According to the Bureau of Labor Statistics (BLS), consumer prices in the United States increased by 30bps to 3.4% y/y in December (November: +3.1% y/y) – above market expectations (+3.2% y/y). We highlight that the increase was primarily due to a slower rate of decline in energy prices amid a solid pace of wage growth. Notably, the decline in energy prices (-2.0% y/y vs November: -5.4% y/y) was much lower than the previous month as fuel and gasoline prices declined at a slower pace, relative to the prior year. On a month-on-month basis, headline inflation rose by 0.3% (November: 0.1% m/m). In our opinion, elevated crude oil prices pose potential upward pressures on consumer prices in the short term. In addition to increased wages, the preceding may likely ensure that broad inflationary pressures remain intact. Nonetheless, financial markets seem to expect that the US Fed will abstain from additional rate hikes in the upcoming two meetings, delaying any potential rate cuts until later in the year. Indeed, the CME FedWatch tool indicates a 95.3% and 71.8% chance that the Fed will keep rates unchanged at its January and March policy meetings, respectively.

China’s economy faces growing deflationary pressures as consumer prices remain negative for three consecutive months. According to the recently released data by the National Bureau of Statistics, China’s headline inflation declined by 0.3% y/y in December (November: -0.5% y/y). Notably, the pace of contraction weakened in the review period mainly due to a more robust demand and softer decline in pork prices. Parsing through the breakdown provided, the decline in food prices slowed by 3.7% y/y in December (November: -4.2% y/y), as pork prices (-26.1% y/y vs November: -31.8% y/y) dropped at a softer rate. At the same time, non-food inflation increased by 0.5% y/y (November: +0.4% y/y), driven by higher price growth in the clothing, health and transport sub-baskets. On a month-on-month basis, headline inflation increased by 0.1% (November: -0.5% m/m). We highlight that the deflationary pressures remain a significant risk to China’s growth prospects amid (1) subdued domestic demand, (2) persistent property market wobbles, and (3) a local debt crisis. Despite the Chinese central bank’s commitment to intensifying macroeconomic policy adjustments to bolster the economy and stimulate a resurgence in prices, we remain cautious about the prospects for the economy.

Global Equities

Equities markets across the globe posted mixed performances this week, as higher-than-expected inflation data in the US and positive labour market signs tempered hopes for early Fed rate cuts. Despite the slightly hotter-than-expected inflation data, US equities (DJIA: +0.7%; S&P 500: +1.8%), were poised to finish the week higher, driven by a rally in mega-cap stocks such as Microsoft and Nvidia. Meanwhile, European equities (STOXX Europe: -0.8%; FTSE 100: -1.5%) were on track for another weekly decline, as the latest US inflation reading dampened expectations of early interest rate cuts by major central banks worldwide. Elsewhere, performances in the Asian market (Nikkei 225: 6.6%; SSE: -1.6%) were mixed as the Japanese market rallied on expectations of an ultra-dovish Bank of Japan, while deflation concerns weighed on the Chinese market. Finally, the Emerging (MSCI EM: -0.7 %) market declined, following the bearish sentiments in China (-1.6%), while the Frontier (MSCI FM: +0.3%) market saw marginal gains driven by the positive performance in Vietnam (+0.2%).

Nigeria

Domestic Economy

According to the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined by 4.0% m/m to USD1.37 billion in December (November: USD1.43 billion). The breakdown provided showed a broad-based decline across the local (82.7% of total inflows) and foreign sources (17.3%). Expressly, local inflows declined by 2.6% m/m to USD1.13 billion (November: USD1.16 billion), primarily due to weaker inflows from Exporters (-15.4% m/m) amid substantial increases in Individuals’ inflows (+1678.6% m/m). Similarly, inflows from foreign sources remained underwhelming, declining further by 9.9% m/m to USD237.10 million (November: USD263.20 million) as foreign investors remained cautious about returning in droves following Nigeria’s FX market inadequacies. Overall, the total inflow into the NAFEM window averaged USD1.17 billion in 2023FY (2022FY: USD1.24 billion). Looking ahead, we expect FX liquidity conditions to remain frail in the near term as FX reform momentum has slowed considerably. In addition, we expect subdued foreign inflows in the short term, as foreign investors are likely to adopt a cautious approach. Nonetheless, we anticipate an improvement in foreign participation over the medium term, propelled by (1) expected FX inflows as guided by the authorities and (2) CBN’s recent actions aimed at clearing its FX backlogs.

Based on the Debt Management Office (DMO) data, Nigeria’s public debt stock increased marginally by 0.6% q/q to NGN87.91 trillion in Q3-23 (Q2-23: NGN87.38 trillion). According to the breakdown, the total domestic debt stock outstanding increased by 3.3% q/q to NGN55.93 trillion, reflecting new borrowings to finance rising government expenditures against the persistent revenue underperformance. Meanwhile, the total external debt stock outstanding declined by 3.8% q/q to NGN31.98 trillion following the (1) redemption of a USD500 million 10-year tenor Eurobond and (2) payment of USD413.86 million as the first principal repayment of the USD3.40 billion loan obtained from the International Monetary Fund in 2020 during Covid-19. Looking ahead, we anticipate the government will limit its reliance on external borrowings and instead emphasize domestic sources. Notably, we envisage the public debt outstanding to settle at NGN90.49 trillion (or 43.1% of GDP) in 2023E (vs 2022FY: NGN46.25 trillion or 23.2% of GDP) driven by (1) the local currency depreciation and (2) an expected increase in new borrowings to fund the 2024E budget deficit.

