INFLATION: Expectations are of a marginal ease, realigning back with the 6-8% corridor for June supported by currency appreciation. Risks on the top side persist on the back of systemic drought in southern Africa, weak Kwacha (ZMW) against the SA Rand (ZAR). Energy deficit poses a high risk to cost push pressures aligning to BOZ projections of elevated consumer price index over the next 8 quarters (2 years). A postponement in sales tax implementation (from 01 July) provides a temporal hedge against price escalation thereby easing inflationary pressure yet breeds uncertainty in business planning and pulse.
Despite oil rising to above $70/bbl in April and May, local pump prices have not been aligned higher providing another hedge against cost increases. Crude has suffered depression in prices by over 20% and are only rising in the last week on geopolitical tensions between US and Iran.
PURCHASING MANAGERS INDEX – PMI for May slid deeper into contractionary zone to 43.9 from 45.2 in April. The reading revealed a high rate of input inflation to 42 month high. June readings expected to be below 50 as business conditions remain tough.
LIQUIDITY: The central bank was in Open Market Operations (OMO) injecting circa K1.28 billion on 25 June pushing cushioning the net short position mainly due to outflows to the revenue authority (ZRA). Outlook for next weeks treasury auction is bleak as we attach high odds of an under-subscription. Yields however will remain fairly unchanged as the BOZ manages interest rates from cheeky bidders. Overnight rates remain a few basis points elevated at 10.75% from levels of 10.25% in previous weeks.
DOLLAR BONDS: Yields on Zambia’s dollar bonds were in a infinitesimal rally of 5 basis points average catching the global fever where demand for riskier assets has persisted.
CURRENCY MARKET: The Kwacha closed previous session at K12.94 after hitting a high of K13 in intra-day trading. Energy demand was the largest driver of the pressure which was cushioned by conversions for payroll by some corporates. However the Kwacha is forecast to gravitate around K13 level for a while. Suffice to say K13 level seems to be the new physiological barrier. The Bank of Zambia (BOZ) will be a key factor in the dollar demand equation as they will be looking to buy dollars in a quest to shore up reserves which have fallen to levels of $1.3 billion.
Annualized volatility remains above 13% to 13.66%.
INTERNATIONAL: US and Asian stocks trade cautiously well ahead of a G20 summit where analysts are searching for thaw in the sideline meeting between Xi Jinping and Donald Trump. Gepolitical tension is another key driver of market tempo as crude markets are taking a positive cue from the tensions pushing Brent crude towards $66/bbl. as WTI US crude futures fall shy of the $59/bbl mark. Gold is at record highs after crossing $1,406.67/ounce given the dampening global risk sentiment.
Compiled by Kondwani Phiri (BT Analyst)
