Global Economy

In line with our expectations, the Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate to 0.25% – 0.50% (previously: 0.00% – 0.25%) whilst guiding that further increase in the target range will be appropriate. In addition, we highlight that the Committee expects to begin reducing its holdings of treasury and mortgage-backed backed securities at a coming meeting. In arriving at its decision, the Committee judged that while indicators of economic activity and employment have continued to strengthen, inflation remains elevated, reflecting (1) supply and demand imbalances related to the pandemic, (2) higher energy prices, and (3) broader price pressures. Besides, the Russia-Ukraine conflict has increased the uncertainties regarding the United States inflation path. Therefore, given the underlying tone of the Committee and the Russia-Ukraine conflict’s near-term impact on inflation and economic activity, we expect the Committee to further increase the policy rate by 0.25% at its next meeting in May. Indeed, members expect rate hikes at each of the remaining six meetings in 2022.

The Monetary Policy Committee (MPC) of the Bank of England (BOE) voted by a majority of 8 – 1 to increase the key policy rate by 25bps to 0.75%, representing the third consecutive increase and returning the benchmark rate to the pre-pandemic level. According to the Committee, an increase was warranted at the meeting given the (1) tight labour market conditions, (2) unrelenting domestic price pressures, and (3) increased risks that the inflationary pressures will persist. That said, the Committee judged that some further modest tightening in monetary policy might be appropriate in the coming months, depending on the evolution of the inflation’s medium-term prospects. We align with the Committee that a further hike in rates may be appropriate in the coming months given the improved labour market data and strong growth amidst the unrelenting inflationary pressures. However, we think a prolonged Russia-Ukraine conflict could have a significant spillover effect on the UK economy, inducing the Committee to be less hawkish later in the year.

Global Markets

This week, global stocks posted broadly positive performances as renewed optimism about global growth outweighed lingering geopolitical tensions arising from the Russia/Ukraine conflict. Accordingly, US (DJIA: +4.7%; S&P 500: +4.9%) stocks snapped a four-week rout buoyed by a rebound in tech stocks whilst investors digested Fed’s hawkish comments. European markets (STOXX Europe: +4.5%; and FTSE 100: +3.2%) were set for a second consecutive weekly gain as bets on risk assets gained traction following news of diplomacy talks between Russia and Ukraine. Asian markets posted mixed performances, as the Japanese Nikkei 225: (+6.6%) rallied mirroring the positive sentiments on Wall Street. Conversely, the SSE: (-1.8%) erased gains accumulated earlier in the week as investors anticipated the outcome of talks between US President Joe Biden and Chinese president, Xi Jinping. Emerging (MSCI EM: +3.2%) and Frontier (MSCI FM: +0.5%) market stocks mirrored the bullish trend across global stocks consequent upon gains in South Korea (+1.7%) and Vietnam (+0.4%), respectively.

Nigeria

Economy

Passthrough impact of higher fuel prices influenced consumer prices in February. According to the National Bureau of Statistics (NBS), headline inflation rose by 10bps to 15.70% y/y in February (January: 15.60% y/y). The increase was primarily driven by the core basket (+14bps to 14.01% y/y) in line with the increased utility prices amidst the global surge in energy prices. Accordingly, prices rose across the sub-components of the core inflation. Notably, the utilities (+37bps to 11.82% y/y) and transport (+4bps to 15.12% y/y) sub-baskets rose to their highest levels since May 2017 (12.91% y/y) and March 2017 (15.43% y/y), respectively. Although food prices (+25bps to 1.87% m/m) increased on a month-on-month basis, the favourable base from the prior year ensured prices eased marginally year-on-year (-2bps to 17.11% y/y). We expect the sustained impact of higher transport costs to exert upward pressure on food prices even as increased diesel prices are expected to stoke increases in the core inflation. Consequently, we forecast headline inflation to print 1.71% m/m in March, translating to a 17bps rise in y/y inflation rate to 15.87%.

