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Wednesday, 27 March 2019

What we’re tracking on 27 March 2019

Tomorrow is interest rate day, and we think it safe to now say the consensus is for a rate cut. Here’s our logic:

  • Adding new predictions from leading research houses to our poll of analysts, we now count seven of 11 houses as calling a rate cut of up to 100 bps (one percentage point).
  • Reuters’ poll earlier this week had eight out of 12 economists expecting the central bank to keep rates unchanged.
  • Bloomberg said overnight that “most economists” it surveyed predict a 100 bps rate cut.

Needless to say, a rate cut would be good for businesses that have delayed much-needed capex because borrowing costs are simply insane — credit-card level interest rates to finance an investment in your business makes no sense.

What’s the logic:

  • First, we import inflation — and the 3.6% appreciation of the EGP since the start of the year is keeping that in check;
  • Second, the US Fed handed us a gift by foreshadowing zero rate cuts this year, meaning Egypt will remain comparatively attractive to the carry trade after a rate cut (a good thing when it comes to keeping the EGP in balance);
  • Third, it’s now or … late 3Q, because the coming months are going to see inflation tick up. Ramadan (May), subsidy cuts (around 1 July), the summer months in general (coupled with Eid vacations) and back-to-school season (starting in September) are all inflationary and promote demand for greenbacks at the expense of the EGP.

Inflation could keep rates on hold in most other major African economies: The central banks of Africa’s other largest economies are also deciding on rates these days, and nearly all of them are expected to keep rates on hold due to “upside risks in inflation,” Bloomberg says in a separate piece.

There’s no consensus in global markets about which way is up: European shares were okay and US futures up yesterday, but Asian shares are slipping this morning as “investors tried to come to terms with a sharp shift in US bond markets and the implications for the world’s top economy,” Reuters reports.

Bonds continue to be a concern though: The yield on 10-year US Treasuries is still in an inverted status against short-term paper. This is concerning investors who see it as a sign of recession (more on this in this morning’s Macro Picture, below).

And you may not want to look at the latest trade data… Global trade fell 1.8% in the first quarter of 2019 — the biggest drop since May 2009, according to World Trade Monitor stats seen by Bloomberg. This is also the first quarterly drop on a year-on-year basis in nine years.

…or at the looming “earnings recession” in the US, where profit margins “are on track to suffer their first fall since 2015 as companies increasingly struggle to pass on costs of rising labour, transportation and raw materials to customers,” the FT writes.

Two stories about tech / tech-driven businesses worth reading if you, like us, are nerds for that kind of thing:

  • Be cautious before buying into the upcoming wave of tech IPOs, argues James Mackintosh in the Wall Street Journal. “When all these supersmart backers of the best startups want to sell out, do you want to be on the other side of the trade?”
  • Why is Silicon Valley so obsessed with the virtue of suffering? The New York Times looks at the popularity of Stoicism in the tech elite and wannabes.

And in regional news worth knowing:

  • Curtains for Bouteflika? Algeria’s army chief called for the constitutional removal of President Abdelaziz Bouteflikaon medical grounds. (CNN Arabic).
  • A UK hedge fund has turned its back on USD 300 mn in Saudi AUM, “highlighting disquiet about Saudi Arabia’s human rights record.” (Bloomberg)
  • So much for the ceasefire: There was renewed violence on the Gaza border last night as Hamas fired rockets into Israel, provoking retaliatory strikes and breaking the ceasefire reportedly brokered by Egypt on Monday. (Reuters)

Making us smile this morning: Ahmed Heikal’s ERC has delivered 51k tons of fuel products (including 38k tons of Euro V-spec diesel) to EGPC, putting it on track to compete trial operations by 2Q, according to Al Mal.

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