The continued increase in household energy costs and food prices pushed the United Kingdom’s (UK) headline inflation to a 41-year high. According to the Office for National Statistics (ONS), consumer prices rose by 100bps to 11.1% y/y in October (September: 10.1% y/y) – the highest print since October 1981 (11.2% y/y). The increased prices reflect the lingering impact of the Russia-Ukraine conflict amid demand pressures induced by higher wages. Accordingly, food prices (16.2% y/y vs September: 14.5% y/y) rose at their fastest rate since September 1977 (17.6% y/y) while the core inflation (6.5% y/y vs September: 6.5% y/y) remains at a 30-year high. On a month-on-month basis, consumer prices rose by 2.0% (September: 0.5% m/m) – the biggest increase in seven months. Over the short term, we expect consumer prices to remain tilted to the upside as energy and food prices remain elevated. In addition, demand pressures are likely to remain intact because of higher wages induced by the tight labour market. Consequently, we expect the Bank of England (BOE) to remain pressured, maintaining its hawkish monetary policy stance over the short term.

According to the Eurostat, the Euro Area economy expanded slowly by 0.2% q/q in Q3-22 (Q2-22: 0.8% q/q) – the slowest growth since the rebound from the COVID-19 pandemic. The subdued growth reflects the lingering impact of elevated price pressures, souring consumer sentiments and tighter monetary conditions in the region. Notably, we highlight that Italy (+0.5% q/q vs Q2-22: +1.1% q/q), Spain (+0.2% q/q vs Q2-22: +1.5% q/q), and Germany (+0.3% q/q vs Q2-22: +0.1% q/q) recorded growth, offsetting the contraction in Latvia (-1.7 q/q vs Q2-22: 0.0% q/q) Belgium (-0.1% q/q vs Q2-22: +0.5% q/q), and Austria (-0.1% q/q vs Q2-22: +1.9% q/q). However, on a year-on-year basis, the euro area expanded by 2.1% y/y in Q3-22 (Q2-22: 4.1% y/y). We expect the regional bloc’s economy to shrink over the short-to-medium term, given the troika impact of (1) tightening financial conditions, (2) elevated inflationary pressures, and (3) lingering supply chain constraints exacerbated by the Russia-Ukraine conflict. Notably, we understand that the European Commission now expects the bloc to contract in Q4-22 and Q1-23 as surging energy costs and high-interest rates undermine aggregate consumption.

Global Markets

The global equities market settled lower as the Fed’s stance on subsequent rate hikes dampened investors’ sentiments and reignited concerns over a Fed-induced recession. Accordingly, US (DJIA: -0.6% and S&P 500: -1.2%) stocks pared back gains as investors weighed hawkish signals from the Federal Reserve. Likewise, European equities (STOXX Europe: -0.9% and FTSE 100: +0.4%) posted mixed performances as investors assessed the (1) rising political tensions over a missile strike on Poland, (2) UK fiscal policy announcement and (3) latest UK inflation data. Likewise, mixed sentiments dominated Asian markets — Japanese equities (Nikkei 225: -1.3%) mirrored Wall Street’s slump as investors dumped riskier assets on recession worries, while the Chinese market (SSE: +0.3%) traded positively as risk sentiments were buoyed by signs of China’s COVID-19 policy pivot and stimulus measures in China’s property sector. Similarly, the Emerging (MSCI EM: +0.7%) and Frontier (MSCI FM: +2.2%) markets stocks closed higher, following positive sentiments in China (+0.3%) and Vietnam (+0.7%), respectively.

Nigeria

Economy

According to the National Bureau of Statistics (NBS), consumer prices maintained their uptrend for the ninth consecutive month, rising by 31bps to 21.09% y/y in October (September: 20.77% y/y). The persistent price pressures reflect the synchronised effects of (1) elevated gas and other energy prices, (2) lingering currency pressures, (3) increased flooding incidents, (4) build-up of higher naira liquidity as the campaign season starts, (5) unfavourable base effects from the prior year, and (6) lingering structural challenges impeding food supply. Thus, food prices (+39bps to 23.72% y/y) remain at a 17-year high, while the core inflation (+16bps to 17.76% y/y) is at its highest level since January 2017 (18.87% y/y). On a month-on-month basis, the headline inflation moderated by 11bps to 1.24% – tracking lower than the 10M-22 average (1.64% m/m). Over the rest of the year, we expect the headline inflation to be influenced by the (1) base effects from the prior year, (2) existing challenges and (3) increased demand that accompanies the festive season. Consequently, we now look for a m/m headline inflation of 1.31% in November and 1.34% in December, translating to y/y readings of 21.37% y/y and 20.79% y/y, respectively.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its last meeting of the year on the 21st and 22nd of November. We note that in the last two meetings, the CBN governor maintained during the post-MPC conferences that the MPC would maintain its interest rate hikes until there is a deceleration in the inflation path, more so that “time-tested monetary policy has shown that inflation must lag policy rates” according to him. Besides, consumer price levels at a 17-year high have a dire implication on macroeconomic stability, depressing the long-run potential GDP. Thus, we believe the MPC would march on with its interest rate hike to re-anchor inflation expectations, which an econometric study by the CBN shows is the most significant driver of actual inflation in Nigeria, according to one of the Committee members. Overall, we expect the MPC to raise the MPR further by 100bps, given the continued hawkish rendition of global central banks amid a comfortable level of domestic growth and persistent domestic inflationary pressures.

