Macro Analysis /

Kenyan bond auction undersubscribed, FOMC meeting minutes were hawkish

  • Forex: Kenyan assets remain under pressure amid mounting fiscal concerns

  • Fixed Income: US Treasury yields rise on the back of hawkish FOMC meeting minutes

  • Macroeconomic: Sub Saharan Africa PMI average edges lower in December

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
6 January 2022
Published byETM Analytics


Today's focus will turn to the weekly US jobless claims for the next batch of labour data. They are likely to reflect the impact of Omicron far quicker than the ADP or the non-farm payrolls data will and are therefore instructive. All of this will be a precursor to the week's main data event, which will be the non-farm payrolls data tomorrow. That will likely dictate the direction of U.S. Treasuries and the USD for the week that follows.

Some hawkish Fed minutes have resulted in the USD unwinding all of yesterday's losses. However, it may be significant that the USD did not surge any more than it did and continues to trade in what has become a well-worn range for more than a month now. It may be that the market is still looking to see how the Omicron variant unfolds before adopting any clear cut direction, while focus ahead of the weekend will fall on the remaining two labour market data releases for further insight. Although there is a slight bullish undertone to the USD, it remains mostly rangebound.


Zambia: Despite nudging lower, Zambia’s headline PMI reading remained buoyed in positive territory. For context, Zambia’s economy-wide PMI reading came in at 51.5 in December, down from 51.8 in the previous month. Markit said in the report that the main takeout was a further expansion in new orders, while the rate of growth in new business quickened for the fourth successive month and was the strongest reading in more than 3 years. In response to higher new orders, companies expanded both their staffing levels and purchasing activity in December. The rise in employment was the seventh in as many months, while input buying increased for the third month running. Looking ahead, business confidence improved, with around 40% of respondents predicting a rise in activity over the course of 2022. Optimism generally reflected hopes of ongoing improvements in demand. That said, respondents highlighted the uncertain nature of conditions at present.

Nigeria: Something for Nigerian Naira bulls to cling on to, data published by the Central Bank of Nigeria showed that the country’s external reserves rose by $5.15bn in 2021 to close the year at $40.52bn, marking a 14.5% rise y/y. The marked increase in the country’s external reserves is due to the $4bn Eurobond issuance in September last year. The Nigerian government has also secured a $3.35bn IMF facility, which also provided a boost for the reserves. The external reserve has been a major buffer for the Central Bank in supporting the Naira.

Oil producers: Oil markets are down this morning, weighed on by the hawkish FOMC minutes released overnight that suggest that the Fed could be looking at raising rates as early as March, and implementing qualitative tightening soon after. The expectation for tighter US monetary policy has seen Brent slip back below the $80 per barrel mark after it breached this level yesterday for the first time since November. This could see prices remain under a bit of pressure in the short term as traders adjust to these new monetary conditions.

Ghana: Bloomberg reported that hundreds of trucks loaded with cocoa are stuck at Ghana’s ports of Takoradi and Tema as workers who offload the vehicles are on an indefinite pay strike. The strike comes amidst a broken global supply chain and will undoubtedly put pressure on the sector going forward. Investors will be hoping for a quick resolution between management and workers.

South Africa: Yesterday was a good day for the ZAR. It is difficult to attribute it to one, single thing. The USD had depreciated slightly on a trade-weighted basis, and that contributed. More Zondo commission findings were highlighted in the press, which further helps to unearth the depth of corruption within the governing party and the SOEs, and finally, SA seems to be exiting its 4th wave at a time when most other countries are deep in the middle of theirs. The ZAR's undervaluation and its position high up the carry attractiveness rankings mean that it also has the ability to attract foreign capital. All of this needs to be contrasted against the Fed's desire to normalise monetary policy. On the one hand, the USD will enjoy monetary policy divergence from its major trading partners. On the other, emergence from the pandemic also means that overall risk appetite is likely to increase, detracting from the USD's appeal. As it is, the USD is comfortably overvalued, with much of the policy divergence is already priced in.

Forex: Kenyan assets remain under pressure amid mounting fiscal concerns

Kenyan assets remain under pressure at the start of the new year as concerns over the country's fiscal outlook continue to deteriorate. The bearish bias in the KES remains entrenched this week with the currency trading at its weakest level in years. For context, according to Bloomberg data, the KES ended the session above the 113 mark. This means that the KES has lost more than 11% since the start of Covid.

