According to the Bureau of Labor Statistics (BLS) in the United States (US), headline inflation slowed further by 10bps to 3.1% y/y in November (October: 3.2% y/y). Analysing the breakdown provided, we highlight that the decline in energy prices (-5.4% y/y vs October: -4.5% y/y) and a moderation in the cost of food (+2.9% y/y vs October: +3.3% y/y) were the significant drivers of the overall downturn in consumer prices in the review month. On a month-on-month basis, consumer prices rose by 0.1% (October: 0.0% m/m). 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. 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, financial market expectations seem tilted towards the key policy rate remaining within the target range of 5.25% – 5.50%, with the CME FedWatch tool indicating an 85.5% chance that the US Fed will keep the rates unchanged at its March policy meeting.

In line with market expectations, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 6 – 3 to maintain the bank rate at 5.25%. In terms of voting pattern, three members voted for a 25bps increase, while six members voted to maintain the rate at 5.25%. In its assessment, the Committee noted that the real GDP aligned with its expectations, while inflation and wage growth undershot expectations. Consequently, the committee emphasized the importance of closely monitoring the underlying tightness in labour market conditions, wage growth and services price inflation to gauge the potential for future rate adjustments. There are indications that the BoE has ended its interest rate hiking cycle, given its expectations of a significant dip in consumer prices in the near term. However, we do not rule out the possibility of an additional rate hike in the near term, considering the statement of Governor Andrew Bailey that “there is still some way to go in bringing down inflation”, which signals that the BoE may return hawkish if conditions warrant a more restrictive policy stance.

Global Equities

Global markets are set to close the week on a positive note, fueled by optimism that the US economy is poised for a ‘soft landing’ in the coming year, potentially lifting other economies worldwide. Thus, US equities (DJIA: +2.8%; S&P 500: +2.5%) printed higher, driven specifically by general market sentiment amid strong November retail sales data. Sequentially, European equities (STOXX Europe: +1.0%; FTSE 100: +1.3%) also posted gains following the positive signs from the US economy despite the more cautious stances from the ECB and BoE on interest rates. Meanwhile, performance in the Asian markets (Nikkei 225: +2.1%; SSE: -0.9%) was mixed as the Japanese market advanced due to dovish signals from the US Fed and BoJ while the series of disappointing economic data for November triggered cautious trading in the Chinese market. Finally, trading in the Emerging (MSCI EM: +1.8%) and Frontier (MSCI FM: +1.0%) markets were bullish, supported by the gains in Brazil (+3.0%) and Iceland (+2.9%), respectively.

Nigeria

Domestic Economy

The Nigerian Upstream Regulatory Commission (NUPRC) reported a second consecutive monthly decline in aggregate crude oil production (including condensates). In November, crude oil production declined by 6.1% m/m to 1.47mb/d (October: 1.56mb/d) – below OPEC’s quota (1.80mb/d) for the 11th consecutive month in 2023. We highlight that the shortfall was largely due to crude oil theft and frequent pipeline vandalism. As a result, the low crude oil production in the review period was driven by declines across the Bonny (-21.7% m/m), Forcados (-15.3% m/m), and Escravos (-8.1% m/m) production terminals. While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that (1) frequent leaks from pipelines and (2) intermittent oil terminal shutdowns for repairs pose downside risks to crude oil production in the near term. Thus, we maintain our 2023E average crude oil production estimate of 1.42mb/d (vs FGN’s estimate: 1.69mb/d), a relatively slight improvement compared to 2022FY average daily production volume (1.37mb/d). Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

According to the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 14.3% q/q to NGN1.75 trillion in Q3-23 (Q2-23: NGN1.53 trillion). Analyzing the breakdown provided, we highlight that foreign CIT payments grew rapidly by 117.0% q/q to NGN1.10 trillion, on account of the lingering impact of the currency devaluation. Meanwhile, local collections declined by 36.4% q/q to NGN651.63 billion, reflecting the challenging operating environment faced by businesses in the country. The decline in domestic receipts was driven by diminished performance in sectors such as Financial and insurance services (-72.7% q/q), Transport and storage (-66.3% q/q), and Manufacturing (-40.7% q/q). On a year-on-year basis, total CIT collections increased significantly by 115.9% (Q3-22: NGN810.19 billion). In the near term, we expect CIT collections to continue to improve, given an increase in voluntary tax compliance and automation of the tax administration process. Key risks to corporates and, subsequently, CIT collections in the near term include the impact of underwhelming demand, a further rise in operating costs arising from FX liberalisation and lingering increases in energy costs.

