According to the Office for National Statistics (ONS), headline inflation in the United Kingdom (UK) eased further in July, settling lower at 6.8% y/y (June: 7.9% y/y) – the lowest print since February 2022 (6.2% y/y). The moderation was primarily due to a 24.9% decline in fuel prices, leading to a further reduction in transport costs (-2.1% y/y vs June: -1.8% y/y). Asides from the preceding, we highlight that price pressures also eased across the food (14.8% y/y vs June: 17.3% y/y), furniture & household goods (6.2% y/y vs June: 6.5% y/y) and recreation & culture (6.5% y/y vs June: 6.7% y/y) sub-baskets. On a month-on-month basis, consumer prices declined by 0.4% relative to a 0.1% m/m price growth in June. While the headline inflation dropped sharply in July, albeit still significantly higher than the Bank of England (BoE) target, the sticky core inflation (6.9% y/y vs June: 6.9% y/y) poses a potential headache for the BoE. Accordingly, the preceding suggests more room for the monetary authority to press on with its ongoing policy-tightening path.

Moderation in consumer prices bolstered economic activities, albeit slowly, in the Euro Area in Q2-23. According to the Eurostat, the Euro Area grew by 0.3% q/q in Q2-23 relative to flat growth in Q1-23. We understand that the quarterly expansion was driven by increased domestic demand, given the moderation in inflationary pressures amid lower energy prices and easing supply chain pressures. Nonetheless, we highlight that the combined impact of (1) higher interest rates and (2) worsening external demand put a lid on the region’s growth. Looking at the individual countries, France grew (0.5% y/y vs Q1-23: 0.1% y/y), Germany’s economy was unchanged (0.0% q/q vs Q1-23: -0.1% q/q), while Italy’s economy contracted (-0.3% q/q vs Q1-23: 0.6% q/q). On a year-on-year basis, the Euro Area grew by 0.6% (Q1-23: 1.0% y/y) – its lowest print since Q1-21 (-0.1% y/y). Over the short-to-medium term, the balance of risks to growth in the regional bloc is still tilted to the downside amid the (1) lingering dampening impact of monetary tightening and (2) weakness in domestic demand, negatively impacting factory activity.

Global Markets

Sentiments across equities markets globally turned sour this week as US economic resilience raised fears of higher global interest rates. Additionally, worries about China’s property sector and weak UK retail sales data further dampened sentiments. As of the time of writing, US equities (DJIA: -2.3%; S&P 500: -2.1%) are set to close lower as strong economic data (retail sales) and minutes of the Fed’s July monetary policy meeting raised fears about interest rates remaining higher for longer. In a similar vein, European equities (STOXX Europe: -2.2%; FTSE 100: -3.3%) mirrored the cautious global sentiment as investors digested falling UK retail sales ahead of the release of eurozone inflation data. Equally, Asian markets (Nikkei 225: -3.1%; SSE: -1.8%) logged the biggest weekly loss in five months as investors digested further signs of weakness in China and the prospect of higher US interest rates. Elsewhere, the Emerging (MSCI EM: -1.3%) and Frontier (MSCI FM: -2.4%) market indices declined consequent upon bearish sentiments in China (-1.8%) and Vietnam (-3.7%), respectively.

Nigeria

Domestic Economy

According to the National Bureau of Statistics (NBS), headline inflation increased further by 129bps to 24.08% y/y in July (June: 22.79% y/y). The increase was primarily driven by the trifecta impact of (1) elevated PMS prices induced by the PMS subsidy removal, (2) lingering currency depreciation that accompanied the CBN’s FX reform, and (3) dry spell season in the northern region as the rainfall was insufficient in the period. Consequently, food inflation (+173bps to 26.98% y/y) rose to its highest level since September 2005 (29.47% y/y) while the core index increased by 34bps to 2.11% m/m, translating to a year-on-year increase of 41bps to 20.47%. We expect the impact of the existing factors stoking upward price pressures to remain intact over the short term. In addition, the ongoing lean season in food-producing states will likely widen the food demand-supply gap further. All in, we see a 3.10% m/m headline inflation in August, translating to a 150bps increase in the y/y inflation rate to 25.70%.

On 16 August, the Nigerian National Petroleum Company Limited (NNPCL) announced that it had secured a USD3.00 billion emergency crude repayment loan from the African Export-Import (AFREXIM) bank. According to the NNPCL, this loan agreement is not a crude-for-refined product swap but an upfront cash loan against proceeds from a limited amount of future crude oil production. We think this loan is a favourable short-term fix in providing near-term FX supply to support the FX market and stabilise the local currency. Nonetheless, we acknowledge that the amount is not enough to significantly support the local currency, more so that the funds will come in tranches. Thus, if not adequately managed with other suggested near-term measures (such as higher interest rates and additional funding support from third parties or multilateral institutions), FX pressures may likely build up again, leading to another round of local currency depreciation. Elsewhere, we think the loan agreement may negatively impact FAAC inflows when the NNPCL starts repaying the loan. Our prognosis is hinged on (1) revenue flows from crude oil, which may reduce if oil production does not improve significantly from current levels and (2) a reduction in future taxes and royalties from NNPCL as the FGN gets them now in advance.

