The bullish trend persisted for the third consecutive week in the domestic equities market, with investors showing interest in bellwether stocks – MTNN (+2.9%), SEPLAT (+7.4%) and AIRTELAFRI (+1.1%) – thus propelling the All-Share Index to a 0.4% w/w increase to 71,112.99 points.
November 17, 2023/Cordros Report
Global Economy
According to the Bureau of Labor Statistics (BLS), the United States headline inflation moderated by 50bps to 3.2% y/y in October (September: 3.7% y/y) – below market expectations (+3.3% y/y). We highlight that the deceleration in consumer prices was mainly driven by the decline in energy prices (-4.5% y/y vs September: -0.5% y/y) and a moderation in the cost of food (+3.3% y/y vs September: +3.7% y/y). On a month-on-month basis, consumer prices were unchanged relative to the 0.4% m/m printed in September. While we expect the headline inflation to maintain its deceleration trend, consumer prices may remain sticky above the Fed’s 2.0% target over the short-to-medium term amid relatively still-tight labour market conditions, which is ensuring the world’s largest economy be on a soft-landing path. Thus, we think the US Fed is unlikely to increase interest rates further from current levels, allowing the previous rate hikes to continue permeating the economy. Indeed, the financial markets expect the key policy rate to remain at a target range of 5.25% – 5.50% until May 2024, when the CME FedWatch tool indicates a 48.9% chance that the US Fed will cut the policy rate by 25bps.
Similarly, in the United Kingdom (UK), the reduction in energy prices led to a 210bps slowdown in consumer prices in October. According to the Office for National Statistics (ONS), the UK’s inflation rate eased to 4.6% y/y in October (September: 6.7% y/y) – the lowest level since October 2021 (4.2%). Analysing the breakdown provided, food prices (10.1% y/y vs September: 12.2% y/y) moderated to a 16-month low, while the core inflation (5.7% y/y vs September: 6.1% y/y) maintained its downtrend for the third consecutive month. On a month-on-month basis, consumer prices were flat in October (September: 0.8% m/m). Looking ahead, we anticipate a further slowdown in consumer prices given the (1) favourable base effects from the prior year, (2) moderation in energy prices, and (3) impacts of elevated interest rates. That said, the BoE forecasts that the inflation rate will only return to its 2.0% target in late 2025, suggesting that the progress in bringing inflation down is slow. Overall, the market-implied path for the BOE’s Bank rate remains at 5.25% until Q3-24 and gradually declines to 4.25% by the end of 2026.
Global Equities
While this week’s focus in global stock markets remains on quarterly corporate earnings announcements, hopes for an end to the Federal Reserve’s interest rate increases aided sentiments amid encouraging economic (consumer and producer prices) data. As of the time of writing, US equities (DJIA: +1.9%; S&P 500: +2.1%) posted gains, driven by signs of cooling inflation, which generated optimism about a potential shift in the Federal Reserve’s interest rate policy. Likewise, European equities (STOXX Europe: +1.8%; FTSE 100: +0.7%) built on last week’s gains, fueled by expectations that the major central banks may have reached the end of their monetary policy tightening cycles. Similarly, Asian markets (Nikkei 225: +3.1%; SSE: +0.4%) advanced, mirroring Wall Street’s gains amid optimism over the solid corporate earnings in Japan. Lastly, Emerging market (MSCI EM: +3.6%) and Frontier market (MSCI FM: +2.0%) indices closed higher, driven by positive sentiments, in China (+0.4%) and Vietnam (+0.5%), respectively.
Nigeria
Domestic Economy
In October, consumer prices, according to the National Bureau of Statistics (NBS), sustained their upward trend, rising by 61bps to 27.33% y/y (September: 26.72% y/y). The increased consumer prices synchronised neatly with the impact of (1) elevated energy prices, (2) lingering currency pressures, and (3) unfavorable base effects from the previous year. Accordingly, we highlight broad-based pressures across the food and core inflation baskets. Notably, food inflation (+88bps to 31.52% y/y) remains at an 18-year high while non-inflation (+59bps to 22.69% y/y) is at its highest level since March 2004 (32.64% y/y). On a month-on-month basis, the headline inflation moderated for the second consecutive month, easing by 37bps to 1.73% (September: 2.10% m/m). We expect consumer prices to remain elevated over the rest of the year, partly due to the troika effects of (1) festive-induced demand, (2) lingering increase in gas and diesel prices, and (3) persistent currency pressures, amid the rebound effects from the prior year. Consequently, we expect the headline inflation to settle at 1.79% m/m and 1.86% m/m in November and December, translating to a y/y reading of 27.83% in November and a likely 28.02% y/y peak in December.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to meet on the 20th and 21st of November after failing to have its September policy meeting, following the appointment of the new CBN Governor. Since the last MPC meeting in July, the monetary policy space has changed rapidly, given some orthodoxy introduced by the CBN, particularly since the beginning of October. We expect the MPC to increase the MPR by at least 100bps at the policy meeting. Notably, we believe that further rate hikes will send a strong message that the apex bank is not relenting in its inflation fight, particularly as near-term inflation expectations are tilted to the upside, potentially reaching a 28.02% y/y peak in December. Besides, we think that maintaining the MPR at current levels will not be synchronous with the lingering increase in the market interest rates. Thus, to align with the recent market interest rate increases, the Committee will likely favour a further increase in the MPR more so that the (1) MPR remains the key signaling tool for market interest rates and (2) inflationary pressures have remained intact.
