This week, the US labour department announced that the country’s consumer price index (CPI) rose to a 12-month high in November, as headline inflation rose by 30bps to 2.1% y/y, largely on account of higher energy and healthcare prices. From a month ago, inflation increased by 0.3% (October: +0.4% m/m), following a 1.1% m/m expansion in fuel prices. Excluding volatile items (food and energy), inflation was flat. Looking ahead, we see further legroom for inflation to run ahead given stronger crude oil prices, which could further put pressure on energy costs.

Elsewhere, in its final meeting of the year, the Federal Open Market Committee (FOMC) held policy parameters unchanged after previously cutting the Fed funds rate on three different occasions in 2019. Specifically, the rate was left at a range of 1.5% to 1.75%, with the committee expressing satisfaction with the current state of the economic landscape. More so, the faster pace of consumer prices in November further justified the committee’s action. Our key takeaway from the policy statement is that the Fed funds rate, will likely remain unchanged for an extended period of time. The foregoing is supported by the “dot plot” which indicated a low probability of a rate cut in 2020. Irrespective, we don’t believe this is the end of the easing cycle in the US, as a further escalation of a trade dispute between the US and China could force a policy re-think, given its negative impact on the external sector, and by extension, economic growth.

Global markets

There were positive returns recorded in several markets across the globe, as U.S.-China trade hopes and an election win for Britain’s ‘Brexit’-backing Conservative Party, cleared two of the clouds on the global investment horizon. Consequently, US (DJIA: +0.4%; S&P: +0.7%), Euro Area (Euro Stoxx: +2.0%; FTSE 100: +2.4%) and Asian (Nikkei 225: +2.9%; CSI 300: +1.7%) indices all looked set to close in the green. Developing world (MSCI EM: +2.1%; MSCI FM: +0.8%) stocks topped an over seven-month peak as positive headlines regarding the two aforementioned risk factors saw widespread position-taking in risk assets.

Nigeria

Economy 

According to the business confidence survey by CBN, business sentiments in November strengthened for the second consecutive month. Specifically, the overall business outlook on the macroeconomy widened by +1.7 points to 29.0 index points – the highest since May 2019. Similarly, strong momentum was recorded across all sectors, with the Construction (+2.9 points) and Services (+2.0 points) sectors leading the pack, closely followed by the Trade (+1.9 points) and the Industrial (+1.4 points) sectors. In our view, the improved reading reflects the lowered cost borrowing and a fairly stable macroeconomic climate. Looking ahead, we expect business confidence to remain strengthened, induced by festive spending and the CBN’s pursuit of improved credit extension to the private sector. 

According to telecommunications data released by the Nigeria Communications Commission (NCC), the total number of telephone subscribers for October 2019 grew by 9.2% y/y, while the number of active lines & internet subscribers witnessed a double-digit expansion of 15.0% y/y over the same period. In our view, the strong performance in the telecommunication sector was as a result of continued competition in the industry, wherein sector players offered customers more data at a lower cost – especially Globalcom and Airtel (c.55.2% market share). Meanwhile, we highlight that teledensity – number of telephone connections for every hundred individuals – dipped by 19.94% y/y, due to the rebasing of the population number used in the calculation from 140 million to 190 million by the NCC. On the strength of this, we still expect the telco sub-sector (c.33.0% of service GDP) to continue to lead growth in the Services sector, thus, boosting non-oil GDP. We forecast GDP growth of 2.36% y/y in Q4-19.

Capital markets

Equities

Profit-taking activities intensified in the equities market as the selloffs from the previous week persisted. With losses recorded on three of five trading sessions of the week, the All-share index shed 1.2% to settle the YTD loss at -15.6%. Analysing the performance by sectors, similar to last week, significant losses recorded in the Banking and Industrial Goods sectors weighed on the market performance, as both indices declined by -1.2% apiece. The Consumer Goods index followed suit, declining by 0.5%. On the other hand, trading in the Insurance and Oil and Gas indices was sideways as both indices closed flat.    

