Global Economy

The United States domestic prices rose to a record high in line with increased utilities and food prices. According to the Bureau of Labor Statistics (BLS), headline inflation rose to 7.9% y/y in February (January: +7.5% y/y) – the highest since January 1982 (+8.3% y/y). The increased domestic prices continue to reflect the lingering impact of the (1) robust consumer demand and (2) supply constraints amidst the previous year’s low base effect. Analysing the breakdown, we highlight that price pressures were most significant in the gasoline (38.0% y/y vs January: 40.0% y/y), used cars & trucks (41.2% y/y vs January: 40.5% y/y), food (7.9% y/y vs January: 7.0% y/y) and shelter (4.7% y/y vs January: 4.4% y/y) sub-baskets. On a month-on-month basis, the headline inflation rose by 0.8% (January: 0.6% m/m) – its highest level in five months. The inflation reading reinforces our view that some previously determined transitory price pressures may be here to stay for some time. The preceding could compel the Fed to hike the key policy rate at its next Monetary Policy meeting. Indeed, the market expects a 25bps increase in the key policy rate in March.

According to China’s National Bureau of Statistics (NBS), the headline inflation held steady at 0.9% y/y in February (January: 0.9% y/y). Decomposing the breakdown, we highlight that food prices (-3.9% y/y vs January: -3.8% y/y) dropped to a five-month low given the faster decline in pork prices (-42.5% y/y vs January: -41.6% y/y). Conversely, the non-food basket increased marginally to 2.1% y/y (January: 2.0% y/y) – price pressures were most significant in the transportation & communication (5.5% y/y vs January: 5.2% y/y), clothing (0.6% y/y vs January: 0.5% y/y) and household goods & services (2.5% y/y vs January: 1.6% y/y) sub-baskets. On a month-on-month basis, consumer prices rose by 0.6% (January: 0.4% m/m). We expect food prices to continue to decline over the short term, given the persistent decline in pork prices. Similarly, we expect a moderate rise in the core basket, supported by increased transportation costs. Overall, we expect the headline inflation to remain relatively rangebound (1.0% – 1.5%) over the short term.

Global Markets

This week, global stocks posted broadly negative performances as investors’ sentiments were shaped by the (1) uncertainty trailing Russia’s invasion of Ukraine and (2) imminent monetary policy tightening by major Central Banks. Consequently, US (DJIA: -1.3%: S&P 500: -1.6%) stocks pared early gains, with investors reacting negatively to record high inflation reading amid selloffs in tech stocks. Elsewhere, in the European market, the STOXX Europe (+1.6%) and FTSE 100 (+1.3%) recouped early losses following investors’ positive reaction to ceasefire talks between Russia and Ukraine later in the week. In Asian markets, the Nikkei 225 (-3.2%) suffered huge losses as investors booked profits amid unabated concerns over the current geopolitical tensions. Likewise, the SSE (-4.0%) declined as fears of US delisting of Chinese firms dampened sentiments. Emerging (MSCI EM: -3.7%) and Frontier (MSCI FM: -0.2%) stocks closed lower consequent to the rout in China (-4.0%) and Vietnam (-2.7%), respectively. 

Nigeria

Economy

According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 15.7% y/y to NGN35.45 trillion in January (December 2021: NGN35.19 trillion). Pertinently, we highlight that the CPS grew by an average of 13.4% y/y in 2021FY. We believe the continuous increase in CPS reflects the impact of (1) CBN’s enforcement of the 65.0% loan-to-deposit ratio, (2) improved domestic macroeconomic conditions compared to 2020FY, and (3) CBN-led interventions to the real sector. On a month-on-month basis, the CPS increased by 0.7% in January (December 2021: -0.5% m/m). That said, the broad money supply grew by 17.8% y/y to NGN44.46 trillion in line with the increase recorded across narrow money supply (17.4% y/y) and quasi money (18.1% y/y). We expect the continued improvement in domestic economic activities to support commercial banks’ ability to create risky assets. Similarly, we expect the CBN to maintain its intervention facilities, albeit slowly, as the economy expands. Accordingly, we expect the CPS to maintain double-digit growth in 2022FY.  

