The passthrough impact of the slowdown in food and energy prices, amid the high statistical base from the previous year continue to influence headline inflation in the world’s largest economy. According to data from the Bureau of Labor Statistics (BLS), headline inflation in the United States (US) maintained its deceleration trend, slowing further by 10bps to 4.9% y/y in April (March 5.0% y/y) – the lowest print since April 2021 (4.2% y/y). Analyzing the breakdown provided, we highlight that food prices (+7.7% y/y vs March: +8.5% y/y) moderated for the eighth consecutive month to mark the lowest print in 16 months. Furthermore, we note that price pressures remained subdued in the cost of energy (-5.1% y/y vs March: -6.4% y/y) and used cars & trucks (-6.6% y/y vs March: -11.6% y/y). Meanwhile, on a month-on-month basis, consumer prices rose by 0.4% (March: 0.1% m/m). In the near term, we still project a deceleration in US consumer prices albeit at a slower pace, supported by the favourable base effects from the prior year.  Accordingly, after the US Fed’s May rate hike, we anticipate a pause in rate hikes at subsequent meetings.

In the United Kingdom, the Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate for the twelfth consecutive time to its highest level since October 2008. The members voted by a majority of 7 – 2 to hike the bank rate by 25bps to 4.50%. Notably, the committee stated that inflation risks are skewed significantly to the upside and expected to remain elevated for a long time. Meanwhile, there was no detailed forward guidance provided as the Committee judged that in determining the extent of future interest rate stances, it will continue to monitor closely the indication of price pressures, resilient labour market conditions, and wage increases. Although we anticipate the possibility of a ‘Hold’ stance by the committee in line with the expected ease in inflation over the short term, however, the body language of the BOE suggests that an additional rate hike may be on the way at the June 22 meeting with the market pricing in a terminal rate of 4.85%.

Global Markets

The global equities market posted broadly positive performances as investors digested the latest US inflation data and the potential impact on the Fed’s monetary policy decision. Accordingly, US equities (DJIA: +0.5%; S&P 500: +1.7%) were on track for a weekly gain as signs of cooling inflation and a slowdown in the labor market spurred hopes for monetary policy easing. Meanwhile, European equities (STOXX Europe: +0.6%; FTSE 100: +0.0%) were partly stable, as investors digested UK GDP data and corporate earnings announcements. In Asia, the Chinese equities (SSE: -1.9%) declined as China’s inflation data pointed to a sluggish post-Covid recovery. Conversely, Japanese equities (Nikkei 225: +0.8%) posted gains, mirroring the positive sentiments on Wall Street. Elsewhere, the Emerging (MSCI EM: +0.1%) and Frontier (MSCI FM: +0.3%) market indices closed higher supported by gains in India (+1.5%) and Vietnam (+2.1%), respectively.

Nigeria

Domestic Economy

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) declined by 18.0% to 1.25 mb/d in April (March: 1.52 mb/d) – the lowest level in 7 months.  We believe the production shortfall in the period was driven by the shutdown of activities at the Forcados oil terminal and the declaration of force majeure on Exxon Mobil’s operation in Nigeria due to the industrial actions by employees. Parsing through the breakdown, we note that crude oil production declined significantly across the Forcados (-9.7% m/m), Escravos (-11.4% m/m), Bonga (-2.9% m/m), and Qua Iboe (-54.2% m/m) production terminals. We maintain our 2023E crude oil production forecast expectations of 1.55 mb/d (FGN’s estimate: 1.69 mb/d) indicating a higher oil production level relative to 2022FY production volume (1.37 mb/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.

According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 18.1% y/y to NGN43.07 trillion in March (March 2022: NGN36.47 trillion). For the review month, we highlight that the increase in CPS reflects the impact of improved domestic macroeconomic conditions and CBN-led interventions on the real sector. On a month-on-month basis, the CPS increased by 3.1% in March (February 2023: -0.5% m/m). In addition, the currency in circulation increased to NGN1.68 trillion in March; a 48.1% y/y decline, highlighting the effects of the CBN’s currency redesign. This policy resulted in a temporary reduction in the amount of money in circulation as people were required to exchange their old banknotes for new ones. We expect that the improvement of domestic economic activities will drive the willingness of commercial banks to create risky assets. Also, we expect the CBN to maintain its intervention programs at a steady pace as the economy expands. Conclusively, we predict that the Credit to Private Sector (CPS) will maintain a double-digit expansion in 2023FY.

