Will Fed's new rate trigger SSA market rebound?

Sub-Saharan African (SSA) Eurobond markets opened on Thursday, Feb 2 with bond prices rallying following the Federal Reserve’s decision to slow its pace of interest rate hikes to rein in cost as inflation begins to show signs of cooling.

The US Central bank announced a 25 basis points hike to the benchmark lending rate on Wednesday Feb 1, taking the rate to 4.75%, from 4.50%.

The Fed admitted however that though inflation had eased somewhat, it remained elevated and would require further hikes.

Inflation in the US surged at its fastest pace in decades last year, averaging 8%. While inflation was heating up, the US Fed responded by pushing up interest rates. The Fed has increased the rates eight times since March 2022 and, on four occasions, pushed up the rates by 75 basis points.?

This led to consumers and businesses tapping the brakes on spending. Tech leaders like Apple Inc., Amazon.com Inc. and Alphabet Inc. on Thursday Feb 2 posted results that show the US economic slowdown is affecting demand for electronics, e-commerce, cloud computing and digital advertising.

As the US markets opened Friday Feb 3, Amazon shares fell 4.7% and Alphabet lost 3.7%. This sent the Nasdaq 100 lower, according to Bloomberg.

It is obvious that the Fed doesn’t want to see a recession in the US and has chosen to tread cautiously with a soft-landing approach to bring down inflation while keeping close tabs on recession.

The US Central Bank intends to maintain a slowed monetary policy that is sufficiently restrictive to return inflation to a target of 2% in the long run to ensure that the US economy does not cave under the weight of higher interest rates.

In the SSA market, the announcement of a slowed hike sent a positive signal, with sovereign Eurobond prices going up on Thursday Feb 2.

Some analysts see the Fed’s slowed hike as a sign that the Fed has pivot, and the war on inflation may be over soon. However, the US Fed Chair, Jerome Powell, noted that it will take a few more rate hikes to get to an "appropriately restrictive" policy level while inflation runs hot.

Recent developments have shown that inflation will continue to fall in the next months. If inflation continues to fall and interest rates drop, liquidity in the SSA market is likely to improve.

Global inflation which currently stands at 6.6% according to the International Monetary Fund (IMF) needs to cool down to resuscitate financial markets, especially frontier markets.

Although the slowed inflation may be good for SSA markets, sovereign countries need to address their macroeconomic imbalances and improve their credit ratings to boost investor confidence in the market.

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To contact the writer of this paper:

Francis Kyei, Senior Market Analyst, GFX Prime

Email: [email protected]

+ 233(0)596920995

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GFX Prime is a securities trading company headquartered in Accra, Ghana. We provide wholesale market participants with prime liquidity services to assess trading availability and successfully execute Sub-Saharan African credit and African FX

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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.