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Local Market Commentary
- It was a relatively uneventful day in Zambia yesterday amid a dearth of domestic data. On the regional front, World Health Africa has called for vaccine supply deals to be brought forward. The call comes on the back of Covax, reducing this year’s supply forecast by more than a quarter. WHO Africa Director Matshidiso Moeti was quoted as saying, “it means we have to sustain prevention measures, work very hard to obtain vaccines and really advocate strongly for the promises that have been made by wealthier countries to be brought forward. It is urgent now in Africa to catch-up in vaccinating its countries.” Moeti added that a shortage of shots is a bigger problem than vaccine hesitancy and that the continent is going to fall short of 50mn doses needed to reach 10% vaccine coverage in Africa by the end of September. A shortage of vaccines and a slow rollout will ultimately weigh on the continent’s growth prospects.
- It is a tale of two-halves when looking at base metals at the moment. Traditionally copper is the focal point but for now the bulls have taken a liking to nickel and aluminium while copper straddles a well-worn range.
- Moving over to the US, there is some data for investors to turn their attention to in wholesale inventories and the latest PPI reading. The drawdown and replacement of inventories always offer some real-economy perspective on general demand conditions, but overall, the PPI data will hold greater interest. In July, U.S. producer prices continued to accelerate, with US PPI final demand rising 7.8% y/y, keeping the overall trend of accelerating producer prices since September 2020 intact. Many cost pressures have been linked to rising fuel and energy prices, and supply chain disruptions, leading the Fed to believe that inflationary pressures will be transitory. However, with no let-up expected in August, this assumption will continue to be tested. Producer price inflation has accelerated well beyond the pre-COVID trend of the base index. In contrast, producer prices in the previous print excluding volatile food and energy prices were still 6.2% higher year-on-year and up 1% m/m. This will put tremendous pressure on manufacturers and squeeze margins, resulting in increased prices passed onto consumers as demand continues to improve.
- In other economic-related news, weekly jobless claims data impressed yesterday. Claims fell to an 18-month low while continuing claims continued to moderate. Rehiring is taking place at a good pace, which, when taken together with the latest JOLTS data, shows that the la-bour market recovery is building up some strong momentum. It will spill over into the payrolls data through the months ahead, which could generate some strong outcomes to offer the Fed the room to start tapering.
- Next week will be a much busier week from a data perspective, with the all-important CPI data, together with retail sales, Michigan con-sumer sentiment data and industrial production, amongst others, all scheduled for release. It is a crucial data week that could help stabi-lise the USD if the releases in aggregate show that the economic recovery is gathering momentum and supporting the taper.
- This week, the USD stabilised and is set to record its first winning week in a month. The effects of the disappointing payrolls data did not last, with investors quite rightly viewing the data disappointment as transitory. Furthermore, several Fed speakers have confirmed this week that a taper is still likely before the end of the year. Inflation is already at the point where the Fed could justify acting. Any further improvement in the labour market and the Fed will feel comfortable in normalising monetary policy. Although the budget and trade defi-cits remain a drag on the performance of the USD, changing expectations on monetary policy still needs to be fully priced in. Within a longer-term broader USD depreciation trend, there can still be phases of ZAR appreciation.
- Locally, the Zambian Kwacha is expected to some gains against the greenback next week, supported by corporate firms selling hard cur-rency in preparation for tax payments.
Rand and International FX Commentary
- Quite aside from market talk of bank hedging behaviour that partly explains the recent appreciation in the ZAR, it was worth noting the very impressive current account data for Q2 that was released yesterday. Although quite historical, it was nonetheless instructive. It of-fered investors some perspective as to just how strongly the tailwinds to the ZAR and other commodity currencies are blowing and why the ZAR might appreciate despite all the difficulties South Africa is facing at the moment. It highlighted the power that a massive trade surplus can exert on the country, just how important the commodity cycle is to SA and why as a strategic plan, SA should focus more squarely on making the mining industry more attractive to foreign investors.
- Recovering global demand and rising commodity prices have combined with an exceptionally weak domestic credit cycle to tilt the scales in favour of some massive surpluses. Once again, there is evidence that the ZAR performs better in a weak domestic economy. When the country starts to live within its means and begins to save, the economic climate stabilises. One can only imagine how much stronger the ZAR might’ve been had it not been for the lockdown measures that continue to keep the tourism industry operating well below potential.
- Furthermore, the impressive performance of the mining sector has played a key role in restoring some resilience to South Africa’s fiscal position. The budget deficit is well below what was first anticipated, not only because mines have produced supernormal profits and paid taxes on that, but because the country’s GDP is performing a little better than anticipated. There may well be some momentum behind the recovery if the economy continues to recover, lockdown measures are eased, and the labour market absorbs more work-seekers. It is, in other words, an environment that is decidedly more positive and constructive than SA has known in the past five years.
- Recessionary conditions often prompt reforms and force changes in an economy. The government is finally adopting more reformist views such as crowding in the private sector into the electricity market and is looking to do the same with SA’s ports and the railway net-work. Pressure is building to release more spectrum in the IT industry to facilitate faster internet speeds and easier and more affordable access, while greater recognition is being given to South Africa’s unsustainable fiscal position. These are all positive steps that assist the ZAR, but they should not be taken for granted, and investors should not turn complacent.
- However, just as the headwinds to ZAR turned into tailwinds, they can turn back again. Much of the support for the ZAR is cyclical. Com-modity prices may not remain this buoyant indefinitely, and SA’s credit cycle will recover to reflect greater consumption and investment. Importer demand will rise, and exports may not hold up quite as well. Equity markets globally look frothy and could correct. There are many dangers that could reverse the current trends, and they may well unfold in the next 6-9 months.