U.S inflation hits 6.4%…implication for SSA Eurobond market

Francis Kyei, Senior Market Analyst

Consumer prices in the United States (US) dipped from 6.5% in December 2022 to
6.4% in January 2023, beating analysts’ forecasts of 6.2%, and raising concerns
whether interest rates pivot will come anytime soon.

The US inflation rose by 0.5% from 0.1% in December, partly reflecting an uptick in
energy prices while the core number which takes out volatile items like energy and
food increased by 0.4%.

The year-on-year core figure recorded 5.6% (without energy and food), down from
5.7% in the prior month, also ahead of the predictions of 5.5%.
Inflation in the US has been falling for seven months straight, after it peaked at 9.1%
in June 2022.

Possible impact on interest rates

On Feb 1, the US Fed raised benchmark lending rates by 25 basis points from 4.75%
to 4.50% to rein in cost as inflation began to show signs of cooling.

Although the Fed Chair, Jerome Powell, admits inflation has eased somewhat, he
believes there is a need for further hikes till inflation hits the 2% target.

The increase in labour statistics in January 2023 and the recent inflation of 6.4%
signal that inflation may take longer than previously anticipated to come down to
2%.

However, with the US economy heading towards a recession, the Fed will be more
cautious when raising interest rates. A hawkish policy will likely cause the US
economy to cave into recession.

The Fed will increase the rates possibly by a quarter basis point at its next meeting in
March 2023 and move gradually till there is a soft landing.

It makes sense that investors will want to limit their exposure in the current volatile
market. However, investors sitting on the side lines, waiting for the perfect time to get
in can miss out on the gains when the market begins to rally.

What does this mean for the SSA Eurobond Market?

Although the January 2023 inflation figure didn’t reduce at the pace analysts
predicted, inflation is still expected to drop further in the coming months.

Despite the current volatility in the SSA Eurobond market, the bear market will
continue to run for a couple of months due to inflationary risks and the outlook for
the SSA economy for the year.

A lot of the volatility in the market so far is because traders and investors have been
pricing bonds on the expectation that revenue and growth will slow over the coming
year.

However, the uncertainties with Nigeria’s election will soon be over when a new
leader is elected. Ghana is gradually making progress with its debt restructuring and
Kenya’s new budget is looking at boosting revenue and reducing debt levels. The war
in Ethiopia is also over, and the country’s economy is set to grow at 7% in 2023.

These developments, coupled with a reduced US inflation means there is light at the
end of the tunnel and risk assets will eventually rally this year.

It makes sense that investors will want to limit their exposure in the current volatile
market. However, investors sitting on the side lines, waiting for the perfect time to get
in can miss out on the gains when the market begins to rally.

Disclaimer: This article has been prepared by GFX Prime, an African investment firm with
its registered office on the 2nd Floor, PWC Towers, Cantonments City, Accra Ghana. This
article has been issued for information purposes only. GFX Prime does not recommend or
propose that any security referred to in this article is appropriate or suitable for your
investment objectives or financial needs