Capital Markets

Equities

The Nigerian equities market extended its bullish run for a second week as investors continued to cherry-pick stocks ahead of 2023FY earnings releases. Although, profit-taking activities briefly tempered the upbeat trend midweek, strong rallies in the Consumer Goods, Banking and Industrial Goods stocks propelled the market’s pricing gauge to a historic high, with the All-Share Index remaining above the 80,000-points mark breached earlier in the week, closing at 83,042.96 points. Notably, increased investors’ interest in BUAFOODS (+15.5%), DANGCEM (+7.7%), TRANSCORP (+17.9%) and GTCO (+8.9%), resulted in a 4.2% w/w gain in the All-Share Index and elevated the Year-to-Date gain to +11.1%. The trading activity level remained positive, as trading volume and value increased by 72.3% w/w and 112.7% w/w, respectively. On sectors, the Consumer Goods (+9.6%), Insurance (+7.6%), Banking (+5.1%) and Industrial Goods (+4.8%) indices advanced, while the Oil and Gas (-1.6%) index declined.

In the short term, we expect market performance to be dominated by the bulls, as positioning for 2023FY earnings releases and accompanying dividends declarations should outweigh profit-taking activities. Notwithstanding, we advise investors to take 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

The overnight (OVN) rate increased by 290bps w/w to 17.8%, following CRR debits and settlements for Wednesday’s OMO auction (NGN357.20 billion) within the week. However, due to banks’ participation at the CBN’s SLF window, the average system liquidity settled higher at a net long position of NGN250.11 billion (vs a net long position of NGN159.30 billion in the previous week).

We anticipate the OVN rate will likely remain elevated next week, as the expected sole inflow from FGN bond coupon payments (NGN65.36 billion) might be insufficient to saturate the system liquidity.

Treasury bills

This week, proceedings in the Treasury bills secondary market were bullish, as the average yield across the market contracted by 247bps to 4.0%. We attribute this week’s secondary market performance to the (1) feed-through effect from the markedly lower yields at the Wednesday PMA and (2) auction participants looking to fill unmet bids. Across the market segments, the average yield dipped by 267bps to 3.3% in the T-bills segment and contracted by 247bps to 8.4% in the OMO secondary market. At the NTB primary auction, the CBN offered instruments worth NGN56.56 billion – NGN2.78 billion for the 91-day, NGN1.49 billion for the 182-day, and NGN52.29 billion for the 364-day bills. The auction was massively contested as the total subscription settled at NGN1.14 trillion (bid-to-offer: 20.2x). Eventually, the CBN allotted exactly what was offered – at respective stop rates of 2.44% (previously: 7.00%), 4.22% (previously: 10.00%), and 8.40% (previously: 12.24%). Likewise, the CBN held an OMO auction this week, offering participants instruments worth NGN300.00 billion – NGN75.00 billion for the 97-day, NGN75.00 billion for the 181-day, and NGN150.00 billion for the 363-day bills. The subscription level at the auction settled at NGN414.20 billion (bid-to-offer: 1.4x), with the eventual allotment amounting to NGN357.20 billion – NGN22.00 billion for the 97-day, NGN35.20 billion for the 181-day and NGN300.00 billion for the 363-day – at respective stop rates of 10.50%, 14.00% (previously: 12.00%), and 17.75% (previously: 15.00%).

Next week, following our expectation of a possible liquidity deficit, we envisage reduced demand for instruments in the Treasury bills secondary market. Thus, we believe yields will likely trend higher.

Bonds

Activities in the FGN bonds secondary market were bullish, as bargain hunting persisted for instruments with attractive yields across the curve. Accordingly, the average yield declined by 44bps to 13.3%. Across the benchmark curve, the average yield contracted across the short (-53bps), mid (-48bps) and long (-42bps) segments following investors’ interest in the MAR-2024 (-145bps), APR-2032 (-66bps) and JUL-2037 (-58bps) bonds, respectively.

Given our analysis of the factors expected to influence market direction in 2024E – such as (1) monetary policy stance globally and domestically and (2) sustained imbalance in the demand and supply dynamics – we expect yields in the FGN bonds secondary market to trend upwards in the medium term.

Foreign Exchange

Nigeria’s FX reserves maintained its upward trend this week, increasing by USD49.07 million w/w to close at USD33.09 billion (11 January 2024). Meanwhile, the naira depreciated by 2.4% to NGN890.54/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover in the market (as of 10 January 2024) increasing by 29.4% WTD to USD457.45 million, as trades were consummated within the NGN475.00 – NGN1,289.00/USD band. In the Forwards market, naira rates depreciated across the 1-month (-7.8% to NGN983.89/USD), 3-month (-7.5% to NGN1,005.14/USD), 6-month (-7.2% to NGN1,039.12/USD), and 1-year (-6.8% to NGN1,114.08/USD) contracts.

Looking ahead, we expect FX 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.