Global Economy

According to the Bureau of Labor Statistics (BLS), the US headline inflation eased for the second consecutive month, albeit above market expectation (8.1% y/y), moderating by 20bps to 8.3% y/y in August (July: 8.5% y/y). Although the headline inflation remains significantly high, reflecting existing challenges, we highlight that moderation in energy prices was the primary driver of the slowdown in consumer prices in the review month. For context, energy prices eased for the second consecutive month to 23.8% y/y (July: 32.9% y/y), given a slower rise in gasoline and fuel oil costs. On a month-on-month basis, consumer prices increased by 0.1% after being unchanged in July. Although we expect that prices will moderate further in the near term given the ease in energy prices, a resilient labour market poses an upside risk in the form of higher wage growth, keeping broad inflationary pressures intact. Accordingly, we expect the US Fed to maintain its tightening cycle in the short term. Indeed, the Fed is set for its next policy meeting on 21 September, with a rate hike of as much as 75bps pencilled into consensus estimates.

The United Kingdom (UK) headline inflation eased for the first time in 11 months as the prices of vehicle fuels and lubricants recorded their largest monthly decline since April 2020. According to the Office for National Statistics (ONS), consumer prices moderated to 9.9% y/y in August – 20bps lower than the 40-year high recorded in July (10.1% y/y). Given that a fall in petrol prices was the primary driver of the moderation in inflation, motor fuel prices (32.1% y/y vs July: 43.7% y/y) made the largest downward contribution to the headline inflation, offsetting the impact of dearer food prices (13.1% y/y vs July: 12.7% y/y). On a month-on-month basis, consumer prices rose by 0.5% (July: 0.6% m/m). We expect inflationary pressures to remain pressured upwards in the near term, with the Bank of England expecting inflation to top out at 13.3% in October and remain at very elevated levels throughout much of 2023. The preceding suggests that the current slowdown in the inflation rate is unlikely to alter expectations of a rise in interest rates when the BoE meets on 21 September.

Global Markets

Global stocks plummeted this week, as jitters in Wall Street over a slowdown in global demand reverberated across the major markets. At the same time, investors remain worried about the effects of aggressive rate hikes on the global economy and in turn, earnings growth. Accordingly, US (DJIA: -3.7% and S&P 500: -4.1%) stocks were set for another weekly loss. Likewise, European (STOXX 600: -1.3% and FTSE 100: -0.9%) stocks were also on course for a negative close, with further pressures stemming from a fall in UK retail sales (-1.6% m/m vs July: +0.4% m/m). Elsewhere, Asian markets (Nikkei 225: -2.3%; SSE -4.0%) posted negative performance following the rout on Wall Street and investors’ reaction to the People’s Bank of China pausing its monetary easing measures. In the same vein, the Emerging (MSCI EM: -1.2%) and Frontier (MSCI FM: -1.2%) markets mirrored the bearish trend across global stocks consequent upon the losses in China (-4.1%) and Vietnam (-0.8%), respectively.

Nigeria

Economy

Recently released data by the National Bureau of Statistics (NBS) showed that the headline inflation increased by 88bps to 20.52% y/y in August (July: 19.64% y/y) – the highest print in 17 years. On the one hand, food inflation rose to its highest level since October 2005 (24.56% y/y), increasing by 110bps to 23.12% y/y (July: 22.02% y/y), driven by the low statistical base effect from the prior year amid the lingering existing challenges impeding food production and supply. On the other hand, the core inflation notched higher by 94bps to 17.20% – the highest print since January 2017 (17.87% y/y). The elevated core inflation reflects the increase in fuel prices and currency pressures compared to the prior year. We expect price pressures to be sustained across the food and non-food baskets in the short term. Accordingly, we forecast the headline CPI to settle at 1.70% m/m in September, with the unfavourable base effect in the corresponding period of 2021 cascading to a 66bps increase in y/y inflation rate to 21.18%.

According to the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 51.3% y/y to NGN714.40 billion in Q2-22 (Q2-21: NGN472.07 billion). Analysing the breakdown, we highlight that the increase was due to broad-based growth across local collection (+51.8% y/y to NGN634.01 billion) and foreign CIT payment (+55.8% y/y to NGN80.39 billion). We think the growth in the local collection was underpinned by improved business activities consistent with the strong corporate earnings delivered by companies during the review period. Simultaneously, the increase in foreign collections continues to reflect the impact of the provision of the 2021 Finance Act, which includes a 6.0% tax on the turnover of e-commerce (including digital services) businesses by non-resident companies. On a quarter-on-quarter basis, we highlight that the CIT collection increased by 29.5% (vs Q1-22: +58.6% q/q to NGN551.53 billion). In the absence of any major shock to the economy, we expect the CIT collections to continue to improve, albeit slowly, over the short term. Our expectation of a moderate rise is in line with the normalisation of business activities after the initial post-COVID boost in 2021FY.

