According to the Bureau of Labor Statistics (BLS), consumer prices in the United States increased by 50bps to 3.7% y/y in August (July: 3.2% y/y). The increase was primarily due to the slower decline in gasoline prices and relatively unfavourable base effects from the prior year. Notably, the decline in energy prices (-3.6% y/y vs July: -12.5% y/y) was much lower than the previous month as fuel and gasoline prices declined at a smaller pace relative to the prior year. On a month-on-month basis, the headline inflation rose by 0.6% (July: 0.2% m/m), driven by the spike in gasoline (10.6% m/m vs July: 0.2% m/m) and fuel oil (9.1% m/m vs July: 3.0% m/m) costs. High oil prices pose upside risks to consumer price pressures in the short term. In addition to lingering wage gains, the preceding may likely ensure that broad inflationary pressures remain intact, albeit significantly below the prior year. Nonetheless, the financial markets believe the US Fed may skip further rate hikes over the rest of the year. Indeed, the CME FedWatch tool indicates a 97.0% and 64.6% chance that the Fed will keep rates unchanged at its September and November policy meetings, respectively. 

At their recently concluded September policy meeting, the Governing Council of the European Central Bank (ECB) voted to increase the three key interest rates by 25bps. Primarily, the Council stated that the need to reinforce progress towards its 2.0% medium-term inflation target on time influenced its decision to raise the key policy rates at the meeting. Elsewhere, the Council considered that the key ECB interest rates have reached levels that, if maintained for a sufficiently long duration, will substantially contribute to the timely return of inflation to the target. The Council’s statement on future rates goes against previous meetings’ statements of “…ensure that the key interest rates will be brought to sufficiently restrictive levels to achieve a timely return of inflation to the 2.0% medium-term target…”. In our view, this change in tone suggests that the ECB may have reached the end of its interest rate hiking cycle. That said, we understand that the ECB President did not outrightly rule out a further rate hike at the post-meeting conference, stating that interest rates would have to remain at restrictive levels for some time.

Global Markets

Sentiments in the Global equities market were broadly positive this week as the market reacted to (1) Arm’s successful IPO and (2) China’s better-than-expected factory output data. As of the time of writing, US equities (DJIA: +1.0%; S&P 500: +1.1%) were on track to end the week positively, driven by the Fed’s comments on possible rate hike pause amid the generally positive reaction to Arm’s IPO on Thursday. In the same vein, European equities (STOXX Europe: +1.4%; FTSE 100: +2.6%) closed in the green despite the ECB’s decision to hike interest rates. Meanwhile, performance across the Asian markets (Nikkei 225: +2.8%; SSE: -0.1%) was mixed, as investors cautiously priced the higher US CPI data amid China’s further stimulus measures. Elsewhere, the Emerging (MSCI EM: +0.8%) market closed higher following gains in Brazil (+3.5%), while the Frontier (MSCI FM: -1.2%) index recorded losses following bearish sentiments in Vietnam (-1.5%).

Nigeria

Domestic Economy

According to the released data by the National Bureau of Statistics (NBS), Nigeria’s trade balance increased to NGN1.29 trillion in Q2-23 (Q2-22: NGN1.01 trillion | Q1-23: NGN927.16 billion). The higher trade balance was primarily driven by a faster decline in imports (-10.4% y/y to NGN5.73 billion) relative to exports contraction (-5.2% y/y to NGN7.02 trillion). Notably, we believe that the year-on-year decline in exports was induced by lower crude oil production (1.22mb/d vs Q2-22: 1.43mb/d) and lower oil price (-33.2% y/y to USD78.72/bbl.) in the quarter. Thus, crude oil exports (79.6% of total exports) declined by 5.4% y/y, while the exports of other oil products fell by 10.0% y/y. Meanwhile, we think the decline in imports was due to the lingering FX challenges, inducing lower imports. In the short term, we expect significant FX depreciation and higher oil prices to support crude oil exports. At the same time, we believe imports will remain constrained, partly driven by the lingering currency depreciation, which is expected to make imports expensive. Consequently, we expect the trade balance to stay in a surplus position in the near term.

The lingering impact of PMS subsidy removal and sustained local currency pressures continue to influence consumer prices. According to the National Bureau of Statistics (NBS), headline inflation rose to a new record high, increasing by 172bps to 25.80% y/y in August (July: 24.08% y/y) – its highest print since August 2005 (28.21% y/y). Aside from the factors mentioned earlier, low statistical base effects from the prior year partly drove the price increase in August. Consequently, food prices (+235bps to 29.34% y/y) rose to their highest level in 18 years, while the core inflation rose faster by 67bps to 21.15% y/y. On a month-on-month basis, the headline inflation increased by 29bps to 3.18% (July: 2.89% m/m). Although September marks the start of the primary harvest season, we expect food prices to remain elevated because of (1) the impact of significant rainfall deficits in July and August on food production prospects in the north and (2) anticipated annual flooding in September. Simultaneously, we expect the lingering pressures to keep non-food prices high. Thus, we anticipate that the headline inflation will rise by 2.47% m/m in September, with the low base effects from the prior year leading to a y/y print of 27.18%.