Capital Markets

Equities

As the holiday season approaches, the domestic equities market rallied on four consecutive trading days this week, with the market recording a 1.2% w/w gain which propelled the All-Share index to 72,389.23 points. Specifically, bargain hunting in MTNN (+2.7%), ACCESSCORP (+9.6%), ZENITHBANK (+6.0%) and UBA (+7.3%) supported the bullish performance. Accordingly, the Month-to-Date and Year-to-Date returns advanced to +1.4% and +41.2%, respectively. Nonetheless, activity levels weakened as total traded volume and value moderated by 22.1% w/w and 29.7% w/w, respectively. Across sectors, the Banking (+7.0%), Consumer Goods (+0.2%) and Industrial Goods (+0.2%) indices posted gains, while the Insurance (-1.0%), and Oil and Gas (-0.3%) indices recorded losses.

We expect the market to remain mixed in the coming week as investors cherry-pick counters given the absence of any significant positive catalysts. Nevertheless, we reiterate the need for investors to seek positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate expanded by 367bps to 23.3% as debits for the FGN bond auction (NGN273.63 billion) and net NTB issuance (NGN250.00 billion) mounted pressure on the liquidity in the financial system. Notwithstanding, the average system liquidity closed higher at a net long position of NGN19.74 billion (vs. a net short position of NGN109.30 billion in the previous week) due to DMBs’ participation at the CBN’s SLF window.

We envisage the OVN rate will likely remain elevated next week as the expected inflow from FGN bond coupon payments (NGN29.84 billion) may be insufficient in saturating the financial system.

Treasury bills

This week, activities in the Treasury bills secondary market turned bullish as the average yield across the market dipped by 263bps w/w to 8.7%. We attribute this week’s performance to (1) auction participants moving to the secondary market to cover for lost bids at the primary market auction (PMA) on Wednesday, and (2) players cherry-picking instruments with attractive yields. Across the market segments, the average yield declined by 272bps to 8.3% in the NTB secondary market and contracted by 166bps to 12.9% in the OMO segment. At this week’s NTB auction, the DMO offered instruments worth NGN13.58 billion – NGN1.10 billion for the 91-day, NGN1.28 billion for the 182-day, and NGN11.20 billion for the 364-day. The auction was hugely contested as the total subscription level settled at NGN1.57 trillion (bid-to-offer: 115.7x vs. previous auction: 16.9x). Eventually, the DMO over-allotted bills worth NGN263.58 billion – NGN728.00 million for the 91-day, NGN6.35 billion for the 182-day, and NGN256.51 billion for the 364-day – at respective stop rates of 6.25% (previously: 9.00%), 11.00% (previously: 13.00%), and 13.50% (previously: 15.75%).

Next week, we anticipate yields in the T-bills secondary market will likely trend upwards following our expectations of a still tight financial system.

Bonds

The Treasury bonds secondary market sustained its bullish performance as investors sought to cover lost bids at Monday’s auction. Consequently, the average yield contracted by 48bps to 14.4%. Across the benchmark curve, the average yield declined at the short (-55bps) and long (-84bps) ends due to demand for the MAR-2024 (-171bps) and JAN-2042 (-117bps) bonds, respectively. Elsewhere, the average yield expanded at the mid (+6bps) segment following the sell-off of the APR-2029 (+23bps) bond. 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: 1.9x; Stop rate: 15.5%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.6x; Stop rate: 16.0%), 15.45% FGN JUN 2038 (Bid-to-offer: 1.3x; Stop rate: 16.5%), and 15.70% FGN JUN 2053 (Bid-to-offer: 6.1x; Stop rate: 17.2%) bonds. The subscription level settled at NGN886.41 billion, translating to a bid-to-offer ratio of 2.5x, with demand skewed towards the MAR 2053 bond (bid-to-offer: 6.1x). The DMO eventually under-allotted instruments worth NGN273.63 billion, resulting in a bid-to-cover ratio of 3.2x.

Over the short term, we expect yields in the FGN bonds secondary market to trend higher, 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 fell by USD10.95 million w/w to close at USD32.85 billion (13 December). Meanwhile, the naira appreciated by 23.5% to NGN889.86/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover in the market (as of 14 December 2023) decreasing by 10.2% WTD to USD516.15 million, as trades were consummated within the NGN475.00 – NGN1186.00/USD band. In the Forwards market, the naira rates on the 1-month (-4.6% to NGN955.43/USD), 3-month (-3.9% to NGN975.10/USD), 6-month (-1.7% to NGN1001.41/USD) and 1-year (-2.5% to NGN1063.94/USD) contracts increased.

Looking ahead, we expect F.X. liquidity conditions to remain tight, pending receipt of expected FX inflows. Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards 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.