Capital Markets

Equities

Local stocks closed in the green territory despite pressure from profit-taking activities during the week. Pertinently, the All-Share Index ended the week 1.2% higher, settling at 44,492.73 points. Precisely, bargain buying in GTCO (+10.8%), NB (+10.3%), STANBIC (+9.1%), ZENITHBANK (+7.0%) and MTNN (+2.6%) amid sell-offs of GUINNESS (-19.0%), WAPCO (-5.6%) and DANGSUGAR (-2.8%) stocks drove the weekly gain. Based on the preceding, the MTD and YTD returns increased to +1.5% and +4.2%, respectively. However, activity levels were weak, as trading volume and value declined by 37.6% w/w and 26.2% w/w, respectively. Performance across sectors was mixed, following gains in the Banking (+4.2%), Insurance (+0.9%), and Consumer Goods (+0.9%) indices, while the Oil & Gas (-1.3%) and Industrial Goods (-0.4%) indices declined.

In the week ahead, we believe investors will focus on the outcome of the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the FI market. As a result, we envisage a cautious trading theme, especially from domestic investors. Notwithstanding, we reiterate the need for positioning 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 returned to the double-digit territory, as it expanded by 367bps w/w to 16.5%. The financial system was under pressure this week, as the outflows for FGN bond (NGN269.22 billion) and FX auctions outweighed the sole inflow from OMO maturities (NGN10.00 billion). As a result, the average system liquidity settled lower this week, closing at a net short position of NGN16.01 billion (vs a net long position of NGN378.28 billion in the previous week).

Next week, we expect the system liquidity to remain tight, as the inflows from FGN Bond coupon payments (NGN17.87 billion) and OMO maturities (NGN40.00 billion) may not be sufficient to keep the system afloat. Thus, we expect the OVN rate to remain elevated.

Treasury bills

Sentiments in the Treasury bills secondary market turned bearish following the low liquidity in the system this week as participants exited positions across the curve to meet their financial obligations. As a result, the average yield across all instruments expanded by 14bps to 10.5%. Across the segments, the average yield increased by 18bps to 10.6% at the NTB secondary market, but contracted by 2bps to 10.2% at the OMO segment. 

Following the relatively slim system liquidity expected next week, we envisage low demand for T-bills and a slight expansion in yields from current levels. Also, we expect market focus to be shifted to the NTB PMA holding on Wednesday (24 November), with the CBN expected to roll over NGN213.43 billion worth of instruments.

Bonds

This week, the FGN bonds secondary market closed on a bullish note as the average yield across instruments contracted by 8bps to 14.4%. We attribute this week’s bullish sentiment to investors looking to the secondary market to compensate for lost bids at the PMA. Consequently, across the benchmark curve, the average yield expanded at the short (+4bps) end following profit-taking activities on the APR-2023 (+77bps) bond, but dipped at the mid (-8bps) and long (-16bps) segments as investors demanded the APR-2032 (-9bps) and APR-2049 (-39bps) bonds, respectively. At Monday’s bond PMA, the DMO offered instruments worth NGN225.00 billion to investors through re-openings of the 14.55% APR 2029 bond (Bid-to-offer: 0.5x; Stop rate: 14.75%), 12.50% APR 2032 (Bid-to-offer: 0.5x; Stop rate: 15.20%) and 16.24% APR 2037 (Bid-to-offer: 3.6x; Stop rate: 16.20%) bonds. Demand was higher across the three tenors as the total subscription level settled at NGN344.01 billion; however, demand at the auction was higher for the long-dated bond accounting for c. 78.4% of the total subscription level. As a result, the DMO eventually allotted instruments worth NGN269.22 billion, resulting in a bid-to-cover ratio of 1.3x.

We expect the outcome of the MPC meeting holding next week (21 & 22 November) to influence sentiments in the bonds market. 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 reserve recorded another decline this week for the eleventh consecutive week, dipping by USD14.11 million w/w to USD37.19 billion (16 November). Across the FX windows, the naira closed flat at NGN445.67/USD at the I&E window (IEW). At the I&E window, total turnover (as of 15 November 2022) decreased by 50.3% WTD to USD356.13 million, with trades consummated within the NGN432.00/USD – NGN468.44/USD band. In the Forwards market, the rate appreciated at the 1-month (+0.4% to NGN449.28/USD) and 3-month (+0.8% to NGN457.27/USD) contracts, but the rate depreciated at the 1-year (-0.2% to NGN504.37/USD) contract. Conversely, the rate was flat at the 6-month (NGN477.02/USD).

We expect the FX liquidity issues to remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production 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. 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.