December 20, 2019/Cordros Report

Global economy
 
As reported by the National Bureau of Statistics, China’s industrial production and consumption expanded at a faster-than-expected pace in November, indicating a possible rebound in activities, after Beijing moved to halt an economic slowdown in the country. Reflecting the effects of supportive policies and favourable seasonal factors, industrial production increased by 6.2% from a year earlier and retail sales climbed by 8.0%. At the same time, fixed-asset investments in the first 11 months of 2019 grew by 5.2% – the slowest pace since at least 1998. The ‘phase-one’ trade deal with the U.S. helps to lift the outlook but does not alleviate the pressure on the economy. Chinese authorities are expected to maintain an accommodative stance on fiscal and monetary policy, though the extent of general fiscal and monetary easing may be scaled back.

Japan’s headline inflation ticked up again in November in the wake of an earlier sales tax increase on utilities and mobile phone charges. Data from the ministry of internal affairs showed consumer prices (excluding fresh food) rose 0.5% from a year earlier, edging up from 0.4% in October.  After factoring out the impact of the sales tax and free pre-school education, though, core inflation maintained the same pace of just 0.2%, highlighting the difficulty the Bank of Japan is facing in lifting price growth toward its 2.0% target. The 2.00ppt increase in the sales tax has pushed up prices of goods and services but also damped consumer demand – a key driver of inflation. Anemic wage growth is still the foremost hurdle to long-term price growth and unless incomes rise, consumption will not increase sustainably and businesses will not be able to raise prices.
 
Global markets
 
Global equity indices hit record highs at the end of the week, as optimism pervaded markets after the U.S. and China, agreed on an initial (‘phase-one’) trade deal. European shares (Euro Stoxx: +1.1%; FTSE 100: +3.2%) led the way following positive company and economic updates. US stocks (DJIA: +1.2%; S&P: +1.2%) hit all-time highs as the U.S. Treasury Secretary said the initial trade deal had been penned and would be signed in early January 2020, dispelling fears of another escalation in the trade dispute. Sentiments were mixed in Asia (Nikkei 225: -0.9%; CSI 300: +1.2%) as investors in Japan chose to book profits ahead of the year-end holiday. Elsewhere, investors, comforted by the preliminary trade truce, continue to view riskier assets in emerging and frontier (MSCI EM: +1.8%, MSCI FM:+0.7%) more favourably towards the end of the year.

Nigeria 

Economy

In line with our expectations for continued food price pressure, November’s headline inflation printed 11.85% y/y – the highest since May 2018. The outturn is 25bps higher than the prior month (October:11.61% y/y) and 4bps shy of our estimate (11.89% y/y). The dual impact of the sustained border closure and festive induced demand took a toll on food prices, as food inflation surged by 39bps to 14.48% y/y. Elsewhere, core inflation expanded by 12bps to 8.99% y/y – highest in 7 months – with pressure emanating primarily from energy inflation (+44bps). In our view, the pressured energy price was due to a sharp jump in AGO (diesel) prices (+2.52% y/y). For December, we expect festive induced demand, coupled with the impact of the border closure to have a negative passthrough to food inflation. That said, despite continued FX stability and liquidity, we expect core inflation to increase further, given the low base from the corresponding period in the prior year. Overall, we expect headline inflation to sustain its upward trajectory, rising to 12.05% y/y (0.92% m/m) in December. 

According to the Monthly Financial and Operations Report by NNPC, refineries consolidated capacity utilisation in September settled at 0.0% for the 3rd consecutive month. The poor performance of the refineries can be attributed to the seemingly perpetual process of revamping the refineries. We highlight that the continued sclerotic state of the refineries reflects on the figures for the Oil refining sub-sector of Manufacturing GDP, which has remained in recession for 6-consecutive quarters. Looking ahead, we expect oil refining output to remain negligible, due to primarily to continued funding issues.

