In the United Kingdom, headline inflation declined to 1.5% y/y in March 2020 from 1.7% y/y in the prior month, given the impacts of the rapid decline in crude oil price on energy costs, and the great lockdown on clothing and apparels prices. In fact, petrol pump prices alone fell by 5.1% y/y – the largest yearly drop since December 2018. Meanwhile, weaker demand, occasioned by the COVID-19 induced rise in the unemployment rate, resulted in producers and retailers aggressively discounting prices in the period. Stripping out volatile items, such as food and energy prices, core inflation only moderated by 10bps to 1.6% y/y. Going forward, we expect consumer prices in the UK to remain largely suppressed. Our prognosis is hinged on the expectation of low crude oil prices, which should continue to weigh favourably on energy inflation, and by extension, headline CPI.

This week, manufacturing activities in the US dropped deeper into the contractionary terrain, as the PMI data slumped to its lowest level in more than 11 years in April 2020. Specifically, manufacturing PMI printed 36.9 index points, down from 48.5 points in March. Clearly, the disruption of the supply value chain, occasioned by the COVID-19 induced lockdown across the states, weighed significantly on export orders. Meanwhile, the postponement of new orders, or in extreme cases, cancellation of orders, led to the retrenchment of workforces in the review period. For the next few months, we see headroom for further moderation in manufacturing activities, due to the unrelenting spread of the Coronavirus, which continues to wreak havoc across the sector. We like that the US government has continued to respond to the economic hardship that the COVID-19 outbreak has dealt the country with legislative relief packages (totalling over $2.00 trillion). This is expected to support a V-sharp recovery post-pandemic.

Global Markets

Global equities retreated, as falling crude oil prices and the failure of a promising COVID-19 experimental drug clinical trial, weakened investors’ sentiments. Stocks in the US (DJIA: -0.1%; S&P: -0.1%) resumed the week’s trading weak, as broadly negative companies’ earnings, weak unemployment data, and falling energy prices dissuaded investors from taking positions in risky assets. However, as oil prices recovered, gains were recorded in the latter part of the week, although these were not enough to offset earlier losses. Elsewhere, European (STOXX: -0.7%; FTSE 100: +0.2%) and Asian (SSE: -1.1%; Nikkei 225: -3.2%) equities were broadly negative as fears of severe and lasting economic outcomes from the coronavirus pandemic resurfaced, following a report that detailed the failure of the clinical trial.

Nigeria

Domestic Economy

This week, the National Bureau of Statistics released inflation data for March 2020, which showed that for the seventh consecutive month headline CPI notched another yearly increase – 7bps to 12.26% y/y for March. Beyond the negative surprise from both the core (+30bps) and food (+7bps) baskets, the unfavourable base from the corresponding period of last year must have added another layer of pressure to the headline number, when compared to our estimate of 12.20% y/y (6bps variance). From our channel checks, we understand that the impact of the lockdown instituted by the FGN is stoking upward pressure on food prices in April, owing to the disruption of the supply chain in the agriculture sector and the frontloading of food items purchases by consumers. Thus, food inflation is expected to grow faster in April by 16bps to 1.10%m/m. Elsewhere, while lower PMS prices should have ordinarily impacted the core basket favourably, we believe further FX depreciation will bleed over to the core basket in April, and thus, neuter gains from lower PMS prices. Overall, headline inflation is expected to print 0.98% m/m, which would cascade into 12.30% y/y in April 2020.

Given the COVID-19 pandemic, which led to the institution of the great lockdown in Nigeria at the twilight of March, together with the deceleration in crude oil prices, we have revised our GDP estimate over 2020E. In our 2020 outlook report, we had expected stronger non-oil GDP to support overall GDP growth of 2.34% y/y. Due to the damage done thus far by the novel COVID-19, we now look for the Nigerian economy to dive into the recessionary zone. Our prognosis is hinged on the expectation of contraction across both the oil and non-oil sectors. For the latter, Nigeria’s production quota, based on the new OPEC+ pact, is set at 1.40mbd. When condensates are accounted for, we now expect oil production to average 1.79mbd (-11.2% y/y). The impact of lower crude oil production is expected to weigh on oil GDP growth especially in Q2 and Q3-20. Thus, oil GDP is now expected to average -12.35% y/y. Elsewhere, the CBN and FGN had announced six initial policy responses to tackle the impact of COVID-19 on the real sector. This is expected to keep the Agriculture sector afloat (2020 average: +2.77% y/y) over 2020E. However, a slower pace of growth in Service, Manufacturing, and Trade is expected to neuter the impact. We now expect the non-oil GDP average growth of -1.06% y/y. Overall, we expect full-year average growth of -2.07% y/y in 2020 (vs. -3.4% estimated by the IMF).

