Weekly Commentary – 3rd November 2023

Top Gainers and Losers in the Equities Markets

• The Stanbic Bank Kenya PMI fell to 46.2 in October 2023, its second-fastest decline since August 2022, amid rising costs. The decline was driven by contractions in output and new orders across all sectors, with new orders falling the fastest in construction, wholesale and retail. Employment also decreased at its fastest pace since June 2020, and purchasing activity fell slightly. Lead time increased due to concerns about vendor cash flow. Input inflation accelerated to a record pace on higher fuel prices and currency weakness, while output cost inflation rose above its previous high in mid-2022 due to rising demand and business activity. Sentiment remained muted, but optimism was still stronger than the record low in April amid expected rise in demand.

• Kenya’s external debt servicing cost has been revised up by an additional KES 216.7 billion, representing a 24% hike. The increase is attributed to the continued weakening of the shilling and rising interest rates on commercial loans. The rise in debt servicing costs puts pressure on public finances and could have negative consequences for the Kenyan economy.

• The Central Bank of Kenya (CBK) approved the acquisition of a 51% stake in SMEB Microfinance Bank by Hope Advancement Inc. (HOPE), a US-based charitable organization. This acquisition is expected to strengthen SMEB MFB by providing additional capital for business expansion, upgrading information technology infrastructure and reconstituting the board to improve governance.

• Kenya and Japan launched an Industrial Policy Dialogue (IPD) to improve their trade balance. The Industrial Policy Dialogue will identify and develop areas of industrial collaboration to strengthen economic relations between Kenya and Japan. It will also provide a forum for discussing potential areas of cooperation in the future. Currently, the trade balance between Kenya and Japan is in favour of Japan, with Kenya importing more goods from Japan than it exports. The IPD is a positive development for both Kenya and Japan, as it will provide an opportunity to boost trade and investment, create jobs and grow their economies.

• Kenya Railways announced an increase in fares for all its train services by upto 50%, effective January 1, 2024, primarily due to rising cost of fuel which has significantly impacted the company’s operating costs. Advance ticket purchases for the Madaraka Express Passenger Service will be subject to the new fares as of November 1, 2023. The fare increase is likely to have a negative impact on railway users, especially those who rely on trains for their daily commute or for long-distance travel, amidst the already rising cost of living.

• BURN Manufacturing, the world’s largest maker of clean cookstoves, has issued the first-ever green bond in Sub-Saharan Africa specifically for clean cooking. The $10 million bond will allow BURN to expand its manufacturing capacity in Kenya and launch a new manufacturing facility in Lagos, Nigeria. This is expected to increase production from 400,000 to 600,000 units per month, including a range of life-saving biomass, electric and LPG stoves.

• The US Federal Reserve maintained its target range for the lending rate at a 22-year high of 5.25%-5.5% in November, for the second consecutive time, reflecting the Fed’s dual focus of bringing inflation back to its 2% target while avoiding a recession. The Fed Chair Jerome Powell signaled that the September dot plot, which showed most policymakers forecasting one more rate hike this year, may no longer be accurate. Powell also stated that the Fed has not discussed any rate cuts yet, as its primary focus remains on whether it will need to raise rates further.

• The Bank of England kept its base interest rate at 5.25%, a 15-year high, at its November meeting, for the second consecutive time. Policymakers are closely monitoring the UK economy, which is showing signs of slowing down, while also trying to deal with the ongoing problem of high inflation. The Monetary Policy Committee (MPC) voted 6-3 to keep rates unchanged, with three members voting for a 0.25% increase. The central bank stressed that monetary policy will likely remain tight for some time in order to bring inflation back to its 2% target, and the MPC is ready to tighten policy further if needed.

• The Eurozone economy contracted by 0.1% quarter-on-quarter in the third quarter of 2023, marking its first decline since 2020. The contraction was primarily driven by the German economy, which contracted by 0.1% in the quarter, while other major economies such as France and Spain grew modestly. The European Central Bank (ECB) downgraded its growth forecast for the Eurozone economy in 2023 to 0.7%, from its previous forecast of 2.8%. The ECB attributed the slowdown to tighter financing conditions and high prices that dampened domestic demand, weak foreign demand and a shrinking industrial sector.

• Eurozone inflation fell to 2.9% year-on-year in October 2023, its lowest level since July 2021, slightly below the market consensus of 3.1%. The core rate, which excludes volatile food and energy prices, also decreased to 4.2% in October, its lowest level since July 2022. However, both rates remained above the European Central Bank’s target of 2%, driven by a drop in energy prices, which fell by 11.1% in October. Food prices also eased, while prices for non-energy industrial goods and services remained relatively stable. On a monthly basis, consumer prices rose slightly by 0.1% in October, following a slightly stronger increase of 0.3% in September.

• The Caixin China General Manufacturing PMI contracted to 49.5 in October 2023, marking the first contraction in the manufacturing sector since July. This was due to a slowdown in new order growth and a renewed fall in output. New orders in October grew slightly, as foreign sales fell for the fourth consecutive month. Manufacturing employment fell to its lowest level since May, even as backlogs of work continued to grow. Input costs rose sharply to a nine-month high in October, while selling prices increased more moderately. Additionally, Chinese manufacturers’ sentiment fell to its lowest level since September 2022.