Global Economy

For the fourth consecutive month, United States’ consumer prices eased – even as it remains near four-decade highs – as energy costs maintained its downward trend. According to the Bureau of Labor Statistics (BLS), the US headline inflation settled at 7.7% y/y in October (September: 8.2% y/y) – its lowest print in ten months. As earlier stated, the moderation was primarily driven by the slowdown in energy prices (17.6% y/y vs September: 19.8% y/y), coupled with decreases in food costs (10.9% y/y vs September: 11.2% y/y) and prices of used cars and trucks (2.0% y/y vs September: 7.2% y/y). On a month-on-month basis, consumer prices increased by 0.4% (September: +0.4% m/m). Although we expect that prices will moderate further in the near term, given the ease in energy prices and some improvement in supply chain bottlenecks, a low unemployment rate 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.

According to the Office for National Statistics (ONS), the UK’s real GDP contracted by 0.2% q/q in Q3-22 (Q2-22: +0.2% q/q), as higher consumer prices and increased interest rates dampened household spending and business investment. Analysing the breakdown provided, we highlight that private consumption (-0.5% q/q vs Q2-22: +0.2% q/q) and business investments (-0.5% q/q vs Q2-22: +3.7% q/q) declined while general government expenditure grew by 1.3% q/q (Q2-22: -1.5% q/q). Notably, we highlight that the UK is the only G7 country yet to fully recover from the COVID-19 slump. On a year-on-year basis, the economy grew slower by 2.4% (Q2-22: +4.4% y/y). We expect economic growth to remain pressured in the short-to-medium term, given the troika effects of (1) tight monetary conditions, (2) a fall in real household incomes, and (3) supply constraints exacerbated by the Russia-Ukraine conflict. Accordingly, the economy is on course for its fastest return to recession since the mid-1970s; the BOE highlighted that the economy could shrink in five of the six quarters until the end of 2023.

Global Markets

Positive sentiments dominated the global equities market as appetite for risk assets strengthened following a slower-than-projected US inflation data which bolstered hopes of less aggressive interest rate hikes from the Federal Reserve. Accordingly, US (DJIA: +4.0% and S&P 500: +4.9%) stocks rallied as signs of cooling inflation fueled interest in tech stocks. In the same vein, European equities (STOXX Europe: +4.1% and FTSE 100: +0.8%) were on track to close higher, supported by positive sentiments in US and China amid recession fears following weak UK GDP data. Similarly, Asian markets (Nikkei 225: +3.9%; and SSE: +0.5%) posted gains, taking a cue from the Wall Street rally and a boost from Beijing’s zero-Covid policy easing signals. Elsewhere, the Emerging (MSCI EM: +0.5%) market was buoyed by the gains in China (+0.5%), while the Frontier (MSCI FM: -0.6%) market declined following bearish sentiments in the Vietnamese (-4.3%) market.

Nigeria

Economy

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates bucked three consecutive months of decline, increasing by 8.2% m/m to 1.23mb/d in September (August: 1.14mb/d). The increase was primarily driven by the Forcados (83.59kb/d vs August: 4.48kb/d) oil terminal as Shell Petroleum Development Company Limited (SPDC) resumed crude oil export at the terminal on 20 October after about three months of shutdown for essential repairs. Bonny (+772.0% m/m), Brass (+98.0% m/m) and Escravos (+26.5% m/m) terminals also supported the higher crude oil production in the review period. However, the crude oil production remains significantly below the country’s OPEC+ quota (1.83mb/d), reflecting lingering challenges. Although we expect the Forcados terminal to continue to support oil production volume in the short term, we expect it to remain below the pre-COVID production high (c. 2.10mb/d) over the medium term. Accordingly, oil GDP could remain a drag on overall GDP growth. In addition, despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short term.

FX liquidity conditions remain weak at the Investors and Exporters Window (IEW) despite the CBN’s efforts at boosting FX inflows to the IEW through incentivising non-oil exports. Expressly, inflows into the IEW declined to their lowest level since April 2021, falling by 41.2% m/m to USD676.80 million in October (September: USD1.15 billion). On the one hand, the inflows from foreign investors declined for the fourth consecutive month to USD72.0 million – the lowest print in 19 months, given the lack of reforms in the FX framework, higher global interest rates and, weak macroeconomic narratives. On the other hand, domestic investors’ inflows declined by 42.5% m/m to USD604.80 million as the euphoria from exporters’ (-46.2% m/m) inflows cooled. Over the short-to-medium term, we do not expect liquidity conditions to retrace towards pre-pandemic levels due to still weak inflows from foreign investors (53.8% of total IEW inflows in 2019). We think foreign investors will need more convincing actions from the CBN as regards flexibility and clarity in the foreign exchange framework before a resurgence of interest in the market, as witnessed in 2017 when the IEW was established.

