In the United States, the Bureau of Labour Statistics (BLS), reported that headline inflation settled at 5.4% y/y in July, unchanged from June’s print. Aside the impact of the low base effect, we highlight that persistent supply chain disruptions and pent-up demand, following the ease of COVID-19 restrictions, in the travel and hospitality sub-sectors of the services sector continued to stoke inflationary pressures. Accordingly, price pressures were most significant in the food (3.4% y/y vs June: 2.4% y/y) and new vehicles (6.4% y/y vs June: 5.3% y/y) baskets, while prices for used cars and trucks (41.7% y/y vs May: 45.2% y/y) and transportation services (6.4% y/y vs June: 10.4% y/y) moderated. On a month-on-month basis, consumer prices rose by 0.5% in July (June: +0.9% m/m) – the slowest rise since February. Although we expect the inflationary pressure to moderate in the coming months as the impact of low base effects dissipates, we expect the headline inflation to remain above the Fed’s 2.0% target in the short to medium term.
 
According to China’s National Bureau of Statistics (NBS), headline inflation in the country moderated to 1.0% y/y in July (June: 1.1% y/y) – the lowest since April 2021. The moderation was due to a sharp decline in the food index (-3.7% y/y vs June: -1.7% y/y) given the sustained fall in pork prices (-43.5% y/y vs June: -36.5% y/y) in line with the recovery of the country’s pig herds size following the African swine fever epidemic that affected the country between 2019 and 2020. Meanwhile, the non-food basket (2.1% y/y vs June: 1.7% y/y) increased steadily following upward pressure from prices of transportation (6.9% y/y vs June: 5.8% y/y) and utilities (1.1% y/y vs June: 0.9%). On a month-on-month basis, consumer prices rose to 0.3% (June: -0.4% m/m) after four consecutive months of decline. While we expect improved food supply to moderate prices in the near term, increased mobility and higher energy prices should exert upward pressure on the non-food index. Overall, we expect headline inflation to remain range-bound between 0.9% and 1.2% over the near term.
 
Global Markets
 
Equities markets across the globe edged higher as investors flocked into cyclical and tech stocks, following the US Senate’s approval of President Biden’s USD1.20 trillion bipartisan Infrastructure Bill. In addition, US inflation data and robust corporate earnings reports in Europe released during the latter part of the week further strengthened investors’ sentiments. Accordingly, US stocks (DJIA: +0.8%; S&P: +0.5%) attained another record high as investors reacted positively to the inflation and jobless claims data. In Europe, the STOXX Europe (+1.2%) and FTSE 100 (+1.3%) were on track for a second consecutive week of gains as optimism over a robust earnings season and economic recovery prospects bolstered buying interests in cyclical and luxury stocks. Similarly, Asian equities (Nikkei 225: +0.6%; SSE: +1.7%) closed the week higher, despite lingering concerns about Beijing extending its regulatory crackdown amid rising coronavirus cases related to the Covid-19 delta variant. Elsewhere, Emerging (MSCI EM: -0.1%) market stocks declined marginally, consequent upon losses in South Korea (-3.0%). In comparison, Frontier (MSCI FM: +0.7%) markets stocks were on track to closer higher following gains in Kuwait (+0.8%).
 
Nigeria
 
Economy
 
According to the National Bureau of Statistics (NBS), Nigeria’s VAT collections increased by 56.6% y/y to NGN1.00 trillion in H1-21. The preceding consists of NGN496.39 billion generated in Q1-21 (Q1-20: NGN324.58 billion) and NGN512.25 billion generated in Q2-21 (Q2-20: NGN327.20 billion), representing a 3.2% q/q increase. This consisted of Non-Import VAT of NGN187.43 billion, Foreign Non-Import VAT of NGN207.69 billion, and Nigerian Customs Service Import VAT of NGN117.13 billion. Across sectors, Other Manufacturing (NGN44.89 billion) generated the highest amount of VAT, followed by Professional Services (NGN29.30 billion) and Commercial and Trading (NGN21.96 billion). With the economy effectively reopened, we envisage a higher VAT collection in Q3-21, given the knock-on effects of improved consumption levels.
 
Also, the NBS reported that the total Company Income Tax (CIT) generated in Q2-21 increased by 17.4% y/y to NGN472.07 billion, bringing the total amount generated as of H1-21 to NGN864.72 billion. Broad classification of the sources of payments showed that local CIT generated the bulk of the total at 88.5%, increasing by 66.3% y/y to NGN417.74 billion. Meanwhile, foreign CIT payment and other payments (payments through Remitta, E-transact and E-tax pay) declined by 56.8% y/y and 91.3% y/y to NGN51.61 billion and NGN2.72 billion, respectively. On a quarter-on-quarter basis, the total amount generated from CIT increased by 20.2%, primarily driven by a 174.3% q/q increase in local CIT payments, which offset the declines across the foreign CIT (-72.0% q/q) and other payments (-95.1% q/q). Over the medium term, we maintain our expectation of increased CIT payments, albeit moderately, given the improved level of business activities compared to the prior year. Furthermore, we reiterate that the increase in CIT and VAT collections bodes well for the FGN’s non-oil revenue over the medium term.
 