Capital Markets

Equities

The local bourse reversed last week’s gains as the All-Share index declined by 1.1% w/w to close at 67,395.74 points. This week’s performance was driven by profit-taking activities in ZENITHBANK (-10.0%), GTCO (-8.1%), DANGSUGAR (-10.8%), and MTNN (-1.5%) shares. Consequently, the Month-to-Date and Year-to-Date gains settled at +1.3% and +31.5%, respectively. On activity levels, the total trading volume and value increased by 10.9% w/w and 4.4% w/w, respectively. Meanwhile, sectoral performance was mixed, as the Banking (-3.2%), Oil & Gas (-2.0%), Consumer Goods (-1.8%), and Industrial Goods (-0.3%) indices declined, while the Insurance (+0.5%) index was the sole gainer.

We anticipate cautious trading on the bourse next week in the absence of strong positive triggers to boost investors’ appetite for risky assets. Overall, we reiterate that investors should seek trading opportunities in fundamentally sound stocks as the weak macroeconomic environment remains a significant headwind to corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 567bps w/w to 24.4%, as the settlements for the FGN bond auction (NGN316.49 billion) outstripped inflows from FGN bond coupon payments (NGN51.12 billion) and OMO maturities (NGN10.00 billion). Consequently, the average system liquidity closed lower at a net short position of NGN273.74 billion (vs. a net long position of NGN164.66 billion in the previous week). 

We envisage the OVN rate will remain elevated next week, as we believe expected inflows from FGN bond coupon payments (NGN134.70 billion) may not be sufficient to saturate system liquidity.

Treasury bills

Proceedings in the T-bills secondary market remained bearish, driven by the tight system liquidity this week. As a result, the average yield across the market expanded by 4bps to 8.2% – average yield increased by 5bps to 8.0% in the NTB segment but declined by 3bps to 13.3% in the OMO secondary market. At this week’s NTB auction, the CBN offered instruments worth NGN152.20 billion – NGN1.10 billion for the 91-day, NGN918.38 million for the 182-day and NGN150.18 billion for the 364-day – to market participants. Demand at the auction was lower than the previous PMA, as the total subscription level settled at NGN643.88 billion (previous auction: NGN875.74 billion). Eventually, the CBN allotted precisely what was offered at respective stop rates of 6.50% (previously: 4.50%), 7.00% (previously: 7.00%), and 12.98% (previously: 12.55%).

In the upcoming week, we anticipate that yields in the Treasury bills secondary market will sustain its upward tilt following the anticipated dearth in system liquidity.

Bonds

Sentiments in the FGN bond secondary market were bearish as the average yield expanded by 23bps to 14.4%. Across the benchmark curve, the average yield advanced across the short (+38bps), mid (+11bps), and long (+22bps) segments due to the profit-taking activities on the MAR-2025 (+152bps), APR-2029 (+24bps), and MAR-2050 (+47bps) 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: 0.5x; Stop rate: 14.50%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.1x; Stop rate: 15.45%), 15.45% FGN JUN 2038 (Bid-to-offer: 0.3x; Stop rate: 15.55%), and 15.70% FGN JUN 2053 (Bid-to-offer: 2.3x; Stop rate: 16.25%) bonds. Demand was lower across the four instruments as the total subscription level settled at NGN290.99 billion (vs NGN312.56 billion in the previous auction), with the DMO allotting bonds worth NGN316.49 billion (including non-competitive allotments of NGN65.00 billion), resulting in a bid-to-cover ratio of 0.9x.

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

Foreign Exchange

Nigeria’s FX reserve maintained its descent this week, as gross reserves dropped by USD32.87 million w/w to close at USD33.29 billion (13 September). Meanwhile, the naira depreciated by 4.6% to NGN756.91/USD at the I&E window (IEW), with total turnover at the window (as of 14 September 2023) decreasing by 48.6% WTD to USD229.01 million, as trades were consummated within the NGN720.00 – NGN807.15/USD band. In the Forwards market, the naira rates recorded for the 1-month (-2.1% to NGN797.78/USD), 3-month (-2.4% to NGN818.79/USD), 6-month (-2.7% to NGN850.66/USD), and 1-year (-3.3% to NGN918.18/USD) contracts decreased.

The narratives in the FX market have remained the same in recent weeks, as FX reform momentum has slowed down. Hence, barring any significant positive developments, we expect (1) the lingering low crude oil production and (2) a sustained dip in foreign investors’ net flows to weigh on FX supply in the short term. Consequently, we expect FX liquidity constraints to linger in the near term, ensuring the local currency pressures remain intact.