According to the recently released data by the National Bureau of Statistics, China’s consumer prices rose by 10bps to 0.2% y/y in May (April: +0.1% y/y). While prices increased slightly, we highlight broad price pressures remain soft relative to the historical average due to the combined effects of (1) general weakness in aggregate demand despite the lifting of COVID-19 containment measures and (2) moderations in global commodities prices. Consequently, the non-food inflation was flat at 0.1% y/y, partly driven by the further decline in transport (-3.9% y/y vs April: -3.3% y/y) and housing (-0.2% y/y vs April: -0.3% y/y) costs. Nonetheless, Food inflation (+1.0% y/y vs April: + 0.4% y/y) picked up slightly. On a month-on-month basis, headline inflation declined by 0.2% (April: -0.1% m/m). While we envisage further increases in consumer prices to be driven by slight increases in demand as China continues to recover from its pandemic controls, we maintain our expectations that the economy will not likely 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 rest of the year to boost domestic demand.

According to the United States Department of Labor, the initial jobless claims in the US increased by 28,000 or 12.0% w/w to 261,000 in the week ending 3rd June (vs the week ending 27th May: 233,000) – the highest level since October 2021 (264,000), and above market expectations (235,000). The preceding marks a third consecutive week of increase in the number of people seeking unemployment benefits given the layoffs seen in the technology industry and, more recently, interest-rate sensitive sectors like manufacturing, housing, and finance. On a 4-week moving average, initial jobless claims increased by 7,500 to 237,250 (vs the week ending 27th May: 229,500). Given that jobless claims are expected to remain volatile in the coming months, albeit tilted to the upside, we expect the gradually cooling labour market to reduce pressure on the Fed to tighten monetary further. Accordingly, the Fed will likely adopt a ‘HOLD’ stance at its 14th June policy meeting. Indeed, the market is currently pricing a 75.9% chance of the Fed keeping the rates steady at a target range of 5.00% – 5.25%, as indicated by the CME FedWatch Tool.

Global Markets

Global stocks posted mixed performances as investors’ focus shifted to monetary policy announcements due next week. In line with this, US equities (DJIA: +0.2%; S&P 500: +0.3%) were on track to close higher as weak employment data boosted expectations of a more dovish stance by the Federal Reserve next week. On the other hand, expectations that the European Central Bank will continue to tighten its monetary policy weighed on European equities (STOXX Europe: -0.3; FTSE 100: -0.1%). Elsewhere, Asian markets posted mixed performances as the Japanese Nikkei 225 (+2.4%) jumped in response to the gains on Wall Street amid expectations of a pause in rate hikes. Conversely, the Chinese market (SSE: -0.1%) declined as weak inflation data fueled concerns over the Chinese economic recovery. Conclusively, the Emerging (MSCI EM: +1.0%) and Frontier (MSCI FM: +0.9%) market indices closed higher following gains in Taiwan (+1.1%) and Vietnam (+0.9%), respectively.

Nigeria

Domestic Economy

According to the recently released data by the National Bureau of Statistics (NBS), Nigeria’s trade balance maintained its surplus position, albeit moderately so, for the second consecutive quarter. Precisely, the trade balance surplus settled at NGN927.16 billion in Q1-23 (Q4-22: NGN996.78 billion). On the one hand, exports grew by 2.0% q/q given the higher crude oil (+4.8% q/q | 79.4% of total exports) and agricultural goods (+63.9% q/q | 4.3% of exports) exports. On the other hand, while imports increased by 3.7% q/q, we highlight that it was lower than the corresponding period of last year, declining by 25.8% y/y. We attribute the preceding to the combined impact of (1) persistent FX liquidity challenges and (2) lower import demand exacerbated by the lingering currency depreciation. Looking ahead, we expect total exports to increase slightly relative to 2022FY levels because of our expectations of higher crude oil production amid a decline in oil prices. However, we expect imports to remain challenged by the lingering effects of the CBN’s capital control measures. Consequently, we expect the trade balance surplus to grow higher in 2023E relative to 2022FY levels.

