Higher inflationary pressures remain entrenched in the United Kingdom (UK) as underlying price pressures remain robust. According to the Office for National Statistics (ONS), consumer prices settled higher at 10.1% y/y in September (August: 9.9% y/y). Decomposing the breakdown provided, we highlight that price pressures remain significant in the food (14.8% y/y vs August: 13.4% y/y) and core (6.5% y/y vs August: 6.3% y/y) baskets. Notably, the core inflation is at a 30-year high. At the same time, food prices are at their highest levels since April 1980 – reflective of the lingering impact of the Russia-Ukraine conflict, which added to the pressures from post-COVID supply chain disruptions. On a month-on-month basis, consumer prices were unchanged at 0.5% in September. The increase in the core inflation to a new record high suggests that broad-based pressures continue to build even as the headline CPI is primarily driven by high food and energy costs. Consequently, we expect the Bank of England (BOE) to remain pressured, maintaining its hawkish monetary policy stance at its next meeting on 3 November.

The Monetary Policy Committee of the People’s Bank of China (PBoC) voted to keep the Loan Prime Rate (LPR) steady at 3.65% at its October meeting. We highlight that this represents the second consecutive month of a HOLD decision after cutting the key policy rate by 5bps at the August policy meeting. We think the decision of the Committee to maintain the key policy rate at 3.65% was in line with the need to avoid a significant policy divergence in the face of synchronised monetary policy tightening in other major economies. Besides, we believe the Committee is caught in a dilemma of stemming the downward slide in the Yuan and supporting economic growth amid the lingering property sector’s woes and the government’s zero-COVID policy. We expect the PBoC to maintain the key policy rate at current levels over the short term as credit demand remains suppressed by intermittent COVID-19 lockdowns and real estate wobbles. Moreover, the persistent capital outflows, given the widened yield gap between the US Treasuries and Chinese bonds, lend credence to be more cautious with a cut or hike amid slow growth.

Global Markets

Global stocks were broadly positive this week, as investors’ sentiments were shaped by impressive corporate earnings and the expectations that the Fed would reduce the pace of tightening. Accordingly, US (DJIA: +2.4% and S&P 500: +2.3%) stocks are poised for another weekly gain as upbeat corporate earnings from Goldman Sachs Group Inc (GS.N), Johnson & Johnson (JNJ.N) and Lockheed Martin (LMT.N), and better-than-expected factory data fueled risk-on sentiments. In the same vein, European equities (STOXX Europe: +0.5% and FTSE100: +0.7%) were on track to close higher on optimism that UK economic and political turmoil could ease. Meanwhile, Asian markets (Nikkei 225: -0.7% and SSE: -1.1%) posted negative performances as investors assessed the (1) rising global interest rates, (2) weak Asian currencies, and (3) impact of the zero-Covid policy on China’s economy. Elsewhere, the Emerging (MSCI EM: +0.2%) market closed higher following gains in India (+2.7%), while the Frontier (MSCI FM: -0.6%) market declined on the back of bearish sentiments in the Vietnamese (-4.0%) market.

Nigeria

Economy

According to the National Bureau of Statistics, headline inflation remains at a 17-year high, rising by 25bps to 20.77% y/y in September (August: 20.52% y/y). The increase was primarily driven by the unfavourable base from the prior year amid the lingering existential challenges impeding and increasing production costs. Accordingly, food prices rose by 22bps to 23.34% y/y (August: 23.12% y/y) while the core inflation increased by 40bps to 17.60% y/y. On a month-on-month basis, the headline inflation eased by 41bps to 1.36% – the lowest print since November 2021 (1.08% m/m). Over the short term, we expect increased flooding incidents to (1) undermine food access and (2) negatively impact the distribution networks even as October is the period of increased food supplies as food produce from the primary harvest reach the market. At the same time, we expect the lingering currency pressures and elevated energy costs to keep the pressure on the core basket intact. Accordingly, we forecast consumer prices to rise by 1.43% m/m in October, translating to a year-on-year print of 21.31%.

According to the breakdown of the 2023 budget presented by the Finance Minister, the FGN proposes to spend NGN20.51 trillion in 2023; major components include non-debt recurrent expenditure (NGN8.27 trillion), debt service (NGN6.31 trillion) and aggregate capital expenses (NGN5.35 trillion). Similarly, the government expects to generate NGN9.73 trillion aggregate revenue, with 47.7% expected to come from both independent revenue and Government Owned Enterprises (GOEs) retained revenue. Accordingly, the government projects the fiscal deficit to settle higher at NGN10.78 trillion in 2023 (vs 2022 budget: NGN7.35 trillion). As usual, the Independent Revenue and GOEs retained revenue estimates are overoptimistic in our view, even as we expect the non-oil revenue performance to be in line with the budget. Notably, independent and GOEs retained revenue underperformed their prorated budget targets by 50.3% and 50.8%, respectively, as of 8M-22. However, we expect the government expenditure to be relatively in line with the target (7-year average: 91.2% performance). Consequently, we see the 2023E fiscal deficit higher than the budgetary estimates, indicating higher borrowing compared to 2022E levels.

