According to the Labor Department, U.S. consumer prices declined for a third straight month in May, as the coronavirus-induced recession continued to depress demand. The consumer price index fell 0.1% from the prior month after a 0.8% drop in April, which was the biggest since 2008. The gauge increased 0.1% y/y following a 0.3% y/y gain in April. The core CPI, which excludes volatile food and fuel costs, also fell 0.1% from the prior month after a 0.4% decline in April. Further declines in prices could spur concern about the risk of deflation as the U.S. economy begins recovering from the Covid-19 recession. At the same time, with states beginning to ease lockdowns, prices stand to increase as demand for goods and services pickup.

According to Eurostat, the Eurozone economy shrank by 3.6% q/q (-3.1% y/y) in the first three months of 2020, compared with preliminary estimates of a 3.8% q/q contraction and the previous period’s 0.1% q/q. It was still the steepest contraction on record as a coronavirus lockdown from mid-March forced non-essential businesses, in an economy that was already barely growing, to close and consumers to stay at home. The effect was the largest on household consumption, which fell by 4.7% q/q, and was closely followed by investment at -4.3%. Q2 will show even weaker GDP and jobs figures, but the key focus is on the recovery in consumption and investment as the lockdowns are gradually lifted. A V-shaped recovery is not a given as there is still uncertainty around whether, as savings rates have gone up and job losses mount, consumers can and want to spend again over the summer months and whether businesses can and want to invest again.

Global Markets

After a positive start to the week, global equities swiftly turned negative as a sobering economic outlook from the U.S. Federal Reserve challenged market expectations. Consequently, US (DJIA: -0.4%; S&P: -0.1%) and Asian (Nikkei 225: -1.7%; SSE: -0.3%) equities were down WTD by midweek. Meanwhile, European (STOXX Europe: -3.9%; FTSE 100: -4.3%) stocks dropped all week as the continent reported its biggest ever GDP drop. Conversely, emerging markets (MSCI EM: +1.0%) stocks rose for a ninth straight session on Wednesday following the early lifting of a ban on equities’ short-selling in Taiwan (+0.5%). Frontier markets (MSCI FM: +1.2%) also gained as the extension of the record OPEC+ output cuts buoyed stocks in Kuwait (+1.2%).

Nigeria

Economy

According to the National Bureau of Statistics (NBS), Nigeria’s external trade balance extended its deficit run for a second consecutive quarter in Q1-20 (NGN139.00 billion vs. a NGN831.62 billion surplus in Q1-19). However, relative to Q4-19 (NGN579.06 billion), the reported deficit was noticeably smaller. Breakdown provided showed that exports (-10.0% y/y) underperformed imports (+14.0% y/y) over the period. On the former, the blend of lower crude oil (-12.8% y/y) and non-crude oil (-1.8% y/y) exports weighed markedly on overall exports. For us, the decline in crude oil exports isn’t surprising, given the sharp deceleration in the oil price (-20.0% y/y) even as crude production (+4.0% y/y) rose marginally. It is noteworthy to mention that crude oil exports still account for more than 72% of total exports, portending that the country is still miles away from achieving its revenue diversification mandate. On the other hand, importation of agriculture (+10.6% y/y) and solid mineral (+20.1% y/y) goods, supported overall import in the review period.

Over the next few quarters, the foreign trade balance is expected to deteriorate further, given the benign outlook for crude oil earnings and prospects for a higher import bill. For one, the oil price is expected to average USD38.71/bbl. over 2020 (vs. USD64.16/bbl. in 2019). That together with the new OPEC+ agreement, which is expected to place a cap on Nigeria’s oil production (Cordros’ estimate: 1.79mbd including condensates), should cascade negatively into export earnings. On imports, the need to flatten the COVID-19 case curve will continue to support the demand for medical supplies. Thus, we suspect that the shipments of medical supplies and food items will dominate the import bill – non-oil imports made up 82.2% of total imports in 2019. Thus, we see further legroom for Nigeria’s trade deficit to expand.

Capital Markets

Equities

Despite a negative closing session, the domestic equities market eked out a gain in holiday-shortened week, following investor interest across banking stocks and large caps, BUACEMENT (+3.8%) and MTNN (+1.7%). Thus, the All-Share Index advanced by 0.7%, WTD, to settle at 25,182.67 points. Accordingly, Month-to-Date and Year-to-Date losses moderated to -0.3% and -6.2%, respectively. On sectors, the Insurance (+3.7%), Industrial Goods (+2.2%) and Banking (+0.5%) indices closed higher while the Oil and Gas (-3.3%) and Consumer Goods (-0.2%) indices recorded declines.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Fixed income and money market

Money market

The overnight (OVN) rate contracted by 687bps, WTD, to 9.8%. The OVN was elevated for the better part of the holiday-shortened week as system liquidity was strained following outflows for the weekly FX auction and MTN’s commercial paper. However, banks were able to access the CBN’s Special Lending Facility window by midweek, which led to the eventual contraction in the rate.

In the coming week, inflows from OMO maturities worth NGN355.20 billion are expected to boost liquidity However, FX and bond auction debits will likely drive the OVN higher by the end of the week.

Treasury bills

Trading in the Treasury bills secondary market was mixed amidst the strain in system liquidity. Consequently, average yield across all instruments contracted by a marginal 3bps to 4.5%. Activities in the relatively more attractive OMO secondary market were slightly bullish as average yield contracted by 10bps to 5.0%. On the other hand, amidst the liquidity crunch, investors sold off at the NTB segment with average yield expanding by 6bps to 3.4%. At the PMA, the CBN fully allotted NGN90.94 billion worth of bills – NGN4.41 billion of the 91-day, NGN7.82 billion of the 182-day and NGN78.71 billion of the 364-day – at respective stop rates of 2.00% (previously 2.45%), 2.20% (previously 2.72%), and 4.02% (previously 4.02%).

Yields on treasury bills are expected to contract, owing to the expected boost in system liquidity next week.

Bonds

Trading in the Treasury bonds secondary market was bearish, in the absence of any significant inflows to support buying activity. Consequently, average yield expanded by 7bps to 10.1%. Across the curve, average yield contracted at the short (-11bps) end, due to demand for  the JAN-2022 (-53bps) bond, while they expanded at the mid (+24bps) and long (+2bps) segments, following sell-offs of the APR-2029 (+34bps) and MAR-2050 (+3bps) bonds, respectively.

We expect investors’ focus to shift to next week’s PMA, wherein the DMO will offer NGN150.00 billion across three instruments to investors through re-openings – 12.75% APR-2023, 12.50% MAR-2035, and 12.98% MAR-2050 bonds. Nonetheless, we still expect some increased activity at the secondary market as investors cover lost bids at the auction which is likely to be oversubscribed.

Foreign Exchange

For the second straight week, the CBN recorded another reserve drawdown as FX outflows outpace inflows – foreign reserves dipped by USD82.09 million WTD to USD36.50 billion. Nonetheless, the naira depreciated against the US dollar by 0.32% WTD to NGN387.75/USD at the I&E window but closed largely flat at NGN450.00/USD in the parallel market. Unlike in the spot market, the naira gained ground against the US dollar across all contracts in the forwards market. Specifically, the 1-month (+0.1% to NGN388.71/USD), 3-month (+0.4% to NGN392.70/USD), 6-month (+0.8% to NGN398.45/USD), and 1-year (+2.3% to NGN416.25/USD) contracts all appreciated against the US dollar.

For us, the widening current account (CA) position suggests that odds are stacked against the Naira. Beyond that, as the economy gradually reopens, the resumption of FX sales to the BDC segment of the market will place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.