Capital Markets

Equities

Nigerian stocks closed in the bear territory following profit-taking activities on all trading sessions this week save for Friday (+0.4%). Precisely, sell pressures on AIRTELAFRI (-5.3%) dragged the All-Share index 0.9% lower to 64,721.09 points. Consequently, the Month-to-Date and Year-to-Date returns dipped to +0.6% and +26.3%, respectively. On the other hand, activity levels were mixed, as the trading volume declined by 3.0% w/w while the trading value increased by 17.2% w/w. Across our sectors’ coverage, the Insurance (-2.2%), Banking (-2.1%), and Oil and Gas (-0.4%) indices declined, while the Consumer Goods (+2.4%) and Industrial Goods (+0.4%) indices advanced.

We expect market performance to stay mixed in the week ahead as investors rebalance their portfolios following an assessment of corporate earnings released thus far for H1-23. 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 market. 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

In line with our expectations, the overnight (OVN) rate grew by 17.0% w/w to 19.8%, following the liquidity squeeze from settlements from the FGN bond auction (NGN230.26 billion) this week. As a result, the average system liquidity closed lower at a net long position of NGN175.63 billion (vs a net long position of NGN365.27 billion in the previous week).

We anticipate the OVN rate will trend lower next week, as we believe the inflow from FGN bond coupon payment (NGN112.67 billion) will help boost the liquidity in the system.

Treasury bills

The NTB secondary market traded with bearish sentiment this week as the tight liquidity in the financial system triggered sell-offs across the curve. As a result, the average yield across all instruments increased by 106bps to 8.4%. Across the curve, the average yield advanced at the short (+178bps), mid (+121bps) and long (+56bps) segments as investors sold off the 20DTM (+196bps), 97DTM (+147bps) and 223DTM (+251bps) bills, respectively.

Next week, we envisage lower yields in the Treasury bills secondary market as the anticipated inflows into the financial system will likely fuel bargain hunting in bills. Nonetheless, we expect market focus to be shifted to the NTB PMA holding on Wednesday (23 August), where the CBN is scheduled to roll over NGN303.22 billion worth of maturities.

Bonds

The FGN bonds secondary market traded on a bearish note, as the average yield expanded by 31bps to 13.8%. Across the benchmark curve, the average yield advanced across the short (+46bps), mid (+24bps), and long (+20bps) segments due to the profit-taking activities on the JAN-2026 (+93bps), APR-2029 (+61bps), and JUN-2053 (+64bps) bonds, respectively. At this month’s bond PMA, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 14.55% FGN APR 2029 (Bid-to-offer: 0.2x; Stop rate: 13.85%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.1x; Stop rate: 15.00%), 15.45% FGN JUN 2038 (Bid-to-offer: 0.6x; Stop rate: 15.20%), and 15.70% FGN JUN 2053 (Bid-to-offer: 2.7x; Stop rate: 15.85%) bonds. Demand was lower across the four instruments as the total subscription level settled at NGN312.56 billion (vs NGN945.14 billion in the previous auction), with the DMO allotting bonds worth NGN230.26 billion (including non-competitive allotments of NGN2.50 billion), resulting in a bid-to-cover ratio of 1.4x.

We expect yields in the FGN bond secondary market to remain elevated in the medium term, driven explicitly by our expectation of a sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep the cost of borrowing moderate remains a downside factor.

Foreign Exchange

Nigeria’s FX reserves declined further this week, as the gross reserves level dropped by USD37.45 million w/w to close at USD33.83 billion (16 August). Meanwhile, the naira closed flat at N740.67/USD at the I&E window (IEW), with total turnover at the window (as of 17 August 2023) increasing by 17.6% WTD to USD459.37 million, as trades were consummated within the NGN701.00 – NGN799.90/USD band. In the Forwards market, the naira rates recorded for the 1-month (+1.4% to NGN783.46/USD), 3-month (+1.3% to NGN802.83/USD), 6-month (+0.8% to NGN831.80/USD), and 1-year (+0.9% to NGN890.12/USD) contracts increased.

We think the recent NNPCL’s emergency crude repayment loan from the African Export-Import (AFREXIM) bank is a favourable short-term fix in providing near-term FX supply to support the FX market and stabilise the local currency. Nonetheless, we acknowledge that the amount is not sufficient to significantly support the local currency, more so that the funds will come in tranches. Thus, if not adequately managed with other measures (such as higher interest rates and additional funding support from third parties or multilateral institutions), FX pressures may likely build up again, leading to another round of local currency depreciation.