Global economy

The Chinese economy returned to growth in the second quarter, marking an important milestone in the global struggle to climb out of the slump brought about by the coronavirus. GDP expanded by 3.2% y/y in Q2-20, reversing a 6.8% y/y decline in Q1-20 and beating the median forecast of 2.4% y/y. The economy saw less drag from the virus which the government more or less has had under control since the early-year outbreak. The rebound was largely industry-driven, while consumer spending was weaker than expected. The breakdown revealed Industrial output rose 4.4% y/y, Net exports grow 8.8% y/y, Retail sales shrank 3.9% y/y, while Fixed-asset investment shrank 3.1% y/y in the first half of the year. The economy bounced back strongly but now the challenge will be to sustain the recovery. Continued momentum in June production bodes well for growth in H2. However, weak consumer spending, as well as challenges from geopolitics (trade war) and widespread flooding, remain significant headwinds. 

U.S. consumer prices posted the biggest monthly gain since 2012 on a rebound in gasoline costs, though inflation remained subdued more broadly amid the pandemic. The consumer price index (CPI) jumped 0.6% m/m in June – the first increase since February – after a 0.1% drop in May. Year-on year, headline CPI rose 0.6%. Gasoline prices jumped 12.3% m/m and accounted for more than half the gain in the overall CPI. Core CPI, which excludes volatile food and fuel costs, rose by a more moderate 0.2% m/m, restrained by a slowdown in rents, from the prior month after a 0.1% decrease in May. On an annual basis, core CPI increased by 1.2% for a second month. The rise is more of a modest bounce from extremely depressed price levels rather than an indication that inflation pressures are about to build. The US economy remains far weaker than before the crisis with employment still 15 million below pre-crisis levels. This suggests a huge output gap, with the economy having significant scope to grow before any real inflation threat emerges.

Global markets

Global markets were broadly positive this week as progress on a possible COVID-19 vaccine, some upbeat earnings reports, and stimulus talks fed into hopes of economic recovery from the coronavirus-induced downturn. US (DJIA: +2.5%; S&P: +1.0%) and European (STOXX Europe: +1.2%; FTSE 100: +2.3%) stocks looked set to record weekly gains. Asian markets were mixed as Japanese (Nikkei 225: +1.8%) stocks closed higher on the preceding factors while state media’s criticism of China’s (SSE: -5.0%) largest domestically listed stock plunged its index to its lowest level since February. Emerging (MSCI EM: -2.2%) and frontier markets (MSCI FM: -0.3%) stocks were set to close lower, as virus infections surged in the US, India, Russia, and Brazil. The ongoing dispute on trade and other issues between Washington and Beijing also hammered risk sentiment.

Nigeria

Economy

Nigerian inflation accelerated for the 10th straight month in June as the COVID-19 induced supply chain disruptions, restrictions on access to foreign exchange, and continued border closures drove up prices. Headline inflation rose to 12.56%, compared to 12.40% in May, and was broadly in line with our estimate of 12.54%. Food inflation rose to 15.17% y/y while Core inflation was stable at 10.12% y/y. From a month ago, headline inflation increased by 4bps to 1.21%, the steepest pace of price growth since June 2018. For July, the troika impact of (1) planting and lean seasons in the North and South respectively, (2) continued naira downslide, and (3) rising COVID-19 cases should continue to pressure headline CPI. Thus, we now expect m/m headline CPI of 1.11%, implying year-over-year inflation of 12.67%.

The Central Bank of Nigeria (CBN) recently placed a restriction on the sale of foreign exchange to importers of maize in the country, citing protection of local production of maize, safeguarding rural livelihoods and job creation as factors behind the move. With the addition of maize to the list of items not eligible for FX from the apex banks FX windows, all member banks, and licensed Bureaux de Change were directed to halt selling FX to importers of the crop. Data from the United States Department of Agriculture (USDA) put Nigeria’s maize production for the 2019/2020 planting and market season at 10.50 MMT and consumption at 10.70 MMT, implying the country is somewhat self-sufficient at maize production.  The data also put Imports at 0.4 MMT for the same period. However, amidst production disruptions due to the current pandemic and insecurity, the Maize Association of Nigeria has estimated a 25% production shortfall this year. Consequently, in the absence of imports to plug the supply gap, domestic maize price pressures are likely to mount.

