According to the Bureau of Labor Statistics (BLS), the US headline inflation slowed below market expectation (8.7% y/y), moderating by 60bps to 8.5% y/y in July (June: 9.1% y/y). Although the headline inflation remains significantly high, reflecting existing challenges, we highlight a slowdown in energy prices primarily drove the moderation in the review period after hitting a 42-year high in June. Specifically, energy prices moderated by 8.70ppts to 32.9% y/y (June: 41.6% y/y) given the lower costs of gasoline, fuel oils and natural gas. On a month-on-month basis, consumer prices were flat after hitting a 17-year high in June (1.3% m/m). We now look for further moderation in the consumer prices in the short term, albeit still significantly above pre-pandemic levels, given the (1) slowdown in global food prices as concerns over supplies of grains and vegetable oil have started to ease and (2) recent slump in crude oil prices. On the former, the FAO World Food Price Index declined for the fourth consecutive month, dropping by 8.6% m/m in July. The high base effects from the corresponding periods of the prior year could also provide some statistical respite to the headline inflation.

The United Kingdom (UK) recorded its first economic contraction in more than a year as the higher cost of living continues to exert downward pressure on household spending. According to the Office for National Statistics (ONS), the UK’s real GDP declined by 0.1% q/q in Q2-22 (Q1-22: +0.8% q/q) – the first economic decline since Q1-21 (-1.6% q/q). Parsing through the breakdown provided, we highlight that the private consumption (-0.1% q/q vs Q1-22: +0.5% q/q) and general government expenditure (-2.9% q/q vs Q1-22: -1.3% q/q) declined while gross fixed capital formation (+0.6% q/q vs Q1-22: +3.8% q/q) grew at a slower pace. On a year-on-year basis, GDP increased slowly by 2.9% (Q1-22: 8.7% y/y), supported by the unfavourable base from the prior year. We expect economic growth to remain pressured in the short-to-medium term, given the troika effects of (1) tight finance conditions, (2) fall in real incomes, and (3) supply constraints exacerbated by the Russia-Ukraine conflict. Indeed, the Bank of England (BOE) now projects the economy to be in an economic recession from Q4-22.

Global Markets

Equities markets around the globe edged higher as lower-than-expected US inflation data stoked expectations that the Federal Reserve could pivot to a slower pace of interest-rate hikes, amid prospects of global economic growth. Accordingly, US (DJIA: +1.6% and S&P 500: +1.5%) stocks were on track to close positively. Likewise, European equities (STOXX Europe: +1.2% and FTSE 100: +0.5%) nudged higher as investors digested a slew of economic data and corporate earnings reports. Similarly, Asian markets (Nikkei 225: +1.3% and SSE: +1.5%) posted weekly gains taking a cue from the positive sentiments on Wall Street. The Emerging (MSCI EM: +1.1%) and Frontier (MSCI FM: +1.0%) markets mirrored the bullish sentiments across global equities consequent upon gains in China (+1.5%) and Vietnam (+0.5%), respectively.

Nigeria

Economy

Nigeria’s crude oil production (including condensates) reversed June’s uptrend, creating more headaches for the oil sector. According to the recently released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) declined by 6.4% m/m to 1.31mb/d in July (June: 1.40mb/d). Predictably, the persistent low crude oil production volume reflects the lingering passthrough impact of (1) infrastructure decay, (2) massive theft and vandalism, and (3) divestments, given the challenging business environment amidst the shift to cleaner energy sources. Notably, crude oil production declined significantly across the Brass (-58.8% m/m), Forcados (-24.2% m/m), Bonny (-21.8% m/m), and Bonga (-10.2% m/m) production terminals. The consistent low crude oil production volume suggests that the oil GDP could drag overall growth in 2022FY amidst the continued resilience of the non-oil sector. Overall, we do not expect a significant improvement in crude oil production over the short term, given the nature of challenges hampering production. Despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short-to-medium term.

Recall that in February 2022, SEPLAT announced the acquisition of the entire offshore shallow water business (Mobil Producing Nigeria Unlimited) of Exxon Mobil in Nigeria; the Nigerian National Petroleum Corporation (NNPC) later announced that it was exercising the right of first refusal over the sale. On Monday, 8 August, President Buhari (also the petroleum minister) approved SEPLAT’s acquisition of the entire share capital of Exxon Mobil’s Nigeria business. However, a few hours later, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) sent a circular rescinding the approval, reiterating that it is exercising its right of first refusal in respect of the deal. On Wednesday, the President reversed the approval, aligning with the NUPRC. In our opinion, this development adds to the regulatory uncertainties and ambiguities surrounding the Nigerian investment landscape, sending wrong signals to investors. Accordingly, it could further add to the oil sector’s existing woes, dimming the hopes of fresh investments over the medium term. Nonetheless, if the deal is finally approved for SEPLAT, we expect it to be a positive catalyst for boosting SEPLAT’s crude oil production, ultimately benefiting the country.

