Global Economy

According to the United States Bureau of Labor Statistics (BLS), headline inflation in the world’s largest economy eased for the sixth consecutive month, settling lower at 6.5% y/y in December (November: 7.1%) – the lowest print since October 2021 (6.2% y/y). Although the preceding further suggests that consumer prices have peaked, it is still significantly above the Fed’s 2.0% target. We highlight that the price moderation continues to reflect the slowdown in energy costs (7.3% y/y vs November: 13.1% y/y) and the prices of used cars & trucks (-8.8% y/y vs November: -3.3% y/y). On a month-on-month basis, consumer prices declined by 0.1% relative to the 0.1% price growth in the previous month. Although we expect prices to moderate further in the near term, given the lingering ease in energy prices and some improvement in supply chain bottlenecks, a low unemployment rate poses an upside risk to prices, keeping broad inflationary pressures intact. Accordingly, we expect the US Fed to maintain its tightening cycle, albeit slowly, in the short term, more so that the headline inflation is still ahead of its 2.0% target.

China’s consumer prices reversed the previous month’s downtrend despite disruptions to domestic demand amid a spike in COVID-19 infections. According to the National Bureau of Statistics (NBS), China’s headline inflation rose by 20bps to 1.8% y/y in December (November: 1.6% y/y). We highlight through the breakdown provided that the increase was primarily driven by higher food prices (4.8% y/y vs November: 3.7% y/y). Elsewhere, the non-food inflation was unchanged at 1.1% y/y, although prices rose in the health (0.6% y/y vs November: 0.5% y/y) and education & culture (1.4% y/y vs November: 1.3% y/y) sub-baskets, reflecting the initial impact of reopening being felt in the healthcare and travel sectors. On a month-on-month basis, headline inflation was unchanged (November: -0.2% m/m). Looking ahead, we believe consumer prices are on course to rise further over the short term. Our expectation is hinged on the government’s lifting of COVID-19 containment measures and its policies towards boosting consumption, both of which are expected to lift consumer demand in the near term.

Global Markets

Unlike in the prior week, positive sentiments dominated the global equities market as investors weighed the prospects of less aggressive rate hikes from the Federal Reserve amid signs of easing inflationary pressures in the US. Accordingly, US stocks (DJIA: +1.7%; S&P 500: +2.3%) rebounded from the losses recorded in the prior week as investors digested CPI data for December and quarterly corporate earnings reports from big banks. Likewise, European stocks (STOXX Europe: +1.3%; FTSE 100: +1.2%) were on course for their second weekly gain as investors evaluated a slew of economic data (UK GDP data for November and US inflation data). In the same vein, Asian markets (Nikkei 225: +0.6%; SSE: +1.2%) closed positively as risk sentiments were strengthened by (1) positive sentiments on Wall Street and (2) optimism about China’s economic recovery following the reopening of its international borders. Similarly, the Emerging market (MSCI EM: +3.0%) and Frontier market (MSCI FM: +2.1%) indices were buoyed by positive sentiments in the Chinese (+1.2%) and Vietnamese (+0.8%) markets, respectively.

Nigeria

Economy

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates settled at 1.41mb/d in December (November: 1.41mb/d), taking the average crude oil production to 1.38mb/d in 2022FY (-14.9% y/y vs 2021FY: 1.62mb/d). Crude oil production increase in November and December compared to the Q3-22 average (1.21mb/d) synchronised neatly with the government’s efforts at curbing crude oil theft and vandalism. However, production volume remains significantly below the country’s OPEC+ production quota (1.83mb/d), likely reflecting the impact of other factors limiting crude oil production asides from oil thefts and vandalism. In December, we note that crude oil production increased in the Bonny (62.8% m/m), Qua Iboe (6.8% m/m), and Forcados (4.6% m/m) terminals. Although we expect crude oil production to increase in 2023E (Cordros estimate: 1.53mb/d vs FGN’s estimate: 1.69mb/d), we think it is unlikely to reach the pre-pandemic level (c. 2.10mb/d) in the absence of incentivising investment in new production capacity and proper training of indigenous firms to handle the divested IOC’s assets. Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in December (from the total revenue generated in November) increased by 22.4% m/m to NGN902.10 billion (November: NGN736.78 billion). We understand that the improvement in the revenue shared this month was due to a significant increase in Oil & Gas Royalties and Petroleum Profit Tax (PPT) and marginal growth in Import and Excise duties, which offset the decline in Value Added Tax (VAT) and Companies Income Tax. Accordingly, the FGN received NGN358.52 billion (November: NGN293.96 billion), state governments received NGN339.41 billion (November: NGN265.74 billion), and the local governments received NGN204.13 billion (November: NGN177.09 billion). We maintain our expectation that the non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2022 Finance Act. However, we expect the oil revenue to remain underwhelming because of the relatively low crude oil production volume and high under-recovery costs.

