According to the Chinese National Bureau of Statistics, consumer prices declined after two consecutive months of increase, moderating to 1.0% y/y in February (January: 2.1% y/y) – the lowest level in the last one year. We understand that the price slowdown primarily reflects the warm weather-induced increase in food supplies and easing demand after January’s Lunar New Year holidays. Accordingly, the breakdown provided showed that there was a broad-based price slowdown in the food (2.6% y/y vs January: 6.2% y/y) and non-food (0.6% y/y; January: 1.2% y/y) baskets. On a month-on-month basis, headline inflation surprised positively, declining by 0.5% relative to an 0.8% m/m price increase in January. While consumer prices are expected to rise in 2023 relative to the prior year as China ends its pandemic controls, we maintain our expectations that the economy is not likely to face acute price pressures like advanced economies. Consequently, the People’s Bank of China will likely keep monetary policy accommodative over the year to support the country’s economic recovery.

In the United States (US), the number of people who filed for unemployment insurance rose above 200,000 for the first time in nine weeks amid reports of more layoffs and some softening of demand for workers from employers. According to the United States Department of Labor, the initial jobless claims in the US increased by 11.1% w/w to 211,000 in the week ending 4th March (vs 190,000 in the week ending 25 February). Likewise, we highlight that the four-week moving average, which smoothens out volatility in the weekly initial jobless claims, printed 197,000 (vs the week ending 25 February: 193,000). Despite the recent layoffs, the labour market continues to be resilient, as the unemployment rate (3.6% in February vs January: 3.4%) remained low. Consequently, the preceding suggests that the US Fed is likely to maintain its hawkish policy stance longer than current market expectations as the stubbornly tight labour market reflects that upward price pressures may persist over the short term, given solid wage gains, which could contribute to increased consumer spending.

Global Markets

The hawkish rhetoric from Federal Reserve Chairman, Jerome Powell, rattled global markets this week, as the Chairman signaled higher projections for the Fed funds rate in the year, than initial market expectations. US equities (DJIA: -3.4%; S&P 500: -3.1%) recorded huge losses as a rout in tech-industry lender – SVB Financial Group – sparked selloffs across banking stocks. Likewise, European equities (STOXX Europe: -0.9%; FTSE 100: -0.8%) fell as worries ahead of the US jobs report and weakness in the banking sector outweighed better-than-expected UK GDP data. Similarly, in Asia, Chinese equities (SSE: -3.0%) declined due to concerns over the outlook for China’s technology sector. Meanwhile, Japanese equities (Nikkei 225: +0.8%) outperformed peers following expectations that the Bank of Japan will maintain its ultra-accommodative stance in the near term. Elsewhere, the Emerging (MSCI EM: -2.0%) market index dipped consequent upon selloffs in China (-3.0%) while the Frontier (MSCI FM: +0.2%) market index edged higher following gains in Vietnam (+2.4%).

Nigeria

Domestic Economy

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) increased for the second consecutive month, rising by 3.6% m/m to 1.55mb/d in February (January 2023: 1.49mb/d) – the highest level since January 2022 (1.68mb/d). Interestingly, the Bonny (+25.3% m/m) and Brass (+25.5% m/m) oil terminals primarily drove the increase, while production from the Forcados (-0.3% m/m), Qua Iboe (-12.5% m/m), and Escravos (-14.8% m/m) terminals declined. Nonetheless, we think the overall crude oil production increase continues to reflect the impact of the government’s recent efforts to curb crude oil theft and vandalism. Although we expect crude oil production to increase in 2023E (Cordros estimate: 1.53mb/d vs FGN’s estimate: 1.69mb/d) relative to 2022FY production volume (1.37mb/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 handover of divested IOC’s assets to indigenous companies. Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

According to the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 116.8% y/y to NGN753.88 billion in Q4-22 (Q4-21: NGN347.81 billion | Q3-22: NGN810.19 billion). Analyzing the breakdown provided, we highlight that local collections rose by 36.7% y/y to NGN353.90 billion, on account of the improvement in business activities. Similarly, foreign CIT payments grew rapidly by 349.6% y/y to NGN399.98 billion, likely due to the lingering impact of the provision of the 2021 Finance Act, which includes a 6.0% tax on the turnover of e-commerce (including digital services) businesses by non-resident companies. However, on a quarter-on-quarter basis, total CIT collection declined by 7.0% (vs Q3-22: +13.4% q/q to NGN810.19 billion). In the absence of any major shock to the economy, we expect the CIT collections to continue to improve, albeit slowly, over the short term, more so that we expect foreign collections to remain firm. Our expectation of a moderate rise is in line with the (1) resilience of domestic economic activities despite increasing downside risks, and (2) high base from the prior year.