Capital Markets

Equities

The bears dictated proceedings in the domestic bourse, as profit-taking activities dominated market performance, with the benchmark index recording declines on four of the five trading sessions of the week. Precisely, the All-Share Index dipped by 2.1% w/w, to close at 49,664.07 points. Notably, selloffs of MTNN (-6.9%), BUACEMENT (-10.0%), DANGCEM (-2.3%) and STANBIC (-9.7%) stocks led to the weekly loss. Consequently, the MTD loss increased to -1.4%, while the YTD gain moderated to +16.3%. However, activity levels were positive, as trading volume and value increased by 114.1% w/w and 5.4% w/w, respectively. Analysing by sectors, the Industrial Goods (-5.2%), Banking (-0.9%), and Oil and Gas (-0.4%) indices declined, while the Insurance (+6.0%) and Consumer Goods (+3.0%) indices closed positive.

In the week ahead, we believe investors will focus on the outcome of the bond auction scheduled to hold on Monday (August 15) 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 unimpressive macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate contracted by 2.00ppts w/w to 13.0%, despite the tepid funding conditions in the system amid inflow from OMO maturities (NGN5.00 billion). We estimate that system liquidity this week averaged a net short position of NGN20.82 billion (vs a net long position of NGN98.45 billion in the previous week).

We expect the OVN rate to tilt upward next week, as the NGN100.00 billion expected from OMO maturities may not be sufficient to offset the outflows from CBN’s auctions (FGN Bond, OMO and FX).

Treasury bills

Activities in the Treasury bills secondary market were bearish, as the average yield across all instruments expanded by 12bps to 8.7%. We attribute this bearish sentiment to participants shifting their focus to the bi-weekly PMA during the week. At this auction, the CBN offered NGN150.62 billion – NGN1.02 billion of the 91-day, NGN1.82 billion of the 182-day, and NGN147.78 billion of the 364-day – in bills. As in the previous auction, the auction closed with the CBN allotting precisely what was offered at respective stop rates of 3.50% (previously 2.80%), 4.50% (previously 4.10%), and 7.45% (previously 7.00%). Across the segments, the average yield increased by 31bps and 1bp to 7.8% and 11.1% at the NTB and OMO secondary markets, respectively. 

Next week, we expect the yields on T-bills to maintain the same trajectory, following the thin liquidity expected in the system.

Bonds

Bearish sentiments persisted at the Treasury bonds secondary market this week as the average yield expanded by 45bps to 12.7%. This, we attribute to weak demand witnessed this week as investors positioned ahead of next week’s bond PMA. Across the benchmark curve, the average yield inched higher at the short (+83bps), mid (+55bps), and long (+8bps) segments as investors took profit off the APR-2023 (+163bps), FEB-2028 (+84bps), and MAR-2035 (+45bps) bonds, respectively.

In the coming week, we expect the outcome of the August 2022 FGN auction holding on Monday (15 August) to influence the sentiments in the Treasury bond secondary market. At the auction, the DMO will offer instruments worth NGN225.00 billion through re-openings of the 13.53% FGN MAR 2025, 12.5000% FGN APR 2032 and 13.0000% FGN JAN 2042 bonds. Notwithstanding, we maintain our stance that yields will continue to rise over the short-term given that the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

This week, Nigeria’s FX reserves decreased by USD166.49 million w/w to USD38.88 billion (11 August). Across the FX windows, the naira weakened against the dollar by 0.3% to NGN429.63/USD at the I&E window (IEW) and by 2.2% to NGN675.00/USD at the parallel market. At the IEW, total turnover (as of 11 August 2022) decreased by 38.0% WTD to USD325.60 million, with trades consummated within the NGN415.00 – NGN444.00/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.1% to NGN429.51/USD) and 1-year (-0.6% to NGN482.24/USD) contracts, but appreciated at the 3-month (+0.1% to NGN438.51/USD) and 6-month (+2.0% to NGN452.24/USD) contracts.

Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term.