Capital Markets

Equities

The Nigerian equities market could not consolidate the gains of the prior week following pressure from profit-taking activities during the week. Particularly, sell pressures on BUACEMENT (-8.0%) led the benchmark index lower. Thus, the All-Share Index dipped by 0.5% w/w to close at 52,214.72 points. Consequently, the MTD and YTD returns settled at -0.4% and +1.9%, respectively. Elsewhere, activity levels were positive as traded volume and value advanced by 21.1% w/w and 59.7% w/w, respectively. Sectoral performances were mixed, as the Oil and Gas (+5.2%), Insurance (+1.2%) and Consumer Goods (+0.9%) indices posted gains while the Industrial Goods (-2.1%) and Banking (-1.3%) indices declined.

We expect market performance to remain mixed in the week ahead as investors rebalance their portfolios based on an assessment of corporate earnings released for Q1-23. Nevertheless, increased FI yields may continue to constrain buying activities. Overall, we reiterate the need for positioning in 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 was depressed for most of the week, as the system remained awash with liquidity, with additional inflows from OMO maturities (NGN5.00 billion). However, the late CRR debit triggered the OVN rate to expand by 125bps to 12.6% this week. We highlight that the system liquidity averaged a net long position of NGN660.01 billion this week (vs a net long position of NGN313.87 billion in the previous week).

In the coming week, we expect the OVN rate to trend upwards as the debits for the FGN bond auction, primarily, and sub-national issuance will likely offset the expected sole inflow from OMO maturities (NGN10.00 billion).

Treasury bills

Activities in the Nigerian Treasury bills secondary market were bullish, as the average yield declined by 85bps to 6.7%. We attribute the lower yield in the market to the excess liquidity in the system this week, as well as participants covering for lost bids at the NTB PMA held during the week, on Wednesday. At the auction, the CBN offered instruments worth NGN143.98 billion – NGN4.52 billion of the 91-day, NGN5.44 billion of the 182-day, and NGN134.02 billion of the 364-day –, and ultimately allotted the full offer amount. The auction stop rates were 4.50% (previously 5.30%), 6.44% (previously 8.00%), and 8.99% (previously 10.17%) on the 91D, 182D, and 364D bills, respectively. The auction was oversubscribed with a subscription level of NGN820.85 billion, translating to a bid-to-cover ratio of 5.7x (previous auction: 6.2x).

Next week, we envisage lower demand for T-bills in the secondary market following our expectations of a tighter system liquidity. Thus, we believe yields in the secondary market will head northward.

Bonds

Proceedings in the FGN bonds secondary market closed on a bullish note this week, as some investors cherry-picked instruments with attractive yields across the curve, particularly at the mid and long tenor instruments. As a result, the average yield across instruments contracted by 9bps to 14.0%. Across the benchmark curve, the average yield dipped on the short end (-37bps) instruments, due to interest on the MAR-2024 (-173bps) bond, but expanded on the long end (+3bps) instruments following profit-taking on the MAR-2035 (+21bps) bond. Meanwhile, the average yield was flat at the mid segment.

Next week, we expect the result of the May 2023 FGN bond auction (15 May) 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

Nigeria’s FX reserve recorded a decline this week, as gross reserves fell by USD34.19 million w/w to USD35.22 billion (10 May). Meanwhile, the naira was flat at N462.33/USD at the I&E window (IEW), with total turnover at the window (as of 11 May 2023) increasing by 61.2% WTD to USD540.07 million, as trades were consummated within the NGN460.00 – NGN480.50/USD band. In the Forwards market, the rate depreciated across the 1-month (-0.9% to NGN474.19/USD), 3-month (-4.1% to NGN518.44/USD), 6-Month (-3.1% to NGN557.64/USD), and 1-year (-4.9% to NGN597.61/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.