Capital markets

Equities

The domestic equities market continued to trade with weak sentiments, as the All-Share Index declined by 0.1% w/w, to 24,287.66 points. Losses in NB (-11.9%) and banking stocks dragged down the index, and offset the gains in AIRTELAFRI (+5.9%), MTNN (+1.6%) and BUACEMENT (+1.2%). Thus, the Month-to-Date and Year-to-Date losses printed -0.8% and -9.5%, respectively. Sectoral performance reflected the market’s negative performance, with the Banking (-3.9%), Oil & Gas (-1.9%), Consumer Goods (-1.9%) and Insurance (-1.9%) indices all recording weekly losses. The Industrial Goods (+0.5%) index was the sole gainer for the week.

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.

Money market and Fixed income

Money market

The overnight (OVN) rate expanded by 765bps to 21.8%, as outflows from CRR debits late in the week outweighed the combined NGN430.00 billion that came into the system from OMO maturities (NGN69.55 billion), FX retail refunds (NGN320.00 billion) and FGN bond coupon payments (NGN40.45 billion).

We expect the OVN to trend southwards next week as inflows from OMO maturities (NGN20.37 billion) and FGN bond coupon payments (NGN133.18 billion) are expected to come into the system.

Treasury bills

The Treasury bills secondary market closed on a bullish note, as average yield across all instruments declined by 11bps to 4.5%. Across the segments, trading in the OMO secondary market (-7bps to 5.6%) improved, on the back of the healthy liquidity in the system. Similarly, bullish sentiments prevailed at the NTB segment (-19bps to 1.9%), as participants covered for lost bids at the PMA. At the PMA, the CBN rolled over the NGN107.04 billion maturing bills, as the auction was oversubscribed, given the dearth of alternatives for local fund managers. The CBN allotted NGN8.85 billion for the 91-day, NGN26.60 billion of the 182-day and NGN71.60 billion of the 364-day – at respective stop rates of 1.30% (previously 1.80%), 1.80% (previously 2.04%), and 3.35% (previously 3.75%).

In the coming week, we expect improved demand for T-bills, as the system is saturated with liquidity.

Bonds

Trading in the Treasury bonds secondary market remained bullish as increased local participation and improved system liquidity sustained the demand for instruments in the space. Consequently, average yield contracted by 32bps to 7.8%. Across the curve, yields at the short (-80bps) and long (-18bps) ends contracted, due to demand for the APR-2023 (-143bps) and MAR-2050 (-27bps) bonds, respectively; whereas it was flat at the mid-segment.

We expect investors’ focus to shift to the primary market, as investors anticipate supply from next week’s PMA. At the auction, the DMO will offer NGN150.00 billion across four instruments to investors – re-openings of the 12.50% JAN-2026, 12.50% MAR-2035, and 12.98% MAR-2050 bonds, and a new issue JUL-2045 bond. 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

The CBN’s foreign reserves sustained its descent as FX outflows continue to outpace inflows, thus dipping by USD13.78 million w/w to USD36.12 billion. Nonetheless, the naira weakened against the US dollar by 0.4% w/w to NGN388.50/USD at the I&E window, and by 1.1% to NGN470.00/USD at the parallel market. In the forwards market, the naira weakened against the US dollar across the 1-month (-0.4% to NGN390.10/USD), 3-month (-0.3% to NGN393.51/USD) and 1-year (-0.1% to NGN413.53/USD) contracts while it strengthened by 0.1% to NGN398.22/USD in the 6-month contract.

Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.