According to the recently released data from the Nigerian National Petroleum Corporation (NNPC), the corporation incurred NGN210.38 billion as PMS under-recovery cost in December (November: NGN220.11 billion). The under-recovery cost for the review month consists of NGN176.48 billion December value shortfall and NGN33.90 billion outstanding under-recovery accrued over 2021FY. Overall, actual under-recovery costs settled at NGN1.61 trillion (or 34.3% of FGN’s retained revenue) in 2021FY, in line with our forecast (NGN1.63 trillion). That said, the NNPC further estimated that it would deduct NGN242.53 billion from February 2022 proceeds due to be shared by the three tiers of government at the March FAAC meeting. The estimated deduction consists of NGN143.72 billion as PMS under-recovery cost in January and NGN98.81 billion November 2021 arrears). We expect under-recovery costs to increase significantly over the short-to-medium term in line with the rise in crude oil prices compared to the 2021FY level. Indeed, as of February, our estimated open market price for PMS (NGN346.84 – NGN349.84/litre) is c.112.0% above the market price (NGN165.00/litre). Accordingly, we expect the government’s oil revenue to remain sub-optimal over 2022FY.

Capital markets
 
Equities
 
The Nigerian equities market closed in the green territory amid bouts of profit-taking. Specifically, gains in PRESCO (+19.6%), GTCO (+3.9%), INTBREW (+4.0%), and OKOMUOIL (+3.7%) stocks pushed the All-Share Index higher by 0.4% to 47,437.48 points. Based on the preceding, the MTD return turned positive +0.1%, while the YTD return increased to +11.1%. Activity levels mirrored the overall market’s board gauge as trading volumes surged by 103.7% w/w while trading value edged up by 0.3% w/w. Performance across sectors was mixed, as the Insurance (+2.7%) and Banking (+1.3%) indices recorded gains, while the Oil and Gas (-2.2%), Consumer Goods (-0.5%), and Industrial Goods (-0.1%) indices closed in the red. 

We expect market performance to be dominated by the bulls in the week ahead, as we expect yield-seeking investors to take positions in stocks with attractive dividend yields amid the negative real returns in the fixed income market. However, we do not rule out intermittent profit-taking activities. Overall, we advise investors to seek trading opportunities in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate contracted by 883bps w/w to 5.0% as the healthy system liquidity position from last week coupled with this week’s inflow from OMO maturities (NGN106.22 billion) outweighed debits for net NTB issuances (NGN142.53 billion), OMO (NGN40.00 billion) and FX auctions.

In the coming week, we expect improved system liquidity as inflows from FGN bond coupon payments (NGN142.09 billion) and OMO maturities (NGN105.00 billion) are likely to offset funding pressures for CBN’s auctions. Thus, we expect the OVN to trend downwards.

Treasury Bills

Trading in the Treasury bills secondary market reversed recent demand trend and closed on a bearish note this week, largely driven by the expiration of actively traded OMO instruments. Consequently, the average yield across all instruments expanded by 7bps to 3.5%. Across the market segments, the average yield expanded by 61bps to 3.9% at the OMO segment. On Thursday, the CBN offered and allotted NGN40.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors (96DTM – 7.0%, 187DTM – 8.5% and 362DTM – 10.1%), as with prior auctions. Elsewhere, the average yield at the NTB segment was unchanged at 3.4%. At Wednesday’s NTB auction, the CBN offered NGN94.00 billion for sale and recorded significant demand with a total subscription amount of NGN482.90 billion (bid-to-offer ratio: 5.1x). Eventually, the CBN allotted NGN2.32 billion of the 91-day, NGN21.29 billion of the 182-day and NGN212.92 billion of the 364-day bills – at respective stop rates of 1.75% (previously 2.24%), 3.28% (previously 3.30%), and 4.10% (previously 4.35%).

Next week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. The CBN is set to roll over NGN58.04 billion worth of maturities to market participants at the auction. 

Bonds

The Treasury bonds secondary market sustained its bullish trading this week, as investors continued to take positions in attractive instruments ahead of further anticipated yield declines.  Accordingly, the average yield contracted by 17bps to 10.4%. Across the benchmark curve, the average yield declined at the short (-22bps), mid (-27bps) and long (-8bps) segments as investors demanded the APR-2023 (-154bps), JUL-2034 (-45bps) and MAR-2036 (-33bps) bonds, respectively.

We envisage the reinvestment of coupon payments will support demand from investors and push yields lower next week. Nonetheless, we are maintaining our medium-term view that the FG’s significant frontloading of borrowings for the year in H1-22 will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply. 

Foreign Exchange

Nigeria’s FX reserves position reversed last week’s accretion as it declined by USD102.51 million w/w to USD39.77 billion (9th March 2022). Meanwhile, the naira was flat at NGN416.50/USD at the I&E window (IEW) but depreciated by 0.3% w/w to NGN579.00/USD at the parallel market. At the IEW, total turnover (as of 10th March 2022) declined marginally by 0.4% WTD to USD550.64 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira was flat at the 1-month (NGN418.50/USD), 3-months (NGN424.52/USD), and 6-months (NGN433.31/USD) contracts but appreciated at the 1-year (+0.1% to NGN448.46/USD) contract.

In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.

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