According to data from the Bureau of Labor Statistics (BLS), headline inflation in the United States (US) moderated by 100bps to 5.0% y/y in March (February: 6.0% y/y) – the lowest print since May 2021 (5.0% y/y). The slowdown was in part driven by the high statistical base from the prior year when the initial impact of the Russia-Ukraine conflict jerked up global commodities prices. Accordingly, food prices (8.5% y/y vs February: 9.5% y/y) moderated further while core inflation (5.6% y/y vs February: 5.5% y/y) remained sticky. On a month-on-month basis, consumer prices rose by 0.1% relative to 0.4% m/m in February. Although a low unemployment rate poses an upside risk to prices, we expect price pressures to remain on a deceleration trend in the near term, albeit at a slower pace, supported by the favourable base effects from the prior year. Accordingly, after the expected rate hike (General expectation: +25bps) at the May policy meeting, we anticipate a pause in rate hikes from the US Fed at subsequent meetings, more so that the fallout from the banking crisis is likely to tilt the US economy into recession later in the year.

Domestic demand in China remains weak despite the removal of COVID-19 containment measures as consumers struggle to recover from the effects of the pandemic. According to the Chinese National Bureau of Statistics, consumer prices eased for the second consecutive month, moderating by 30bps to 0.7% y/y in March (February: 1.0% y/y) – the lowest print since September 2021 (0.7% y/y). On the one hand, food prices (2.4% y/y vs February: 2.6% y/y) slowed to a 10-month low because of a further drop in vegetable prices. On the other hand, non-food inflation (0.3% y/y vs February: 0.6% y/y) eased further in line with the faster price declines across the transport and housing sub-baskets. On a month-on-month basis, headline inflation declined by 0.3% (February: -0.5% m/m). 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. Consequently, the preceding suggests that the People’s Bank of China has more room to keep monetary policy accommodative over the year to boost domestic demand.

Global Markets

Global equities were positive across board this week as the outlook for US monetary tightening retreated, following the softening US Producer Price Index (PPI) data and an increase in jobless claims. Accordingly, US equities (DJIA: +1.6%; S&P 500: +1.0%) were set to close the week positively. Meanwhile, sentiments across European equities (STOXX Europe: +1.6%; FTSE 100: +1.7%) remained upbeat, as signs of cooling inflation fueled hopes that the Federal Reserve will pause or temper its current rate-hiking cycle. In Asia, the Japanese equities (Nikkei 225: +3.5%) closed higher taking a cue from the rally on Wall Street. Conversely, the Chinese equities (SSE: +0.3%) erased early losses in the week prompted by selloffs in Alibaba, as China’s export data lifted sentiments. Finally, the Emerging (MSCI EM: +1.0%) and Frontier (MSCI FM: +0.5%) market indices posted gains driven by bullish sentiments in China (+0.3%) and Morocco (+0.1%), respectively.

Nigeria

Domestic Economy

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) declined by 2.0% m/m to 1.52 mb/d in March (February: 1.55 mb/d). We suspect the decline emanated from the explosion at the Trans Niger Pipeline arising from crude oil theft activities in the Rumuekpe community of Rivers State. Parsing through the breakdown provided, we note that major declines were recorded across the Brass (-10.3% m/m) and Forcados (-15.0% m/m) oil terminals. Overall, crude oil production averaged 1.52mb/d in Q1-23 (Q4-22: 1.35mb/d). Based on the preceding, we have raised our 2023E crude oil production forecast to 1.55mb/d (previously 1.53mb/d vs FGN’s estimate: 1.69mb/d) indicating a higher oil production level relative to 2022FY production volume (1.37mb/d). Nonetheless, we think aggregate production is unlikely to reach its pre-pandemic high (c. 2.10mb/d) in the absence of investment in new production capacity. Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

In its April World Economic Outlook (WEO), the International Monetary Fund (IMF) retained Nigeria’s 2023E growth forecast at 3.20% y/y (2022FY: 3.10% y/y). We understand that the growth expectation is on account of (1) higher crude oil production and (2) the expected reforms and positive sentiments that come with a new government. That said, the outlook remains clouded by (1) elevated inflationary pressures, (2) higher borrowing costs given increased interest rates, and (3) the spillover impact of global uncertainties. For us, we have downgraded Nigeria’s growth forecast to 2.77% y/y in 2023E (previously: 3.02% y/y) primarily due to our expectations that the cash crunch witnessed in Q1-23 will significantly hamper activities in key sectors including agriculture, trade, real estate, and manufacturing. Notably, the World Bank estimates that the informal sector accounts for 56.2% of Nigeria’s GDP as of 2018 while data from the National Bureau of Statistics (NBS) shows that the informal sector’s share of GDP was 41.4% as of 2015.

