Weekly Commentary – 22nd September 2023

Top Gainers and Losers in the Equities Markets

• The Kenyan economy is projected to grow by 5.5% in 2023 and maintain this growth momentum for the next three years, according to Kenya National Treasury Draft Budget Review. This rosy projection is pegged to the strong growth of the private sector, the recovery of the mainstay agricultural sector, and the consolidation of Kenya’s public sector.

• The Capital Markets Authority (CMA) approved Kenya’s first-ever Sukuk bond issuance, a Shari’ah-compliant financial instrument. The Linzi Sukuk, issued by Linzi Finco Trust, offers a return of 11.13% and seeks to raise KES 3 billion. The funds will be used to develop 3,069 institutional housing units, aligning with the government’s Transformative Agenda to address the rising demand for affordable housing. The CMA’s approval signifies a notable diversification of the capital markets, offering investors an ethical and socially responsible investment option.

• The government has extended its petroleum supply agreement with Saudi Aramco, Emirates, and Abu Dhabi for an additional year, through December 2024. Under the new deal, the government was successful in renegotiating freight and premium expenses as well as credit terms, which could lead to lower fuel prices, reduced monthly fuel import expenditures and gradually increase the country’s dollar reserves. While this will translate to ease at the pump, several other factors, such as global crude oil prices and currency exchange rates, will also need to be taken into account.

• The Federal Reserve retained the target range for the Federal Funds Rate at 5.25%–5.5% in September, in line with market expectations. However, it signalled that there could be another increase this year. This follows a 25 basis point hike in July, which was the seventh consecutive hike by the central bank. Policymakers anticipate that the Fed funds rate will be 5.6% this year and 5.1% in 2024. The Fed also revised its economic growth and inflation forecasts slightly higher. GDP growth is projected to be 2.1% in 2023 and 1.5% in 2024.

• The People’s Bank of China (PBoC) kept lending rates unchanged at the September fixing as policymakers evaluated the effects of earlier easing measures, including an interest rate fall in August and a recent lowering in the reserve requirement ratio for banks. The five-year rate, a benchmark for mortgages, was maintained at 4.2% for the third consecutive month, and the one-year loan prime rate (LPR), the medium-term lending facility used for business and household loans, was left constant at a record low of 3.45%. In August, there were some indications that the Chinese economy was improving, particularly in terms of industrial output and retail sales. Inflationary conditions also eased after the country slipped into deflation earlier this year. However, because of sluggish international demand and a decline in the housing market, the economy’s overall outlook is still uncertain.

• The Euro Area inflation rate was revised lower to 5.2% in August 2023, from an initial estimate of 5.3%. This is the lowest reading since January 2022, but it is still higher than the European Central Bank’s (ECB) target of 2%. The cost of services accounted for the largest percentage increase, followed by food and non-energy industrial products. Energy prices continued to fall but at a slower pace. The monthly CPI increased by 0.5%, which is slightly less than the initial projection of 0.6%. The ECB recently revised its inflation predictions for 2023, 2024 and 2025 to 5.6%, 3.2%and 2.1% respectively, primarily driven by increased energy prices.

• The HCOB Eurozone Composite PMI increased to 4.71 in September 2023, slightly surpassing market expectations of 46.5. However, the most recent PMI rating still showed a large monthly fall in business activity at the end of the third quarter, primarily due to a sharp contraction in the manufacturing sector. The rate of decline in the service sector eased slightly in September, but the sector still contracted for the first time in 2023. Total inflows of new orders decreased the most since November 2020, and backlogs of work experienced the largest decline since June 2020. The rate of job creation was also the second-slowest in the current 32-month sequence of growth. Selling prices increased the least since February 2021, and input price inflation advanced to a four-month high. Finally, the level of business sentiment dropped to its lowest point since November of last year.

• The S&P Global US Composite PMI registered at 50.1 in September 2023, down from 50.2 in August, showing a general stagnation in activity across the private sector. This is the lowest overall performance since February and the fourth month in a row that the PMI has decreased. While manufacturing output continued to decline as a result of rising interest rates and ongoing inflationary pressure, service sector growth moderated to an eight-month low. Total new business inflows decreased by the greatest since December 2022, while outstanding business decreased at the fastest rate since May 2020. Meanwhile, job creation reached its highest level since May. In terms of prices, input cost inflation has accelerated to its greatest level since June, while charge inflation is at its slowest rate in three years. Finally, business confidence reached a nine-month low.