Capital Markets

Equities

Bullish sentiments returned to the Nigerian equities market as investors renewed interest in bellwether stocks. Accordingly, the All-Share Index advanced by 2.5% w/w to close at 52,512.48 points, following bargain-hunting activities in MTNN (+6.9%), DANGCEM (+3.1%) and BUACEMENT (+3.6%). Consequently, the YTD return increased to +2.5%. On activity levels, the trading volume and value increased by 39.5% and 9.1% w/w, respectively. Sectoral performance was largely positive following gains in the Banking (+3.5%), Industrial Goods (+3.3%), Oil and Gas (+3.2%), and Consumer Goods (+0.7%) indices. On the flip side, the Insurance (-1.6%) index was the sole loser of the week.

In the short term, we expect market performance to be dominated by the bulls, as positioning for 2022FY earnings releases and accompanying dividends declarations should outweigh profit-taking activities. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate dipped by 450bps to 10.0% as inflows from CRR refunds (NGN280.00 billion) and OMO maturities (NGN10.00 billion) kept system liquidity afloat. Accordingly, the average system liquidity this week remained at a net long position of NGN430.30 billion, relative to the net long position of NGN351.00 billion in the prior week.

Next week, we expect the OVN rate to trend slightly upward, as the inflow from FGN bond coupon payment (NGN65.36 billion) may not be enough to saturate the system.

Treasury bills

The Nigerian Treasury bills secondary market remained bullish as the average yield across all instruments contracted by 7bps to 3.3%. We attribute this week’s performance to higher demand following (1) the healthy system liquidity and (2) market participants moving to the secondary market to compensate for lost bids at Wednesday’s NTB PMA. Across the market segments, the average yield contracted by 9bps to 3.3% at the NTB secondary market, but was flat at 3.4% at the OMO segment. At this week’s NTB auction, the CBN offered bills worth NGN56.93 billion – NGN1.55 billion of the 91-day, NGN1.49 billion of the 182-day, and NGN53.90 billion of the 364-day – to market participants. Demand was higher, especially for the 364-day T-bills, as the total subscription settled at NGN389.04 billion. Eventually, the CBN allotted exactly what was offered at respective stop rates of 2.00% (previously 2.75%), 4.33% (previously 7.15%), and 7.30% (previously 8.49%).

For next week, we believe yields in the NTB secondary market will move northward, given the anticipated lower liquidity in the system.

Bonds

Proceedings in the FGN bonds secondary market turned bearish this week, following selloffs of instruments across the curve as investors still await clarity on the FGN’s intended borrowing for Q1-23. That said, the average yield across all instruments expanded by 11bps to 12.8%. Across the benchmark curve, the average yield dipped at the short (-4bps) end as investors demanded the APR-2032 (-87bps) bond, but expanded at the mid (+9bps), and long (+28bps) segments following profit-taking on the APR-2032 (+16bps) and MAR-2050 (+40bps) bonds, respectively.

We expect the publication of the FGN bond issuance calendar for Q1-23 to influence sentiments in the Treasury bonds secondary market in the short term. Nonetheless, in the medium term, we still expect frontloading of significant borrowings for the year by the FG to result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserve maintained its accretion for the fourth consecutive week, as the gross reserve position rose by USD42.32 million w/w to close at USD37.21 billion (11 January 2023). The naira was flat at NGN461.90/USD at the I&E window (IEW). On activity levels, the total turnover (12 January) at the IEW increased by 9.5% WTD to USD409.97 million, with trades consummated within the NGN426.00 – NGN477.26/USD band. In the Forwards market, the naira depreciated at the 1-month (-1.3% to NGN476.61/USD), 3-month (-0.6% to NGN482.30/USD), and 6-month (-2.4% to NGN590.77/USD) contracts, but appreciated at the 1-year (+1.2% to NGN524.22/USD) contract.

For our outlook, we believe the FX liquidity issues will remain over the short-to-medium term as we do not see 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.