Capital Markets
Equities
The bullish trend persisted for the third consecutive week in the domestic equities market, with investors showing interest in bellwether stocks – MTNN (+2.9%), SEPLAT (+7.4%) and AIRTELAFRI (+1.1%) – thus propelling the All-Share Index to a 0.4% w/w increase to 71,112.99 points. Consequently, the Month-to-Date and Year-to-Date returns rose to +0.4% and +38.8%, respectively. However, trading activity weakened, with total traded volume and value decreasing by 19.9% w/w and 39.0% w/w, respectively. Meanwhile, sectoral performance was mixed, with gains observed in the Oil and Gas (+2.6%), Insurance (+0.9%) and Consumer Goods (+0.2%) indices and a decline in the Industrial Goods (-1.2%) index. The Banking index remained unchanged.
We believe investors will closely monitor the results of the upcoming MPC meeting next week to gain further clarity on the movement of yields in the FI market. As a result, we anticipate cautious trading on the local bourse. Overall, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
In line with our expectations, the overnight (OVN) rate increased by 462bps w/w to 22.2%, following the tight liquidity conditions at the start of the week and debits for the FGN bond PMA (NGN434.50 billion) amid inflow from OMO maturities (NGN30.00 billion). Nonetheless, given that the DMBs have slowed the pace of SDF utilisation (average: NGN99.12 billion | NGN282.84 billion in the prior week), the average system liquidity settled higher at a net long position of NGN17.31 billion (vs a net short position of NGN206.05 billion in the previous week).
Next week, we expect system liquidity to remain relatively low, as the expected inflow from FGN bond coupon payments (NGN17.87 billion) may be insufficient to saturate the financial system. Thus, the OVN rate is likely to remain elevated.
Treasury bills
Bullish sentiments persisted in the Treasury bills secondary market this week, as market players continued to cherry-pick instruments with attractive yields. Consequently, the average yield across the market declined by 65bps to 12.9%. Across the market segments, the average yield contracted by 61bps to 12.8% in the NTB secondary market and declined by 114bps to 14.7% in the OMO segment.
Following our expectation of a liquidity squeeze next week, we envisage higher yields in the T-bills secondary market. In addition, the DMO is scheduled to hold an NTB PMA on Wednesday (22 November), where it will roll over maturities worth NGN211.71 billion.
Bonds
Proceedings in the FGN bonds secondary market closed on a bearish note as the average yield expanded by 6bps to 15.8%. Across the benchmark curve, the average yield contracted at the short (-25bps) end, as investors demanded the MAR-2024 (-147bps) bond. Elsewhere, the average yield expanded at the mid (+5bps) and long (+24bps) segments, following selloffs of the JUN-2033 (+21bps) and APR-2053 (+90bps) bonds, respectively. At this month’s auction, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 14.55% FGN APR 2029 (Bid-to-offer: 0.4x; Stop rate: 16.00%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.4x; Stop rate: 17.00%), 15.45% FGN JUN 2038 (Bid-to-offer: 0.5x; Stop rate: 17.50%), and 15.70% FGN JUN 2053 (Bid-to-offer: 3.7x; Stop rate: 18.00%) bonds. The subscription level settled higher at NGN445.80 billion, translating to a bid-to-offer ratio of 1.2x (vs bid-to-offer ratio of 1.1x at the previous auction). Eventually, the DMO over-allotted instruments worth NGN434.50 billion, which resulted in a bid-to-cover ratio of 1.0x.
Over the short term, we expect higher yields in the FGN bonds secondary market, driven by the sustained imbalance in the demand and supply dynamics.
Foreign Exchange
Nigeria’s FX reserve declined further this week, as the gross reserves level decreased by USD65.56 million w/w to close at USD33.31 billion (16 November). Meanwhile, the naira depreciated by 1.5% to NGN791.75/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market (as of 16 November 2023) decreasing by 8.6% WTD to USD635.21 million, as trades were consummated within the NGN600.00 – NGN1,140.00/USD band. In the Forwards market, the naira rates across the 1-month (+1.0% to NGN864.79/USD), 3-month (+0.1% to NGN889.78/USD) and 6-month (+0.1% to NGN917.14/USD) contracts recorded appreciation, while the 1-year (-0.8% to NGN976.61/USD) contract depreciated.
Looking ahead, we expect FX liquidity conditions to improve slightly, albeit still frail relative to historical levels, as it appears the CBN has regained its momentum regarding FX reforms. Consequently, if the recent convincing actions by the policymakers to turn the tide are sustained, we expect the local currency pressures to ease. Nonetheless, we expect foreign investors to be keenly watching the development in the FX space with regard to the (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.