Capital Markets

Equities

The local bourse extended its bullish run for the third consecutive week, primarily driven by the gains in DANGCEM (+3.6%) and MTNN (+1.4%) stocks. Thus, the All-Share Index notched a 0.5% w/w gain to close at 55,794.51 points, with the YTD return settling at +8.9%. However, activity levels were mixed, as trading volume declined by 46.4% while trading value grew by 18.6% w/w. Sectoral performance was mixed as the Oil & Gas (-3.8%), Banking (-1.8%) and Consumer Goods (-0.3%) indices declined while the Industrial Goods (+1.7%) and Insurance (+0.7%) indices advanced.

We expect market performance to be dominated by the bulls in the week ahead, as we expect investors to take positions in stocks with attractive dividend yields. However, we envisage an undulating pattern will emerge as intermittent profit-taking activities will likely persist. Overall, we advise investors to seek trading opportunities in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate contracted by 161bps w/w to 10.8%, as the healthy liquidity from the prior week coupled with this week’s inflow from OMO maturities (NGN50.00 billion) were enough to outweigh the debits for net NTB issuances (NGN100.00 billion). Notwithstanding, the average system liquidity closed lower at a net long position of NGN294.52 billion (vs a net long position of NGN908.57 billion in the prior week).

We expect a further squeeze in the system next week, as the expected inflow from FGN bond coupon payments (NGN51.12 billion) may not be sufficient to support financial system liquidity. Hence, we believe the OVN rate will head upwards.

Treasury bills

The Treasury bills secondary market closed on a bullish note this week, as the average yield across all instruments dipped by 37bps to 3.6%. We attribute this performance to participants’ looking to compensate for unmet demand at the NTB PMA, amid quiet activity in the OMO segment of the market. Across the segments, the average yield contracted by 39bps to 3.6% in the NTB segment, but remained flat at 3.0% in the OMO secondary market. At the NTB primary auction, the CBN offered to participants instruments worth NGN224.50 billion – NGN1.03 billion of the 91-day, NGN10.55 billion of the 182-day, and NGN212.92 billion of the 364-day bills. The auction was keenly contested with a total subscription of NGN906.21 trillion (bid-to-offer: 4.0x) with more demand skewed towards the longer-dated bill (NGN890.55 billion translating to 98.3% of the total subscription). Eventually, the CBN allotted bills worth NGN324.50 billion – NGN1.03 billion of the 91-day, NGN10.55 billion of the 182-day, and NGN312.92 billion of the 364-day – at respective stop rates of 1.44% (previously: 3.00%), 6.00% (previously: 3.24%), and 10.00% (previously: 9.90%).

In the coming week, we anticipate an upward tilt in T-bills yield, following our expectation of a lower system liquidity. Nonetheless, we expect market focus to be shifted to the NTB PMA holding on Wednesday (15 March), where the CBN is scheduled to roll over NGN161.87 billion worth of bills.

Bonds

This week, activities in the Treasury bonds secondary market were bullish as investors cherry-picked bonds with attractive yields across the short and long ends of the curve. As a result, the average yield contracted by 18bps to 13.1%. Across the benchmark curve, the average yield contracted at the short (-36bps) and long (-18bps) ends due to demand for the MAR-2024 (-88bps) and APR-2037 (-39bps) bonds, respectively. Conversely, the average yield was flat at the mid segment.

We maintain our stance that the frontloading of significant borrowings by FG in H1-22 will result in an uptick in bond yields in the medium term, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserve declined for the eighth consecutive week, falling by USD197.84 million w/w to USD36.41 billion (09 March). Meanwhile, the naira appreciated by 0.1% to N461.50/USD at the I&E window (IEW), with total turnover at the window (as of 09 March 2023) increasing by 29.0% WTD to USD471.43 million, as trades were consummated within the NGN446.00 – NGN478.52/USD band. In the Forwards market, the naira rate appreciated across the 1-month (+0.1% to NGN466.68/USD), 3-month (+0.8% to NGN482.13/USD), 6-month (+0.6% to NGN508.90/USD), and 1-year (+0.1% to NGN542.79/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.