According to the recently released trade report by the National Bureau of Statistics (NBS), total exports increased by 80.5% y/y in Q4-21 to NGN5.77 trillion (Q3-21: +71.6% y/y) given the growth across all the components of the country’s exports. Notably, crude oil exports (74.0% of total exports) grew by 69.3% y/y in line with the rally in crude oil prices (average of USD79.55/bbl. in Q4-21. vs Q4-20: USD44.29/bbl.). Meanwhile, total imports grew by 69.4% y/y to NGN5.94 trillion in Q4-21 (Q3-21: +67.6% y/y) amidst the (1) recovery in domestic demand and (2) elevated global price level. Accordingly, the trade deficit settled at NGN173.96 billion in Q4-21 (Q3-21: NGN199.31 billion). Given the revised figures for 2020FY and 9M-21, we highlight that the trade deficit settled at NGN1.94 trillion in 2021FY (2020FY: NGN178.26 billion trade deficit). Although we expect the lingering increase in crude oil prices to support exports over the short term, we expect the impact to be tethered by low crude oil production volume. Elsewhere, we expect the continued rebound in domestic demand to continue to drive total imports. Accordingly, we expect the trade balance to remain in a deficit position over the short term.

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. 

In the week ahead, we believe investors will focus on the outcome of the bond auction and the MPC meeting to gain further clarity on the movement of yields in the FI market. As a result, we envisage cautious buying actions from dividend-yield-seeking investors amid intermittent profit-taking activities. Notwithstanding, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 467bps w/w, to 9.67%, as late debits for Net NTB issuances (NGN114.57 billion), OMO (NGN40.00 billion) and FX auctions offset inflows from FGN bond coupon payments (NGN142.09 billion) and OMO maturities (NGN105.00 billion).

We expect the OVN rate to trend northwards, as outflows for next week’s auctions (FX and FGN bond) and arbitrary CRR debits, if any, are likely to offset the inflows from OMO maturities (NGN105.00 billion) and FGN bond coupon payments (NGN37.72 billion).

Treasury Bills

Proceedings in the Treasury bills secondary market closed the week on a bullish note as the healthy system liquidity fostered demand for short to mid-dated bills. However, we observed some level of inactivity in the early part of the week, with market participants shifting their focus to the PMAs in both market segments. Against the preceding, the average yield across all instruments declined by 11bps to 3.4%. Across the market segments, the average yield fell by 30bps and 13bps to 3.6% and 3.3% at the OMO and NTB segments, respectively. At this week’s OMO auction, the CBN sold NGN40.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions. At the NTB auction, the CBN offered NGN58.04 billion – NGN960.66 million of the 91-day, NGN3.61 billion of the 182-day, and NGN53.46 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN172.61 billion – NGN5.91 billion of the 91-day, NGN6.85 billion of the 182-day and NGN159.85 billion of the 364-day bills – at respective stop rates of 1.74% (previously 1.75%), 3.00% (previously 3.28%), and 4.00% (previously 4.10%).

With system liquidity expected to tighten in the coming week, we envisage an increase in the average yields on T-bills from current levels.

Bonds

The Treasury bonds secondary market retraced this week and turned bearish, as only a handful of trades were consummated following weakened demand. We suspect that investors held on to idle funds in anticipation of next week’s PMA. Accordingly, the average yield expanded by 10bps to 10.5%. Across the benchmark curve, despite the weakened activity levels, we still witnessed cherry-picking on attractive mid- to long-dated instruments. Precisely, the average yield across the curve 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.

In the coming week, we expect the outcome of the March 2022 FGN auction holding on Monday (March 21) to influence the direction of yields in the bonds secondary market. At the auction, the DMO is offering instruments worth NGN150.00 billion through re-openings of the 12.5000% FGN JAN 2026 and 13.0000% FGN JAN 2042 bonds. We maintain our yield uptick stance in the medium term, as the FGN’s borrowing plan (NGN2.57 trillion) for 2022FY points to elevated supply.