Macro Analysis /

Bond yields to rise as hawkish Fed bets rise, Angola Kwanza continues to firm

  • Forex: Angolan Kwanza remains Africa’s thirst best performing currency despite a deepening negative real rate

  • Fixed Income: A more hawkish than expected Fed should bolster the appeal of bonds for money managers

  • Macroeconomic: Nigeria’s crude production rises in November but remains well below the long term average

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
14 December 2021
Published byETM Analytics


Inflation in the US is a problem, and the belief that the impact is transitory is being questioned more each day. Fed Chairman Powell has alluded to the need to accelerate the taper and talk of hiking interest rates. This context makes the upcoming FOMC meeting so interesting and important. It will determine how expectations for the next year are shaped and the ultimate impact on the financial market. It is the week's main event, and anything that speaks to the Fed's decision making will hold interest. Today's PPI data is a case in point.

The trade-weighted USD is flirting with a key technical trend line, which, if broken to the topside, could open the door for further gains. It is not surprising given the upcoming FOMC meeting where the Fed may very well persist with its more hawkish stance as it seeks to control inflation. To gain perspective on how the USD might respond, the Fed's behaviour needs to be considered against the ECB, which later this week will be faced with a very different prospect. The EU economy is in the middle of a soft patch, and while the Fed may seek to accelerate tapering, the ECB might look to stall on removing stimulus. Therefore, it is not surprising that the EUR looks vulnerable to more selling, while the USD holds the potential to extend its gains a little further.

In the commodity space, oil markets declined yesterday and are extending that drop this morning as uncertainty surrounding the Omicron variant of the virus is more than offsetting positive demand forecasts presented by OPEC yesterday. The front-month Brent contract slipped by more than 1% yesterday and has slid back down to just over $74 per barrel as a result, bringing the 200DMA at $73.20 into view. This drop in prices has also seen the futures curve shift closer towards a bearish contango structure, with the prompt spread currently a mere 12cents in backwardation, well down from levels over $1.30 seen this time last month. Another bearish signal is that the most recent CFTC data has suggested that speculators are trimming their bullish bets on oil, with the net long position on the commodity at its least bullish in over three months.


Africa: Ratings agency Fitch said in a report that the sector outlook for African banks next year is neutral, with uncertain business conditions and COVID-19 risk constraining the recovery. Fitch added that they anticipate a slightly faster rise in lending, with most economies growing at the trend rate and banks gradually loosening stricter/pandemic-era underwriting standards. Fitch’s base case also considers risks to global growth, relatively high commodity prices, and still favourable external financing conditions. Fitch also noted that the pace of downgrades has significantly reduced this year compared to the prior year, and barring any significant downside risks, these trends are expected to persist in 2022.

Ghana: As part of new measures to combat a new wave of coronavirus infections, Ghana will now charge airlines $3,500 for every passenger flown into the country who is not fully vaccinated. Starting today, carriers that take vaccinated passengers without negative PCR test results into Kotoka International Airport will also be fined, according to the Ghana Health Service and Ghana Civil Aviation Authority statement. Non-Ghanaian nationals who are not fully vaccinated may be denied entry and returned to the point of embarkation at a cost to the airline. The move comes as governments worldwide shore up travel restrictions to prevent the spread of omicron, a highly transmissible coronavirus variant.

Tanzania: The Arab Bank for Economic Development in Africa has granted Tanzania loans and grants totalling $3bn over the next five years. According to the Finance Ministry, the agreement was reached following talks between the country’s finance minister and the lender’s Director-General Sidi Ould Tah. The financing is for projects including roads, energy, education, agriculture, and private companies’ capacity-building programs. The loans and grants are also likely to support the country’s economic recovery prospects.

Senegal: Reports citing Finance and Budget Minister Abdoulaye Daouda Diallo indicate that Senegal will leverage its expected oil and gas revenue to reduce its debt from 66.7% of GDP in 2021. Moreover, Senegal will continue to prioritise “concessional debt, the regional market, and public-private partnerships” to fund its budget and keep debt sustainable. Note that parliament approved a budget of CFA 5.2trn for 2022, and Senegal’s main oil and gas projects are set to begin production in 2023.

South Africa: One bit of good news in the press this morning are indications that the UK may look to remove SA off its red list as the worldwide spread of Omicron means that these bans are pointless. The travel bans could be scrapped as early as this week and replaced with requirements to be double vaccinated with a negative PCR test. It is unclear whether it also comes attached to a quarantine stay, but it is encouraging these foreign countries to come to their senses. However, the damage to the tourism industry is complete, and SA's recovery to pre-Covid economic activity levels may now need to wait until deep into 2022 or longer

Uganda: In a monthly report from the Uganda Coffee Development Authority, coffee exports rose 22% y/y in November on the back of higher yield. Specifically, shipments last month climbed to 524,902 bags, vs 430,310 bags a year earlier, as trees planted in recent years started to yield, supported by favourable weather. About a third of Uganda’s coffee exports in November went to Italy, while Germany, Belgium, India, Algeria were other top destinations. Exports this month are projected at 600k bags due to peak harvesting season in the central and eastern regions. Increasing coffee exports have underpinned hard currency inflows, which in turn has supported the Ugandan Shilling’s resilience. For context, the UGX is the best performing East-African currency on a YTD basis, up by 2.58% against the USD.