In May, the total inflows into the Investors & Exporters Window (IEW) increased by 46.8% m/m to USD1.14 billion relative to USD775.70 million in April, according to the data obtained from the FMDQ. Although foreign inflows settled higher to USD207.10 million (April: USD96.20 million), it remains underwhelming relative to pre-pandemic levels (2019FY monthly average: USD1.56 billion) because of the (1) lingering FX liquidity constraints, (2) an overvalued currency, and (3) the absence of significant macro reforms. Simultaneously, inflows from local sources increased by 37.1% m/m to USD931.50 million, primarily driven by higher inflows from Exporters (+42.7% m/m to USD437.80 million | 47.0% of local inflows) and non-bank corporates (+30.3% m/m to USD440.00 million | 47.2% of local inflows). We anticipate that the FX liquidity conditions will remain frail over the short-to-medium term without reforms to attract US dollar inflows into the economy. The low FX liquidity conditions are also likely to be driven by lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy. Thus, foreign investors will need convincing actions regarding flexibility and clarity in the FX framework as we advance.

Capital Markets

Equities

Despite the negative kick-off this week, the domestic bourse closed in the green territory given investors interest in AIRTELAFRI (+1.8%). Notably, the All-Share index advanced by 0.2% to close at 55,930.97 points. As a result, the month-to-date and year-to-date returns for the index settled at +0.3% and +9.2%, respectively. Activity level was weaker than the prior week, as trading volume and value declined by 15.1% w/w and 1.4% w/w, respectively. From a sectoral standpoint, the Insurance (+13.9%) index recorded the most significant gain, followed by the Oil and Gas (+3.4%), Banking (+1.1%) and Consumer Goods (+0.1%) indices. On the flip side, the Industrial Goods (-1.3%) index declined. 

We expect the choppy trading pattern that played out this week to persist in the week ahead as investors continue to cherry-pick stocks with sound fundamentals and, at the same time, remain cautious about leaving gains in the market. 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 23bps to 12.1% this week, with the level ticking up marginally at the tail end of the week, given a late CRR debit. We note that system liquidity was buoyant during the week, with the level settling at a net long position of NGN543.14 billion (prior week: net long position of NGN184.17 billion).

Next week, we expect the OVN rate to head upwards as we envisage a squeeze in the system liquidity in the face of no significant inflows into the system.

Treasury bills

Proceedings in the Treasury bills secondary market were tempered at the start of the week, but turned bullish after the NTB auction as the average yield dipped by 9bps to 6.3%. We attribute this performance to the combined impact of (1) the healthy system liquidity and (2) market participants moving to the secondary market to compensate for lost bids at Wednesday’s PMA. At the auction, the CBN offered bills worth NGN182.85 billion – NGN1.03 billion of the 91-day, NGN1.94 billion of the 182-day, and NGN179.89 billion of the 364-day – to market participants. Demand was higher, especially for the 364-day bill (bid-to-cover: 4.5x), as the total subscription settled at NGN815.61 billion. Eventually, the CBN allotted exactly what was offered at respective stop rates of 4.48% (previously 2.29%), 6.00% (previously 4.99%), and 9.45% (previously 7.99%).

Looking ahead, we envisage yields in the Treasury bills secondary market to expand as the liquidity in the financial system becomes pressured during the week.

Bonds

Activities in the FGN bonds secondary market remained bullish as investors continued to cherry-pick attractive bonds across the curve. Accordingly, the average yield across all instruments declined by 12bps to 13.8%. Across the benchmark curve, the average yield contracted at the short (-26bps), mid (-10bps), and long (-5bps) segments, following investors’ demand for the MAR-2027 (-43bps), APR-2032 (-16bps), and APR-2049 (-14bps) bonds, respectively.

We maintain our view that frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserves declined further this week, as the gross reserves level declined by NGN137.97 million w/w to NGN34.88 billion (07 June). Likewise, the naira depreciated by 1.7% to NGN472.50/USD at the I&E window (IEW), with total turnover at the window (as of 08 June 2023) decreasing by 21.4% WTD to USD74.18 million, as trades were consummated within the NGN460.00 – NGN492.30/USD band. In the Forwards market, the naira appreciated across the 1-month (+0.5% to NGN480.18/USD), 3-month (+0.9% to NGN506.77/USD), 6-month (+0.8% to NGN532.01/USD) and 1-year (+0.8% to NGN561.12/USD) contracts.

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) decline in oil prices, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.