Capital markets
 
Equities
 
The bulls continued to dominate the local bourse as the market recorded a second consecutive weekly gain. Precisely, foreign investors’ sustained interest in AIRTELAFRI (+15.0%) buoyed market performance. Consequently, the NGX ASI rose by 1.9% w/w, to close at 39,533.97 points. Accordingly, MTD return rose to +2.6%, while the YTD return for the index moderated to -1.8%. Activity levels were stronger, as trading volume and value grew by 66.4% w/w and 55.0% w/w, respectively. Also, sectoral performance was broadly positive following gains in the Banking (+0.5%), Oil and Gas (+0.4%) and Consumer Goods (+0.3%) indices, and declines in the Insurance (-2.5%), and Industrial Goods (-1.4%) indices.
 
In the coming week, we expect investors to be focused on the bond auction scheduled to hold on Wednesday as they keep an eye on the movement of yields in the FI market. As a result, we envisage cautious trading amid intermittent profit-taking activities. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.
 
Money market and fixed income
 
Money market
 
The overnight (OVN) rate contracted by 325bps w/w, to 17.3%. The healthy liquidity position from last week and this week’s inflows from OMO maturities (NGN80.00 billion) supported the contraction amid outflows for net NTB issuances (NGN104.84 billion) and the CBN’s weekly FX auction.
 
We expect tighter liquidity in the system in the coming week, as debits for the week’s FGN bond and CBN FX auctions will likely outweigh expected inflows from OMO maturities (NGN91.00 billion).
 
Treasury bills

Trading in the Treasury bills secondary market closed on a bullish note this week, following (1) increased demand for OMO bills on the back of limited supply from the CBN, and (2) as market participants sought to fill lost bids from Wednesday’s NTB PMA. Consequently, the average yield across all instruments contracted by 54bps to 6.2%. Across the market segments, the average yield at the OMO segment contracted by 12bps to 7.7%. Notably, we highlight that there has been no primary market offering in the segment for four consecutive weeks. Similarly, the average yield at the NTB segment contracted by 95bps to 4.7%. At the PMA, the CBN offered bills worth NGN51.49 billion across the three conventional maturities. Demand was strong, with a subscription level of NGN398.38 billion (Bid-to-offer ratio: 7.7x; previously 2.1x) recorded. Eventually, the CBN allotted NGN156.33 billion – NGN4.80 billion of the 91D, NGN3.75 billion of the 182D and NGN147.78 billion of the 364D bills – at respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 7.35% (previously 8.20%).
 
We envisage the trend of lower yields on T-bills will persist in the coming week, as we maintain our view of improved buying activities as participants react to the lower rate on the recently (re)issued bills and the CBN’s continued absence from the OMO primary market.
 
Bonds
 
Bullish sentiments persisted in the Treasury bonds secondary market following improved demand, as investors anticipate lower stop rates at next week’s auction. Specifically, the average yield contracted by 38bps to 11.6%. Across the benchmark curve, the average yield declined at the short (-62bps), mid (-24bps) and long (-33bps) ends as investors’ interests piqued on the JAN-2022 (-156bps), FEB-2028 (-46bps) and MAR-2035 (-55bps) bonds, respectively.
 
In the coming week, we expect the outcome of the bond auction and release of the July 2021 CPI (Cordros Forecast: 17.54%) to shape market sentiments and the direction of yields. At the auction, the DMO will be offering instruments worth c. NGN150.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.40% FGN MAR 2036 and 12.98% FGN MAR 2050 bonds. For the rest of the year, we maintain our view of lower yields given our expectations of limited supply and deliberate efforts by the DMO to reduce domestic borrowing costs for the government.
 
Foreign Exchange
 
Nigeria’s FX reserve sustained its accretion for the fifth consecutive week, as the gross reserves position edged higher by USD24.41 million w/w to USD33.59 billion (11th August 2021). Meanwhile, the naira appreciated by 0.1% to NGN410.80/USD at the I&E window (IEW) but depreciated by 1.0% to NGN515.00/USD in the parallel market. At the IEW, total turnover (as of 12th August 2021) decreased by 15.6% WTD to USD571.97 million, with trades consummated within the NGN400.00 – 421.96/USD band. In the Forwards market, the rate was flat at the 1-month (NGN412.22/USD) and 1-year (NGN434.91/USD) contracts but appreciated across the 3-month (+0.1% to NGN415.27/USD) and 6-month (+0.1% to NGN421.65/USD) contracts.
 
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased inflows from crude oil receipts, and (2) inflows from FCY borrowings (USD6.18 billion) and IMF SDR (USD3.40 billion). Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.