Global economy

According to China’s National Bureau of Statistics, the country’s Consumer Prices Index (CPI) rose by 4.5% y/y in December 2019, unchanged from the prior month, but lower than the consensus forecast of 4.7%. The uptick in headline inflation was due to the 97.0% y/y expansion in pork prices, as African swine fever continues to ravage the country’s passel of hogs. While food inflation eased by 200bps to 17.1% y/y, thanks to the favourable base effect, non-food prices climbed by 30bps to 1.3% y/y, on account of pressured energy prices. With the tight supply of pork and the Lunar New Year celebration in January, consumer prices are expected to remain elevated in the early months of 2020. Further out, prices are expected to moderate as recent government policy initiatives aimed at supporting pork production begin to materialize. 
 
Elsewhere, economic activities in the U.S continued its decelerating trend, as manufacturing PMI shrank by 0.9 points to 47.2 index points in December 2019. To put the number in proper context, this is the fifth consecutive month of decline and the lowest reading since June 2009. Against weaker consumer demand, new orders plunged by 0.4 points, with a negative pass-through to production (-5.9 points). Adding to this is the still weak external sector, which put slight pressure on new export orders (-0.6 points) in the review period. Given the protectionism-induced drag in 2019, de-escalation in the trade war between the US and China remains a key tailwind for the U.S manufacturing sector, especially from the viewpoint of external position. While the labour market remains strong (portending strong upside for domestic demand), extended trade tensions will continue to exert pressure on the U.S manufacturing sector. 
 
Global markets Global equity indices sustained its positive momentum from last week as equity investors welcomed the news that the phase 1 trade deal between the US and China will be signed next week. To add, the receding worries that the U.S and Iran might be heading to the war front also supported appetite for risk assets. While trading across European markets were mixed (Euro Stoxx: +0.7%; FTSE 100: -0.3%), the US (DJIA: +1.1%; S&P: +1.2%) and Asia (Nikkei 225: +0.8%; CSI 300: +0.4%) markets were on the verge of closing positive for the second straight week. The positive global sentiments for risk assets extended to the emerging and frontier (MSCI EM: +0.4%, MSCI FM: +0.5%) markets, driven by South Korea (+1.4%), Kenya (+2.4%), and Nigeria (+9.1%).
 
Nigeria

Economy 

The composite PMI for December strengthened by 1.8 points to 61.5 index points on the back of festive-induced spending which supported both the manufacturing and non-manufacturing sectors. Riding the wave of faster increases recorded across new orders (+2.1points), production levels (+1.7 points), and employment levels (+0.3 points), the manufacturing PMI grew by 1.5 points to 60.8 index points – the highest in 13 months. In the same vein, the non-manufacturing PMI rose by 2.0 points to 62.1 index points, supported by the sharp expansions in new orders (+1.2 points), inventory levels (+1.6 points), and business activities (+2.6 points). For January, we expect the PMI to maintain its upward trajectory, albeit at slower a pace, as the festive induced increase in consumer spending witnessed over the last two months of 2019 dissipates.

This week, air transportation data released by the National Bureau of Statistics (NBS) revealed stronger patronage in Q2-19, as both the domestic and foreign passengers expanded by 7.6% y/y and 5.8% y/y, respectively. For us, this development is hardly surprising as it only substantiates the strong Air transport GDP (+12.3% y/y) achieved in the period under review. Conversely, cargo movement dipped by 7.3% y/y, on the account of weakened cargo imports (-7.9% y/y) and exports (-4.3% y/y). Despite the strong performance in the sector, air transport GDP still remains weak when compared to pre-recession average growth of 15.1% (Post-recession of 7.1%).

Capital markets

Equities

The Nigerian equities market posted a whopping 9.1% w/w gain, the largest weekly return for 2-years (12 January 2018: +10.0%), to become the world’s best-performing stock market for the week. Also, the enthusiasm which greeted the listing of BUACEMENT (+2.6% w/w), supported appetite for risk assets, especially at the twilight of the week. Beyond that, investors’ interest in DANGCEM (+21.1% w/w) and PRESCO (+19.8% w/w) further propelled the benchmark index. Against the foregoing, the YTD return for the market settled at 9.6%. Analysing by sectors, all sector indices closed positive, with the Industrial Goods (+22.6%) index leading the pack, followed by the Banking (11.6%), Insurance (+6.7%), Oil & Gas (+5.4%), and Consumer Goods (+1.6%) indices.

Looking ahead, while we expect profit-takers to dominate activities in the coming week, we still see significant legroom for a further rally as the elevated maturities from fixed income instruments hunt for investment vehicles. Nonetheless, we advise investors to cherry-pick fundamentally sound stocks.

Money market and fixed income

Money market

The overnight (OVN) rate undulated during the week, before settling higher by 7.6ppts at 10.7%. The rate pared on the first three trading sessions of the week to 2.8%, as system liquidity remained buoyant. However, on the penultimate trading day of the week, the rate surged 1.6ppts to 4.4% as CBN mopped up liquidity, selling a total of NGN411.14 billion through an OMO auction. 

In the coming week, OMO maturities (NGN405.39 billion) will bolster system liquidity, and so, barring any liquidity mop-up activities by the CBN, we expect a contraction in the overnight lending rate.

Treasury bills 

The Treasury bills secondary market sustained its bullish trend in the week, as the average yield dipped by 36bps to 4.2%, with buying interest observed at the short and the long tenor segments of the curve. In the same vein, investors’ interest in short-dated bills drove yields downwards by 37bps to 12.7% at the OMO bills segment of the secondary market. Also, at the OMO bills auction, the CBN fully allotted instruments worth NGN411.14 billion – NGN0.10 billion of the 89DTM and NGN411.04 billion of  362DTM at respective stop rates of 11.5% and 13.3%. However, no sale was recorded on the 180-day bills. 

We expect trading volumes to start to temper in the NTB market, as the average yield sits at the single-digit level. However, the average OMO yield is expected to remain around the same level, paring marginally in the coming week.

Bonds

The bulls continued to dominate at the Treasury bonds secondary market, as the average yield further declined by 30bps to settle the week at 10.2%. As investors continued to seek higher-yielding instruments, buying interests was witnessed across all segments of the curve, with the APR-2023 (-44bps), JUL-2030 (-30bps), and MAR-2036 (-64bps) bonds recording the largest interest. 

We expect trading activities to remain strong in the bonds market, as investors seek higher-yielding assets. However, cautious trading is expected as investors await the outcome of December 2019 inflation.

Foreign exchange

Amidst continued sell-offs by offshore investors, Nigeria’s FX reserves fell to a 2-year low, dipping by USD170.83 million WTD to USD38.32 billion (8th Jan 2020). 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. Consequently, the naira strengthened at the I&E window by 0.7% WTD to NGN362.60/USD but was flat at NGN362.00/USD at the parallel market. Elsewhere, total turnover at the I&E window expanded by 15.4% WTD to USD869.86 million, with trades consummated within the NGN357.50 – 365.50/USD band. In the Forwards market, the naira strengthened across all contracts, WTD – 1-month (+0.7% to NGN365.24/USD), 3-month (+0.8% to NGN370.02/USD), 6-month (+0.8% to NGN378.08/USD) and 1-year (+0.7% to NGN403.39/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 through to at least H1-20.