Capital Markets

Equities

Bearish sentiments continued to pervade the domestic equities market as the All-Share Index dipped by 0.4% w/w to close at 49,475.42 points. Notably, sell-offs of some banking stocks – FBNH (-5.7%), ACCESSCORP (-6.2%), UBA (-6.0%), ZENITHBANK (-1.5%) and UBN (-4.2%) – led the weekly loss. Consequently, the MTD and YTD returns printed -0.7% and +15.8%, respectively. Activity levels were weak, as trading volume and value declined by 24.3% w/w and 14.1% w/w, respectively. Sectoral performance was negative as all the five sectors in our coverage posted losses. The Banking (-3.3%) index led the decline, followed by the Insurance (-2.6%), Consumer Goods (-0.3%), Industrial Goods (-0.2%) and Oil & Gas (-0.2%) indices.

We expect alpha-seeking investors to rotate their portfolios towards cyclical stocks that delivered decent earnings during the Q2-22 earnings season amid the yield uptick in the FI market. However, we think the absence of a near-term catalyst will likely skew overall market sentiments to the negative side, particularly as the political space gets heated. 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

In line with our expectations, the overnight (OVN) rate expanded by 117bps, w/w, to 10.2%, as outflows for CBN’s weekly auctions – OMO (NGN20.00 billion) & FX – outweighed the inflows from FGN bond coupon payment (NGN51.12 billion) and OMO maturities (NGN35.00 billion). Notwithstanding, the average system liquidity level settled higher, at a net long position of NGN212.55 billion (vs a net long position of NGN78.72 billion in the previous week).

In the coming week, we expect system liquidity to tighten as the debit for FGN bond auction (NGN225.00 billion) may most likely overshadow the inflow from FGN bond coupon payment (NGN157.84 billion). Thus, we expect the OVN rate to trend upwards.

Treasury bills

The Treasury bills secondary market closed with bearish sentiments this week as the healthy system liquidity continued to underpin demand for bills. Consequently, the average yield across all instruments dipped by 10bps to 8.3%. Across the segments, the average yield contacted by 11bps and 21bps to 10.6% and 7.6% at the OMO and NTB secondary markets, respectively. That said, this week, the CBN conducted an OMO auction, where they offered and sold NGN20.00 billion worth of bills. At the auction, stop rates were maintained at 7.00%, 8.50% and 10.10%, respectively. Elsewhere at the NTB PMA, the CBN offered NGN159.60 billion – NGN11.44 billion of the 91-day, NGN21.85 billion of the 182-day, and NGN126.31 billion of the 364-day – in bills. As in previous auctions, the CBN allotted precisely what was offered at respective stop rates of 5.50% (unchanged), 6.00% (previously 5.85%), and 9.75% (previously 10.00%).  

Following the lower inflows expected in the system next week, we expect a low demand for T-bills and a slight expansion in yields from current levels.

Bonds

This week, bullish sentiments persisted in the FGN bonds secondary market as investors continued to cherry-pick instruments with attractive yields. As a result, the average yield across instruments dipped by 24bps to 12.7%. Across the benchmark curve, the average yield contracted at the short (-79bps) end following the bargain hunting on the APR-2023 (-383bps) bond, but was unchanged at the mid and long segments. 

In the coming week, we expect the outcome of the September 2022 FGN auction holding on Monday (19 September) 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 16.2499% FGN APR 2037 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 reserve recorded another decline, falling by USD228.63 million w/w to USD38.69 billion (15 September). Across the FX windows, the naira was flat at NGN436.25/USD at the I&E window (IEW) but depreciated by 0.1% to NGN709.00/USD at the parallel market. At the I&E window, total turnover (as of 24 September) increased by 5.4% WTD to USD367.63 million, with trades consummated within the NGN414.00 – 452.17/USD band. In the Forwards market, the rate was flat at the 1-month (NGN435.85/USD) contract, but appreciated at the 3-month (+0.1% to NGN440.08/USD) and 1-year (+0.1% to NGN475.74/USD) contracts. The rate depreciated at the 6-month (-0.1% to NGN452.42/USD) contract.

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 that historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term. 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.