Botswana: Bloomberg has today pencilled in for the release of the November CPI reading. The October reading came in at 8.8% and we expect the pressures to remain firmly anchored to the topside given the weakness in the local currency and the fact that energy prices remained elevated. We reiterate that the Bank of Botswana does see the inflation rate returning to the 3-6% target band in the second half of 2022 and remains of the opinion that inflation is transitory and not demand side driven, thus an increase in rates will hurt the domestic recovery which has shown no signs of overheating at yet.

Forex: Angolan Kwanza remains Africa’s third best performing currency despite a deepening negative real rate

The Angolan Kwanza (AOA) has been resilient on the year so far, underpinned by several factors. These include elevated oil prices, a current account surplus, an improving fiscal position that saw Moody’s raise Angola’s credit rating, and rising foreign exchange reserve levels. Note Angola’s foreign exchange reserve levels rose to a 15-month high in November, while oil revenue jumped by 37% m/m in October. As a result, the AOA is the third best performing African currency on a year-to-date basis, up by 13.75% against the USD. According to the performance of 20 African currencies tracked by Bloomberg, only the Zambian Kwacha (+30.45%) and Mozambican Metical (+16.78%) have fared better.

Although the above-mentioned factors have underpinned the AOA, a deepening real rate poses a downside risk to the local unit’s resilience. Headline inflation in Angola accelerated further in November, coming in at 26.98% y/y from 26.87% y/y in the month prior. This was the fastest pace of price growth since July 2017 and marked the eighth consecutive month that inflation has risen. On a month-on-month basis, CPI rose 2.1%, the same pace as in October. Food price inflation, a major contributor to the headline reading, remained buoyed above 30%, amid high demand as the country depends heavily on imported food.

Evidently, inflationary pressures persist in the economy, and the Bank of Angola forecasts that a scenario of inflection in the trajectory of inflation is only expected from 2022 onwards. For now, the continued acceleration in inflation has seen Angola’s real rate (Policy – CPI) move deeper into negative territory to -6.08%. From a currency perspective, this could detract from the resilience shown by the AOA thus far.

Fixed Income: A more hawkish than expected Fed should bolster the appeal of bonds for money managers

In the wake of the strongest headline inflation reading in decades, the Federal Reserve is expected to turn more hawkish at its FOMC meeting on Wednesday evening with policymakers set to double down on the pace at which it is normalising monetary policy. While a faster taper, double the current pace, is mostly baked into financial assets, the risk is that markets aren't pricing in just how high the Fed will want to hike rates. We expect that the dot plot will indicate two to three rate hikes in 2022 post the meeting.

ETM’s expectations for a steeper rate hike path implies that US Treasury yields are likely to rise further in the coming weeks as the market adjusts for higher rates. Recent economic data shows that the US economic recovery remains healthy and that the level of slack in the labour market continues to narrow. That said, while CPI hit a multi-year high in November, there are signs that inflation pressures in some sectors are easing when looking at input prices and the recent correction lower in international commodity prices.

Global fund managers have flagged inflation and expectations for a faster pace of policy tightening as a major risk to their portfolios going forward. While equities are favoured at the moment, given the low yields from bonds, we are likely to see a reassessment of portfolio structures if the Fed comes out more hawkish than anticipated by markets as bonds would become more attractive given that yields would be expected to rise further. As has been the case for some time now, the forward guidance used by the Fed on Wednesday evening will prove to be paramount for the direction of financial markets as we head into the new year.

Macroeconomic: Nigeria’s crude production rises in November but remains well below the long term average

While Nigeria’s oil production rose in November, the country’s crude production remained well below its long term average. The combination of dysfunctional refineries, an oil spill at one of the country’s leading production facilities and OPEC quotas are to blame for the reduced production. For context, Nigeria produced an average of 1.53mn barrels per day in November compared to its 10-year average production of some 1.83mn barrels per day, according to Bloomberg data.

Meanwhile, the OPEC Monthly Oil Market Report, published yesterday, showed that the country produced 1.42mn barrels per day according to secondary sources and 1.27mn barrels per day based on direct communication to the cartel. While the government is pushing to pump more oil to increase its average daily production, operational setbacks and sabotage from key pipelines undermine optimal production.

In terms of rig count, the number of operating oil rigs fell to seven in November from nine in the previous month, partly due to a crude oil spill in Nembe creek. Compared to the 11 rigs operating in September this year, the November count is equal to 2020 records and lower than 16 rigs recorded in 2019.

While Nigeria is expected to increase its production to 1.66mn barrels per day in December, partly due to the new OPEC agreement, there are concerns that the country will not be able to achieve this level of production despite assurances by the Minister of State for Petroleum Timipre Sylva. Looking forward, with the investment community turning away from fossil fuels as they invest in sustainable energy projects, it is hard to imagine a significant increase in Nigerian oil production in the years ahead.

That said, Nigeria’s oil sector will benefit from the investment of Africa's richest man Aliko Dangote. Dangote’s mega refinery project is expected to produce around 650k barrels of refined crude per day. Despite being Africa's biggest oil producer and exporter, the country depends almost entirely on fuel imports after allowing its significant refining capacity, 445k barrels per day, to become dilapidated over several decades.