Capital Markets

Equities

Profit-taking across DANGCEM (-4.4%), NESTLE (-5.9%) and Tier One banks stocks caused a retrace in market performance, after last week’s whopping gain. Consequently, the All-Share Index declined by 1.4% w/w, to settle at 22,921.59 points. Accordingly, the MTD return decreased to +7.1%, while the YTD loss increased to -15.8%. Analysing by sectors, this week’s performance was negative as declines in the Banking (-5.2%), Consumer Goods (-2.6%), and Oil & Gas (-1.7%) indices masked the gains recorded in the Insurance (+1.2%) and Industrial Goods (+0.7%) indices.

As risks remain on the horizon following the increasing number of COVID-19 cases in Nigeria and as economic fortunes remain wary, we continue to advise investors to trade cautiously and seek only fundamentally justified stocks.

Fixed income and money market

Money market

The overnight (OVN) rate expanded by 18.83ppts, w/w, to 21.1%. During the week, the OVN remained depressed as system liquidity remained healthy against the backdrop of the significant inflows from CBN’s CRR refunds from the prior week, and inflows this week from OMO maturities (NGN267.67 billion) and FGN bond coupon payments (NGN32.67 billion). However, the rate expanded at the end of the week following outflows from CRR debits and debits for OMO (NGN112.65 billion) and FGN bond (NGN156.06 billion) auctions.

In the coming week, inflows worth a combined NGN179.80 billion are expected in the system from OMO maturities (NGN30.66 billion) and FGN bond coupon payments (NGN149.14 billion). Barring any significant mop-up by the CBN, we expect the OVN to remain depressed.

Treasury bills

The Treasury bills market remained bullish as the average yield across all instruments contracted by 94bps to 7.7%. This was driven by the OMO segment (average yield: -135bps w/w to 9.9%) of the market given the still buoyant system liquidity. Similarly, the average yield at the NTB segment contracted by 36bps to 2.7%, as trading activities remained quiet in the segment. There was an OMO auction held during the week, during which the CBN fully allotted instruments worth NGN112.65 billion – NGN20.37 billion of the 89DTM, NGN11.50 billion of the 180DTM and NGN80.78 billion of the 341DTM instruments at respective stop rates of 11.5% (previously 11.5%), 11.5% (previously 11.5%), and 12.7% (previously 12.8%).

We expect the bullish trend to continue in the Treasury bills market, supported by relatively healthy liquidity. In the NTB segment, we expect the focus to be shifted to this week’s PMA, where the CBN will be rolling over NGN131.53 billion worth of maturities.

Bonds

Trading in the FGN bonds secondary market was bullish, as yields readjusted to the lower PMA stop rates. Consequently, the average yield across instruments contracted by 35bps to close at 10.5%. At the auction, instruments worth NGN60.00 billion were offered to investors through re-openings – 12.75% APR 2023 (Bid-to-offer: 2.5x; Stop rate: 9.0%), 12.50% MAR 2035 (Bid-to-offer: 5.4x; Stop rate: 12.0%), and 12.98% MAR 2050 (Bid-to-offer: 5.9x; Stop rate: 12.5%). Despite subscriptions across instruments settling at NGN275.67 billion, the DMO eventually allotted instruments worth NGN156.06 billion, resulting in a bid-cover ratio of 4.6x.

We expect sustained demand next week across the bond yield curve as investors bargain hunt for investible instruments.

Foreign Exchange

This week, Nigeria’s FX reserves remained under pressure, dipping by another USD282.67 million WTD to USD33.66 billion (24th of April 2020), as offshore outflows intensified in the face of weak inflows. Nonetheless, the Naira appreciated by 0.82% w/w to NGN383.00/USD at the I&E window but depreciated significantly by 7.56% w/w to NGN450.00/USD in the parallel market. As with the I&E spot market, the exchange rate appreciated against the greenback across all contracts in the Forward market. Precisely, the 1-month (+1.2% to NGN384.99/USD), 3-month (+1.8% to NGN389.20/USD), 6-month (+2.7% to NGN396.73/USD), and 1-year (+5.1% to NGN415.20/USD) contracts recorded increases in naira value.

For us, the CBN will have to grapple with a sizeable FX demand post-COVID-19 pandemic. In the meantime, we expect the Naira to maintain stability at current levels as the CBN continues to intervene across all FX windows. Assuming the planned USD6.9 billion foreign borrowing is 100% successful, that should help support the FX reserves, and thus, boost the CBN ammunition in its currency defense.