In our view, given the risk-off sentiment dominating the domestic market, we expect the market to shed points in the coming week, except we see a policy-driven catalyst. Nevertheless, valuations remain attractive, hence we expect pockets of gains over the final weeks of the year as fund and portfolio managers realign portfolios prior to the start of 2020.

Money market and fixed income

Money market

The overnight (OVN) rate undulated during the week, before settling lower by 0.28ppts at 2.8%. On the first trading day, the rate settled 0.2ppts lower at 2.9% as system liquidity thinned out. Similarly, by the second trading day, the rate had advanced by 0.1ppts, before then increasing on the subsequent trading day following maturities worth NGN141.36 billion filtering into the system. However, on the penultimate trading of the week, the rate pared marginally by 0.1ppts to 2.9%.

In the coming week, T-bills maturities worth a combined NGN73.30 billion – OMO (NGN51.30 billion) and PMA maturities (NGN22.00 billion) –, and Federal Government Savings bonds coupons (NGN13.33 million) – from the 11.418% JUN-2021 and 12.418% JUN-2022 instruments – are expected during the week. In combination with the already substantial system liquidity level, we expect the rate to remain moderate during the coming week.

Treasury bills 

Trading in the Treasury bills market remained bullish this week as the average yield across instruments pared by 99bps to 10.8%. As with the prior week, the NTB market, where local corporates and individuals trade, remained the most active. Consequently, the average yield on NTB in the secondary market declined by 1.1% to 6.5%, while in the OMO space the average yield pared by 0.9% to 13.2%. Also, there was a PMA auction held during the week, for instruments worth NGN45.00 billion – 91DAY (Stop rate: 5.0000%; Previous stop rate: 6.495%; Bid-to-offer: 10.77x), 182DAY (Stop rate: 6.1900%; Previous stop rate: 7.2300%; Bid-to-offer: 4.63x), 364DAY (Stop rate: 6.8800%; Previous stop rate: 8.3700%; Bid-to-offer: 6.41x). 

As expected substantial OMO maturities have continued to pressure secondary market yields. We expect this trend to persist till the end of Q1-20 over which period a further NGN5.11 trillion worth of instruments will mature. Overall, we expect volumes in the market to pare and market participants to continue to take positions in Treasury bonds as has been witnessed over the past few weeks.

Bond 

Trading in the Treasury bonds secondary market was tepid as the average yield pared marginally by 80bps to settle at 10.8%. There were yield declines recorded across all instruments in the market, with the largest decline recorded on the 15.54% FEB-2020 instrument (-175bps to 5.2%). Also, the DMO will hold the final PMA Treasury bonds auction for 2019 during the week, on the 18th of December, when three instruments will be offered to investors through re-openings – 12.75% FGN APR 2023, 14.55% FGN APR 2029, and 14.80% FGN APR 2049. 

For the PMA next week, we expect strong participation at the auction, as investors seek to lock in high yields, given the expectation of a declining yield environment. In our view, the restrictions on trading in the Treasury bills will continue to drive volumes in the Treasury bonds market. Consequently, we expect the average yield in the market to settle in the single-digit territory by 2019YE.

Foreign exchange 

Amidst continued sell-offs by offshore investors, Nigeria’s FX reserve dipped by USD27.86 million WTD (11th Dec 2019) to USD39.38 billion. Meanwhile, the CBN sustained its weekly FX interventions, selling USD210.00 million across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Nonetheless, the naira weakened by 0.1% WTD to NGN363.49 /USD at the I&E window but closed flat at NGN360.00/USD at the parallel market. Elsewhere, total turnover at the I&E window increased by 44.8% WTD to USD1.34 billion, with trades consummated within the NGN357.00 – 363.80/USD band. In the Forwards market, the naira rate was weaker across all contracts week-on-week – 1-month (-0.1% to NGN366.30/USD), 3-month (-0.1% to NGN371.80/USD), 6-month (-0.2% to NGN380.25/USD) and 1-year (-1.2% to NGN378.65/USD). 

Despite the rate of decline in FX reserves, which has heightened fears regarding the possibility of a currency devaluation, our model suggests that the CBN has enough ammunition to sustain its naira defense over 2019 and through H1-20.