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Local Market Commentary
- Headline inflation in Zambia slowed further in October, coming in at a 10-month low of 21.1% y/y from 22.1% y/y in the month prior. On m/m basis consumer prices climbed 0.4%. A breakdown of the data shows that food price inflation, a major contributor to the headline reading, retreated further from record-high levels, coming in at 28.1% from 29.6% in September. With October’s print, inflation in Zambia has slowed for the third straight month, and this could also be attributed to the effects of the Zambian Kwacha’s two-month world-beating rally at the start of Q3 still filtering through.
- A continued slowdown in inflation will further ease the pressure on policymakers at the bank of Zambia to tighten and provide it with some room to support the economy’s recovery further. That said, it is worth noting that the Bank of Zambia earlier this month indicated that it remains committed to raising its key interest rate should the disinflationary process be slower than expected in returning inflation to within the target range of 6%-8% by the second half of 2023.
- While inflation has remained above the BoZ’s target of 6%-8% for more than two years, the BoZ expects it to decelerate faster towards the target bank on the back of favourable outlook for the exchange rate and improved fiscal consolidation efforts. While the Zambia Kwa-cha has come under some selling pressure in recent weeks, the broader bias remains bullish. For context, the Kwacha is Africa’s best-performing currency on a year-to-date basis against the dollar up by 22.73%.
- Meanwhile, Zambia’s trade surplus widened to a 3-month high of ZMW 4.8bn in September from ZMW 3.9bn in the month prior. The trade balance reading however compares with a surplus of ZMW 7.4bn in the corresponding month of 2020. Looking ahead a positive fun-damental outlook for copper and Zambia’s pledge to boost production suggests risks exist for the surplus to widen exist in the near-to-medium term.
- Finance Minister Situmbeko Musokotwane will today present the 2022 National Budget to parliament. The 2022 budget presentation will be monitored both domestically and on the international front as it provides the first litmus test of the new government led by President Hakainde Hichilema on whether they intend to deliver on the campaign pledges. The budget will be scrutinized for signs of prudent debt management, transparency, accountability, and a greater commitment to economic recovery and development.
- It will be an important weekend for the U.S. economy, with President Biden likely to take a lead role in the G20 and COP 26 climate sum-mit. Biden will be keen to roll back further any damage to international relations done by the Trump administration and to commit whole-sale to tackle climate change. Commitments to growth and climate change will come at a cost, and taxpayers will ultimately foot the bill. Tax burdens in many developed economies, especially the U.S., will need to rise to help offset much of the damage done through the lockdowns and the pandemic and return economies to debt sustainability.
- On those points, President Biden has not succeeded in passing the bills he would’ve liked to pass heading into the weekend. He has pro-posed separating the infrastructure bill of $1.0trln from the $1.75trln earmarked for climate change and social safety net spending. On the latter, Biden has been forced to curtail his ambitions from the original $3.5trln plan to something that moderate Democrats can live with. Heading into COP 26, Biden can now only talk about plans to pass the climate bill, rather than being able to report back on what the U.S. has accomplished and how it plans to spend the funds.
- A strong performance in stocks yesterday, the inability of Congress to press ahead with President Biden’s spending programmes, and the strong EUR have all weighed on the USD heading into the weekend. Since late September, the trade-weighted USD sank to its weakest levels and will likely consolidate these levels heading into the weekend, when the G20 meet and the COP 26 summit follows. Further-more, there will be some position squaring ahead of the FOMC decision next week, resulting in the USD losing some ground.
Rand and International FX Commentary
- Emerging market currencies continued their choppy trade yesterday, with mixed performances despite a broadly softer US dollar. The USD came under pressure following third-quarter GDP results, which showed the economy grew at the slowest pace in over a year in the three months through to September as the Delta variant compounded effects of labour shortages and supply constraints.
- Furthermore, the USD was pressured by gains for major currencies, with the euro advancing following the ECB’s policy announcement. While the ECB ultimately kept policy unchanged, the central bank noted it could continue slowing asset purchases under the pandemic emerging purchase program whilst still maintaining favourable financing decisions, thus keeping December bets for more significant changes to current policy.
- Amidst the flurry of data and central bank decisions, the ZAR had a tough time steadying while domestic sentiment remained subdued by load shedding ahead of next week’s municipal elections and the following week’s Medium Term Budget Policy Statement. The ZAR ultimately fell amongst the laggards for the third day, closing at 15.1100/$, 0.70% weaker than the previous day’s close.
- As for domestic data yesterday, PPI data showed producer prices accelerated by more than expected in September, rising 7.8% from August’s print of 7.2%. While Stats SA listed coke, petroleum, chemicals, rubber and plastic products, equipment, food products and beverages as the main drivers behind the increase in the headline figure, the ZAR’s depreciation through September would have only added to higher producer costs. While we can expect base effects to diminish towards the back-end of the year, producer prices are likely to remain elevated for a while longer until the commodity cycle slows and supply chains are restored. On a monthly basis, producer prices rose 0.9%, up from 0.8% and surpassing expectations of a drop to 0.4%. Ultimately, this will influence the SARB’s monetary policy stance, as manufacturers’ costs are eventually passed onto consumers, driving inflationary pressures. However, for now, we still see the SARB standing pat at its November policy meeting.
- The day ahead sees a bumper domestic data card with private sector credit growth and money supply data this morning, followed by government budget statistics and SA’s September trade balance. With money supply and credit growth remaining below historical trends, these will continue to have a marginal impact on consumer prices and aid the SARB in extending its accommodative policy stance towards year-end, likely at the expense of the ZAR. The trade data is expected to show a narrowing in the current surplus as commodity prices declined during the month and domestic demand improved amid the easing of lockdown restrictions. While the surplus should still show exports remained buoyed by elevated commodity prices, risks lie further down the line with a potential growth slowdown in China which could affect SA’s exports and thus remove a significant part of the ZAR’s resilience.
- Externally, markets will focus on a flash Eurozone CPI print for October, which is expected to rise and thus could further bolster bets for sooner policy tightening. Stateside data includes US PCE core which is one of the Fed’s preferred measures of inflation, where a higher print could equally stoke bets for Fed policy tightening and thus provide some support to the USD after yesterday’s drop. As for the local currency, the ZAR has continued to lead EM currencies weaker in early morning trade, which could remain the case into the weekend with limited scope for improving sentiment ahead of upcoming local risk events.