Capital Markets

Equities

Risk-off sentiments continue to reverberate in the Nigerian equities market with the absence of positive triggers to turn the tide for the market. Particularly, sustained sell pressures in AIRTELAFRI (-10.0%) led the benchmark index lower. Thus, the All-Share Index declined by 2.1% w/w to close at 51,893.94 points. Consequently, the MTD and YTD returns settled at -4.3% and +1.3%, respectively. However, activity levels were positive as traded volume surged by 163.5% w/w while traded value increased by 6.7% w/w. Across sectors, the Insurance (-1.5%), Banking (-1.4%), and Industrial Goods (-0.4%) indices declined while the Consumer Goods and Oil and Gas indices closed flat.

With the moderation in the prices of bellwether stocks over the past weeks, we expect the bulls to make a re-entry. We believe this may be further influenced by positive Q1-23 earnings releases. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed income space. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money Market and Fixed Income

Money market

The overnight (OVN) rate inched higher by 13bps w/w to 19.0%, reflective of the still depressed system liquidity. For context, the average system liquidity remained at a net short position of NGN89.88 billion (vs a net short position of NGN64.90 billion in the previous week).

In the coming week, we expect the OVN rate to remain elevated as the debits for FGN bond auction will likely offset the expected sole inflow from FGN bond coupon payment (NGN46.44 billion). Nonetheless, we note a significant maturity at the tail-end of the month (c. NGN759.00 billion), which will be accompanied by more coupon payments that may cause rates to descend.

Treasury bills

The persistent squeeze in the financial system continues to trigger bearish sentiments in the Treasury bills secondary market, amid participants anticipating the influx of liquidity expected at the tail of this month. Consequently, the average yield across the market expanded by 101bps to 8.5%. Across the market segments, the average yield in the NTB segment inched higher by 106bps to 8.8% but remained at 4.0% in the OMO segment. At this week’s NTB auction, the CBN offered instruments worth NGN149.64 billion – NGN3.15 billion for the 91-day, NGN2.52 billion for the 182-day, and NGN143.97 billion for the 364-day. Demand at the auction was slightly higher than the previous PMA, as the total subscription level settled at NGN280.35 billion (bid-to-offer settled at 1.9x vs. the previous auction: 1.2x). Eventually, the CBN allotted bills worth NGN149.64 billion – NGN2.78 billion for the 91-day, NGN3.02 billion for the 182-day, and NGN143.84 billion for the 364-day – at respective stop rates of 6.00% (unchanged), 8.00% (unchanged), and 14.70% (previously: 14.74%).

Next week, we envisage lower demand for T-bills in the secondary market following our expectations of tight system liquidity. Thus, we believe yields in the secondary market will maintain the current northward trend.

Bonds

The FGN bonds secondary market sustained its bearish sentiment this week, as investors stayed on the sidelines ahead of this month’s FGN bond primary auction scheduled for Monday, next week. Accordingly, the average yield advanced by 4bps to 13.7%. Across the benchmark curve, the average yield expanded at the short (+15bps) end following the sell-offs on the JAN-2026 (+60bps) bond but contracted at the long (-1bp) end as investors demand the MAR-2050 (-5bps) bond. Meanwhile, the average yield was flat at the mid segment. 

Next week, we expect the result of the April 2023 Treasury bond auction to influence the sentiments in the secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 13.00% FGN JAN 2042 and 12.98% FGN MAR 2050 bonds. Over the medium term, we expect an uptick in bond yields as we believe investors will demand higher yields, which will be driven by significant borrowings expected from the FG for the year.

Foreign Exchange

After twelve consecutive weeks of decline, Nigeria’s FX reserve increased slightly this week, as the gross reserve position rose by USD38.89 million w/w to close at USD35.43 billion (12 April 2023). At the I&E window, the naira depreciated by 0.2% to NGN464.00/USD, with total turnover at the window (as of 13 April) decreasing by 27.4% WTD to USD297.42 million – trades were consummated within the NGN460.00 – NGN507.08/USD band., In the Forwards market, the rate across the 1-month (-0.5% to NGN469.20/USD), 3-month (-0.5% to NGN485.89/USD), and 6-month (-0.4% to NGN513.22/USD) contracts decreased but appreciated at the 1-year (+0.6% to NGN562.49/USD) contract.

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.