Kenya’s bond sale, meanwhile, was undersubscribed with the sale of the reopened 5-year bonds receiving KES 28.4bn bids compared to KES 30bn, which the bank had initially planned to issue. The Central Bank of Kenya accepted KES 27.4bn in bids and the weighted average yield of the auction was 11.234%. Recall that the central bank planned two bond auctions in January with an aim to raise KES 60bn.

As mentioned above, one of the main detractors from investor sentiment in Kenya is the country’s worsening fiscal outlook as public debt continues to balloon on the back of President Kenyatta’s infrastructure drive. China, one of Kenya’s largest creditors, sent its Foreign Ministry to Kenya yesterday, partly due to fears over the country’s fiscal outlook. China has lent African countries billions of dollars as part of President Xi Jinping's Belt and Road Initiative (BRI), including $5bn for the construction of a modern railway from the Kenyan port of Mombasa. Many have argued that the Chinese funding is a debt trap and are pushing for the government to renegotiate its debt as the risk of falling into a position of debt distress mounts. For now, we remain mildly bearish on Kenyan assets.

Fixed Income: US Treasury yields rise on the back of hawkish FOMC meeting minutes

Given its influence on the global fixed income market, it is worth zooming in on US Treasuries this morning. The hawkish FOMC meeting minutes published last night saw US Treasury yields rise further as the market prices for a more aggressive policy tightening by the Federal Reserve this year as inflation pressures persist.

The minutes from the December Fed meeting confirmed that policymakers discussed hiking interest rates earlier and at a potentially faster pace than previously communicated, given the strengthening economy and higher inflation. The details of the meeting also showed that some officials now favour qualitative tightening soon after the first rate hikes, with all members unanimous in their view that these hikes will come this year.

Yields on the 2yr and 10yr Treasuries rose above 0.83% and 1.70%, respectively, while the S&P had its worst session since 26 November, sliding by around 1.50%. Market pricing for a rate hike as early as March has now reached 80%. The sustained rise in US Treasury yields has come as a headwind for emerging and frontier market bonds. Going forward, given our expectations for inflation to remain elevated in the first half of the year, we expect the broader bearish bias in global bonds to persist.

Macroeconomic: Sub Saharan Africa PMI average edges lower in December

Growth dynamics are back in focus today. Regional PMI was mixed with three of the African PMI scores tracked by ETM coming in higher than the previous month, while three decreased. The moves to the downside were more pronounced than those to the upside and as such, the Sub-Saharan Africa average PMI reading edged lower, falling from 52.8 in November to 52.5 in December.

A breakdown of the data from IHS Markit showed that the most notable topside move was in Nigeria’s headline PMI reading. As mentioned earlier this week, the Stanbic IBTC Bank Nigeria PMI came in at a two year high in December. Specifically, Nigeria’s headline PMI reading came in at 56.4 in December, up from 55.0 in the previous month. Markit said in the report that one of the main drivers of growth was the quickest rise in new orders for over two years with firms stating that there was a general improvement in domestic and international demand. Sub-sector data showed expansions across the board, although manufacturers recorded by far the strongest increase.

The most notable decline, meanwhile was in South Africa”s headline PMI reading. SA’s economy-wide Standard Bank PMI gauge pointed to a downturn in economic activity in December as concerns around the Omicron coronavirus variant and tightened travel restrictions towards the final weeks of the year weighed on demand. Additionally, the ongoing supply chain disruptions, attributed to higher production costs and weaker demand. The latest headline figure returned to contractionary territory, registering 48.4 in from 51.7 in November, which underscores the fragility and slow recovery in the business conditions across SA. According to IHS Markit, the overall fall in output was the fastest in five months, albeit notably softer than those recorded in July and the middle of 2020 when strict domestic COVID-19 measures were applied. Similarly, new orders fell sharply but at a slower rate than in those periods. Purchasing activity also fell sharply as manufacturers sought to reduce their spending in the face of elevated prices. With purchasing down, and delivery times continuing to lengthen sharply due to shipping delays and disruption at ports, input inventories contracted for the sixth month running, the survey showed.