that the Fed might offer on the timing of the ta-per. Although it is widely accepted that the taper can now proceed given the strength of the underlying U.S. economy, investors are un-clear whether the taper will start in Sep or whether the Fed will wait until 2022 to begin. If the latter, the USD will come under tremen-dous pressure, and a strong risk rally will follow. If the former, the USD will likely regain its composure, although it is unlikely to surge giv-en just how much of this news has been priced in.
- Investors across many different markets and especially the USD are waiting for the guidance to come from Fed Chairman Powell in his ad-dress this evening. This weekend holds the potential to move markets significantly through the week ahead if the central banks paint a strong picture for the economic outlook and shade the guidance in favour of tapering sooner rather than later. A growing chorus of hawks are urging the Fed to consider an earlier taper to avoid any further distortions down the line.
Rand and International FX Commentary
- The USD-ZAR treaded water for most of the day yesterday, hovering in a narrow range and unable to sustain any topside or downside breaks outside of 14.9000-15.0000. Resultantly, the ZAR held steadier than most other EM currencies, which fell as the US dollar edged higher. While risk appetite showed signs of fading, the USD began to show some strength as it bounced off a one-week low, spurred on by an uptick in Treasury yields and today’s Jackson Hole speech from Fed Chair Jerome Powell.
- Albeit a marginal gain of 0.30% as it settled near the 14.9000/$-handle, the ZAR secured its fourth consecutive daily gain yesterday. While the ZAR’s continued strength this week has been notable, it is ultimately due to its higher sensitivity to broader market moves. Recall the local currency weakened the most amongst EM currencies last week and has thus had greater scope to reverse losses this week as the USD eased and investors scaled back Fed tapering bets.
- On the data front, domestic PPI data yesterday showed producer prices eased in July, slowing to 7.1% y/y from 7.7% y/y in June. The de-celeration was less pronounced on a monthly basis as the PPI rose 0.7% from 0.8% in June. While the removal of base effects as we move forward should see producer price inflation ease in the coming months, inflation in input prices remains significantly elevated and some 2.5% greater than current CPI inflation. All in all, the weak state of domestic consumption has inhibited producers from offloading higher prices onto consumers. As such, we will unlikely see a significant bump in inflation in the near term, barring substantial currency deprecia-tion, as consumers remain price-sensitive and thus likely to cut back purchases should inflation rise substantially.
- Externally, overnight Fedspeak has been the major development and, with a hawkish tone emanating, will keep the market on edge ahead of Powell’s Jackson Hole speech. Specifically, Dallas Fed President Kaplan said he expects the Fed to begin raising interest rates next year. Meanwhile, two other regional Fed Chiefs downplayed the impact of the delta COVID-19 variant, with one repeating calls for a trimming of the Fed’s $120 billion per month in asset purchases soon. While none of the Fed speakers mentioned hold votes on monetary policy this year, this should stoke bets that the number of hawks amongst FOMC members is growing.
- In the spot markets, major currencies have continued to trade mixed against the USD in this morning’s Asian session. Haven currencies have been bid, with the Japanese Yen and Swiss Franc both buoyed this morning, suggesting the market may be turning more risk-averse than it was at the start of the week. While most focus will be on the Fed’s Jackson Hole symposium through the day, the release of the Fed’s preferred measure of inflation, core personal consumption expenditure (PCE), should also hold some market-moving potential giv-en its implications for US monetary policy further out.