Capital Markets

Equities

Local stocks logged their steepest decline in the year following bouts of profit-taking activities during the week. As a result, the All-Share Index declined by 6.7% w/w, to close at 44,396.73 points — its lowest point since 18 January  (44,655.89 points). Particularly, selloffs of top telecommunication player, AIRTELAFRI (-27.1%) underpinned the market’s performance. Consequently, the MTD loss increased to -9.4%, while the YTD return moderated significantly to +3.9%. However, activity levels were positive, as trading volume and value increased by 90.7% w/w and 40.1% w/w, respectively. Sectoral performance was mixed as the Industrial Goods (+3.2%), and Banking (+1.2%) indices advanced, while the Insurance (-3.7%), Oil and Gas (-1.5%), and Consumer Goods (-0.9%) indices declined.

With the significant moderation in the prices of bellwether stocks this week, we expect savvy investors to take advantage of this and make a re-entry into stocks with sound fundamentals and attractive dividend yields. However, we do not rule out the possibility of continued profit-taking activities. As a result, we envisage a choppy trading pattern. Nonetheless, 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 was flat at 16.5% on tighter system liquidity. Specifically, we highlight that the average liquidity level for the week settled lower at a net short position of NGN174.62 billion (vs net long position of NGN54.08 billion in the previous week) as debits for the FGN bond (NGN107.88 billion) and FX auctions outweighed the sole inflow from FGN bond coupon payments (NGN46.44 billion).

We expect the OVN rate to moderate from current levels next week. We believe the expected inflows from FGN bond coupon payments (NGN178.50 billion) and OMO maturities (NGN30.00 billion) would saturate and improve system liquidity.

Treasury bills

This week, the sustained illiquidity in the system drove another bearish sentiment in the Treasury bills secondary market, as local banks sold off positions to meet their financial obligations. Consequently, the average yield across all instruments expanded by 235bps to 10.3%. Across the segments, the average yield increased by 298bps to 10.3% at the NTB segment, but moderated by 2bps to 10.3% at the OMO secondary markets. 

Next week, we expect yields in the T-bills secondary market to trend southwards, given the anticipated inflows in the system. Also, we believe participants will shift focus to next week’s NTB PMA, as the CBN is set to roll over NGN240.26 billion worth of maturities.

Bonds

The Treasury bonds secondary market ended this week on a bearish note as investors continued to reprice bonds upwards following the (1) elevated interest rate in the environment and (2) September CPI reading (20.77%). As a result, the average yield expanded by 40bps to 14.1%, following profit-taking activities on the short (+83bps), mid (+31bps), and long (+10bps) spectrum of the curve. Precisely, sell-offs on the ARP-2023 (+325bps), NOV-2029 (+40bps), and APR-2037 (+38bps) bonds drove the week’s sentiments. This week, the DMO conducted the October 2022 FGN bond PMA on Monday (17 October). At this auction, instruments worth NGN225.00 billion were offered to investors through the reopenings of the 14.55% FGN APR 2029 (Bid-to-offer: 0.1x; Stop rate:  14.50%), 12.50% FGN APR 2032 (Bid-to-offer: 0.2x; Stop rate: 15.00%) and 16.2499% FGN APR 2037 (Bid-to-offer: 1.3x; Stop rate: 16.00%) bonds. Demand at the auction was low as total subscriptions across the offer instruments settled at NGN119.18 billion, with the DMO eventually allotting instruments worth NGN107.88 billion, resulting in a bid-cover ratio of 1.1x.

In the coming week, we believe the improved liquidity in the market following FGN bonds coupon payments will support investors’ demand and temper yields from current levels. Nonetheless, we maintain our stance of a sustained uptick in yields over the medium term as 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 USD114.56 million w/w to USD37.68 billion (20 October). Across the FX windows, the naira weakened against the dollar by 0.1% to NGN441.67/USD at the I&E window (IEW). At the IEW, total turnover (as of 20 October) decreased by 6.4% WTD to USD282.42 million, with trades consummated within the NGN423.00 – NGN459.42/USD band. In the Forwards market, the naira appreciated at the 1-month (+0.2% to NGN447.36/USD), 3-month (+0.3% to NGN454.29/USD), 6-month (+0.3% to NGN471.43/USD), and 1-year (+0.2% to NGN497.03/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 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.