Capital markets
 
Equities
 
Trading in the equities market was highly volatile this week as year-end activities ramped up. Positive sentiments trailed large-cap Consumer Goods & Banking stocks; however, selloffs of index-heavyweight, MTNN (-2.4%), capped gains, leading the index to close flat week-on-week. Consequently, the MTD and YTD losses remained at -1.8% and -15.6%, respectively. On sectoral performances, the Consumer Goods (+1.3%), Insurance (+1.0%), and Banking (+0.8%) indices edged higher, driven by gains in NB (+10.0%), WAPIC (+9.1%) and STANBIC (+3.9%). Conversely, selloffs of OANDO (-6.1%) and WAPCO (-1.4%) led to declines in the Oil & Gas (-0.7%) and Industrial Goods (-0.5%) indices.
 
We see the level of activity and volatility being sustained over the final days of the year, with some pockets of gains expected, as fund and portfolio managers realign portfolios prior to the start of 2020.
 
Money market

The overnight (OVN) rate maintained an uptrend during the week, advancing on three of the five trading days in the week, before settling higher by 0.14ppts at 2.9%. On the first trading day, the rate settled 0.6ppts higher at 3.4% as system liquidity thinned out. Similarly, by the second trading day, the rate advanced by 0.3ppts, before then declining on the subsequent trading day as investors committed capital to auctions – Treasury bonds and bills PMAs. However, on the penultimate trading of the week, the rate pared by 0.1ppts to 2.9% as the system became awash with liquidity from maturities (NGN100.62 billion) which could not be re-invested on the prior trading day.

In the coming week, OMO maturities worth NGN279.90 billion will hit the system on the 24th (NGN17.54 billion) and 26th (NGN262.26 billion). This, we expect to boost system liquidity and tether the OVN rate in the current range.

Treasury bills 

Trading in the Treasury bills market remained bullish this week, as the average yield across instruments pared by 21bps to 10.5%. The positive sentiments were witnessed primarily in the OMO segment of the market, where the average yield pared by 49bps to 5.8%. However, in the NTB segment, the market traded sideways as the average yield advanced by 1bp to 13.1%. Also, there was a Treasury bills PMA auction held on the 18th of December, for instruments worth NGN7.00 billion – 91DAY (Stop rate: 4.0000%; Previous stop rate: 5.0000%; Bid-to-offer: 12.36x), 182DAY (Stop rate: 5.0000%; Previous stop rate: 6.1900%; Bid-to-offer: 9.34x), 364DAY (Stop rate: 5.4950%; Previous stop rate: 6.8800%; Bid-to-offer: 18.87x).

In our opinion, rates have declined to the trough, where the magnitude of the bid-to-offers at PMAs and trade volumes in the secondary market should begin to wane. Nonetheless, we expect yields to pare marginally in the coming week.

Bond 

Trading in the Treasury bonds secondary market was seemingly bearish, as the average yield across instruments settled 24bps higher at 11.1%. In our view, this was due to the outcome of the PMA auction held by the DMO during the week, on the 18th of December. At the auction, three instruments worth NGN150.00 billion were offered to investors through re-openings – 12.75% APR-2023 (Bid-to-offer: 1.41x; Stop rate: 11.0000%), 14.55% APR-2029 (Bid-to-offer: 1.84x; Stop rate: 12.0000%), and 14.80% APR-2049 (Bid-to-offer: 2.52x; Stop rate: 13.0000%). Notably, all instruments closed with stop rates above the secondary market trading levels, which we surmise was responsible for the direction of yields in the secondary market. Also, the DMO eventually allotted instruments worth NGN264.40 billion, representing 1.76x the offer amount.

The level of subscriptions witnessed at the PMA during the week substantiates our view that volumes should begin to move towards that market. We expect this trend to persist over the coming weeks, just as yields decline given strong buying activity.

Foreign exchange

Amidst continued sell-offs by offshore investors, Nigeria’s FX reserve dipped by USD238.02 million WTD to USD39.01 billion (18th Dec 2019). 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 at the I&E window by 0.2% WTD to NGN364.06/USD – an 11-month high –, but closed flat at NGN363.00/USD at the parallel market. Elsewhere, total turnover at the I&E window declined by 43.0% WTD to USD864.62 million, with trades consummated within the NGN357.00 – 364.80/USD band. In the Forwards market, the naira was stronger across all contracts, WTD – 1-month (+0.3% to NGN365.55/USD), 3-month (+1.2% to NGN368.86/USD), 6-month (+2.3% to NGN374.66/USD) and 1-year (+2.5% to NGN390.67/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 defence through to at least H1-20.

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