Global Economy

According to data from the Bureau of Labor Statistics (BLS), headline inflation in the United States (US) eased slightly to 6.4% y/y in January (December: 6.5% y/y) – above the consensus estimate (6.2% y/y) but still the lowest print since October 2021 (6.2% y/y). The slowdown was primarily driven by moderations in the prices of food (10.1% y/y vs December 2022: 10.4% y/y) and used vehicles (-11.6% y/y vs December 2022: -8.6% y/y). 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.

According to the Office for National Statistics (ONS), consumer prices in the United Kingdom (UK) eased for the third consecutive month, settling at 10.1% y/y in January (December 2022: 10.5% y/y). Analysing the breakdown provided, we highlight that transportation (3.1% y/y vs December 2022: 6.5% y/y); restaurants & hotels (10.8% y/y vs December 2022: 11.3% y/y); and clothing & footwear (+6.2% y/y vs December 2022: +6.5% y/y) baskets were the most significant drivers of the overall price slowdown in the period. On a month-on-month basis, headline inflation declined by 0.6% (December 2022: +0.4% m/m) in line with the continued drop in diesel prices and a lower cost of air travel after a steep rise in December. Barring any unexpected price shocks in the economy, we expect consumer prices to moderate further in the near term, given the continued drop in energy prices. However, given that prices are expected to remain significantly above the BOE’s target, the monetary authority could be pressured to maintain its rate hikes, albeit slowly, at its next two meetings.

Global Markets

Sentiments remained weak in the global equities market as a spate of economic data (US CPI report and US retail sales figures) lifted expectations for further steep Federal Reserve interest-rate hikes. Consequently, US equities (DJIA: -0.5%; S&P 500: 0.0%) were weighed down by an above-expectation inflation print, and a surprising decline in jobless claims. Elsewhere, European equities (STOXX Europe: +1.6%; FTSE 100: +1.7%) defied the negative narrative in the global space for a second consecutive week following a rally in defensive stocks. Asian markets – Japanese equities (Nikkei 225: -0.6%) and Chinese equities (SSE: -1.1%) – traded lower this week as investors digested economic data from the US and more hawkish commentary from the Federal Reserve. Likewise, the Emerging (MSCI EM: -0.2%) and Frontier (MSCI FM: -0.2%) market indices posted marginal losses underpinned by selloffs in China (-1.1%) and Bahrain (-0.1%), respectively.

Nigeria

Domestic Economy

According to the National Bureau of Statistics (NBS), headline inflation reverted to an upward trend, rising by 47bps to 21.82% y/y in January (December 2022: 21.34% y/y) – the highest level since September 2005 (24.32% y/y). The elevated price pressures were primarily driven by the chronic PMS scarcity and the associated higher fuel prices witnessed in the review period. Thus, food inflation expanded (+56bps to 24.32% y/y) to the highest level since October 2005 (24.56% y/y), while core inflation (+66bps to 19.15% y/y) rose to its highest print in 15 years. On a month-on-month basis, headline inflation increased by 15bps to 1.87% (December: 1.71% m/m). Over the short term, we expect inflationary pressures to maintain an uptrend in line with the (1) higher food demand-supply gap, (2) lingering PMS scarcity & elevated energy prices, (3) currency pressures, and (4) election uncertainties. Accordingly, we forecast m/m headline inflation of 1.88% in February, translating to 22.11% y/y.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions on the local bourse increased by 34.8% m/m to NGN140.70 billion in December (November: NGN104.38 billion). Analysing the breakdown provided, we highlight that domestic transactions (89.2% of gross transactions) rose by 39.5% m/m to NGN125.49 billion but domestic investors remain net sellers of equities for the ninth consecutive month. Likewise, foreign transactions (10.8% of gross transactions) advanced by 5.4% m/m to NGN15.21 billion, although the level of transactions remained significantly below the 2022FY monthly average (NGN31.59 billion) on account of (1) lingering FX liquidity constraints, (2) heightened global uncertainties, and (3) high global interest rates. In the short to medium term, we expect domestic investors to continue to dominate the market, although election uncertainties and prospects for higher FI yields may constrain buying activities. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to upcoming elections, sustained FX liquidity challenges, and tightening global financing conditions.