Capital Markets

Equities

Activities in the domestic bourse took a negative turn this week as the loss recorded on the second trading day (-1.8%) proved sufficient in wiping off the cumulative 1.2% gain as of Friday. Precisely, the All-Share Index declined by 0.7% to 43,968.75 points, driven by sell-offs in GUINNESS (-10.0%), FLOURMILL (-9.9%), NB (-6.3%), MTNN (-2.0%) and DANGCEM (-0.8%). Consequently, the MTD and YTD returns printed +0.3% and +2.9%, respectively. Likewise, activity levels were weaker than the prior week, as trading volume and value declined by 21.9% w/w and 24.5% w/w, respectively. Elsewhere, the performances across sectors were broadly negative, as all our coverage indices – the Insurance (-2.2%), Consumer Goods (-1.9%), Oil and Gas (-0.7%), and Industrial Goods (-0.3%) — save for the Banking (+0.2%) index, printed losses.

We expect bearish sentiments to remain predominant next week in the absence of any positive triggers to turn the tide for Nigerian equities. Nonetheless, 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

Just as we envisaged, the overnight (OVN) rate expanded by 400bps to 12.8% this week, as the net NTB issuances (NGN117.09 billion) and OMO auction (NGN20.00 billion) debits outweighed the sole inflow from OMO maturities (NGN15.00 billion). We highlight that the average liquidity level remained at a net long position of NGN378.28 billion (vs net long position of NGN407.81 billion in the previous week).

We believe the outflows for next week’s auctions (FGN bonds, OMO & FX) and possible CRR debits will pressure the system liquidity. Thus, we expect the OVN rate to trend northwards next week.

Treasury bills

The buoyant system liquidity triggered bullish sentiments in the NTB secondary market this week, as market participants took positions at the short and mid spectrums of the curve to cover for lost bids at the NTB PMA. Consequently, the average yield across all instruments dipped by 40bps to 10.5%. Across the market segments, the average yield contracted by 50bps to 10.6% in the NTB segment and declined marginally by 2bps to 10.2% in the OMO secondary market. At this week’s NTB PMA, the CBN offered NGN193.03 billion – NGN21.15 billion of the 91-day, NGN32.83 billion of the 182-day, and NGN139.06 billion of the 364-day – in bills. At the auction, demand was higher at a total subscription level of NGN520.92 billion with more demand skewed towards the longer-dated bills (NGN499.42 billion translating to 95.9% of the total subscription). Eventually, the CBN allotted NGN310.12 billion – NGN4.52 billion of the 91-day, NGN5.44 billion of the 182-day, and NGN300.16 billion of the 364-day bills – at respective stop rates of 6.50% (unchanged), 8.05% (unchanged), and 13.99% (previously: 14.50%).

With system liquidity expected to be tight in the coming week, we anticipate an increase in the average yield on T-bills from current levels.

Bonds

The FGN bonds secondary market turned bullish this week, as the average yield dipped by 6bps w/w to 14.5%. We attribute this performance to investors cherry-picking attractive bonds in higher-yield environments particularly at the short and mid segments of the naira curve. Across the curve, the average yield contracted at the short (-15bps) and mid (-13bps) segments following bargain-hunting activities on the JAN-2026 (-35bps) and NOV-2029 (-16bps) bonds, respectively. However, sell-offs were witnessed at the long (+8bps) end as investors sold off the MAR-2036 (+37bps) bond.

We expect the outcome of the FGN auction holding on Monday (14 November) to shape the sentiments in the Treasury bond secondary market next week. At the auction, the DMO will offer instruments worth NGN225.00 billion through re-openings of the 14.55% FGN APR 2029, 12.50% FGN APR 2032, and 16.2499% FGN APR 2037 bonds. Notwithstanding, in the medium term, we maintain our view of an uptick in bond yields, as both the FGN’s borrowing plan for 2022FY and the expected fiscal deficit point towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserves sustained its decline for the tenth consecutive week, falling by USD141.14 million w/w to USD37.22 billion (10 November). As a result, the naira depreciated by 0.1% to NGN445.75/USD at the I&E window (IEW). At the IEW, the total turnover (10 November) advanced by 9.7% WTD to USD461.91 million, with trades consummated within the NGN432.00 – NGN461.22/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.5% to NGN451.06/USD), 3-month (-0.5% to NGN460.71/USD), 6-month (-0.1% to NGN476.91/USD), and 1-year (-0.2% to NGN503.46/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. Moreover, 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 significantly attract foreign inflows back to the market.