Capital Markets

Equities

The local bourse posted its first weekly retreat in the month following renewed risk-off sentiments by investors. Precisely, the loss recorded on the final trading day (-1.3%), proved sufficient to wipe out the cumulative gains of 0.4% as of Thursday, driven primarily by sell pressures on AIRTELAFRI (-6.0%). Consequently, the All-Share Index shed 1.0% w/w to close at +5.0% YTD. Analysing activity levels, trading volume, and value decreased by 20.1% w/w and 22.3% w/w, respectively. Across sectors, the Insurance (+1.2%), Oil and Gas (+0.9%), Consumer Goods (+0.7%) and Industrial Goods (+0.1%) indices advanced, while the Banking (-1.3%) index declined.

In the week ahead, we believe investors will be caught between two opposing forces ranging from (1) uncertainties ahead of the nation’s presidential election, and (2) the release of 2022FY corporate earnings with accompanying dividend declarations. Consequently, we expect more of a choppy theme as cautious trading takes center stage ahead of the 2023 general elections scheduled to hold later in the week. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

In line with our expectations, the overnight (OVN) rate inched higher by 669bps w/w to 17.8%, as funding for FGN bond (NGN770.56 billion) and FX auctions outweighed inflows from OMO maturities (NGN60.00 billion). As a result, the average system liquidity closed lower this week at a net long position of NGN218.41 billion (vs. a net long position of NGN452.55 billion in the previous week).

We expect a further squeeze in the financial system next week, as the debits for next week’s auctions (NTB, OMO & FX) will most likely offset the inflows from OMO maturities (NGN70.00 billion) and FGN bond coupon payments (NGN66.82 billion). Hence, we expect the OVN rate to trend higher.

Treasury bills

This week, the Treasury bills secondary market turned bearish, primarily driven by the tighter liquidity in the system, as market participants sold off instruments across the curve to satisfy their financial obligations. Consequently, the average yield across the market expanded by 255bps to 4.0%. Across the market segments, the average yield increased in the OMO and NTB secondary markets by 247bps and 255bps to 3.8% and 4.0%, respectively.

Next week, we anticipate yield in the T-bills secondary market will trend upwards, following our expectation of lower liquidity in the system. Nonetheless, we expect the result of the upcoming NTB PMA to influence the sentiments in the NTB secondary market next week. At the auction, the CBN is set to roll over NGN263.50 billion worth of bills to market participants.

Bonds

In the same vein, activities in the FGN bonds secondary market closed this week on a bearish note as investors showed apathy to instruments in this space in reaction to the higher-than-expected inflation reading (+21.82% y/y). Accordingly, the average yield inched higher by 19bps to 13.3%. Across the benchmark curve, the average yield expanded across the short (+57bps), mid (+5bps), and long (+2bps) segments on the back of the selloffs on the APR-2023 (+248bps), APR-2032 (+2bps), and JUL-2034 (+16bps) bonds, respectively. At this month’s bond PMA, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 13.98% FGN FEB 2028 (Bid-to-offer: 3.3x; Stop rate: 13.99%), 12.50% FGN APR 2032 (Bid-to-offer: 0.9x; Stop rate: 14.90%), 16.25% FGN APR 2037 (Bid-to-offer: 3.3x; Stop rate: 15.90%), and 14.80% FGN APR 2049 (Bid-to-offer: 3.6x; Stop rate: 16.00%) bonds. Demand was higher across the four instruments as the total subscription level settled higher at NGN993.10 billion (vs NGN805.16 billion in the previous auction), with the DMO allotting bonds worth NGN770.56 billion (translating to a bid-to-cover ratio of 1.3x).

In the medium term, we maintain our view that the frontloading of significant borrowings by FG for the year will 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 descent for the fifth consecutive week, as the gross reserve position declined by USD 42.21 million w/w to close at USD 36.78 billion (16 February 2023). Meanwhile, the naira appreciated by 0.1% to NGN461.25/USD at the I&E window (IEW), with total turnover at the window (as of 16 February 2023) increasing by 24.1% WTD to USD437.42 million, as trades were consummated within the NGN446.00 – NGN478.71/USD band. In the Forwards market, the rate on the 1-month (+0.4% to NGN486.88/USD) contract increased but declined on the 3-month (-1.5% to NGN493.97/USD), 6-month (+5.5% to NGN533.80/USD), and 1-year (-14.4% to NGN618.70/USD) contracts.

We believe 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 who have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.