Global
 
According to the Bureau of Labor Statistics (BLS), headline inflation, in the United States (US), moderated by 30bps to 3.1% y/y in January (December: 3.4% y/y), coming higher than market expectation of +2.9% y/y. We highlight that the deceleration in consumer prices was mainly driven by the decline in energy prices (-4.6% y/y vs December: -2.0% y/y) and a moderate increase in the cost of food (+2.6% y/y vs December: +2.7% y/y). On a month-on-month basis, the headline inflation rose by 0.3% (December: +0.2% m/m), driven by the uptick in shelter cost (0.6% m/m vs December: 0.4% m/m). Although we anticipate inflation to moderate further in the near term, given the ease in energy prices, we think the resilient labour market poses an upside risk in form of higher wage growth, keeping broad inflationary pressures intact. Accordingly, we expect the US Fed to await greater confidence in the sustainable return of inflation to their 2.0% target before considering any interest rate cuts. In line with the preceding, the CME FedWatch tool now indicates an 89.5% and 57.0% chance that the Fed will keep rates unchanged at its March and May policy meetings, respectively.
 
In the United Kingdom (UK), consumer prices held steady in January. According to the Office for National Statistics (ONS), the UK’s headline inflation was 4.0% in January (December: +4.0% y/y) falling below market expectations (+4.2% y/y). We highlight that the deceleration in costs of food (+6.9% y/y vs December: +8.0% y/y) and furniture & household goods (+0.4% y/y vs December: +2.5% y/y) were enough to offset the upward price pressures stemming from the softer decline in housing and utilities prices (-2.1% y/y vs December: -3.4% y/y), driven by a higher gas and electricity charges. Meanwhile, on a month-on-month basis, consumer prices declined by 0.6% (December: +0.4% m/m) – the lowest level since January 2023 (-0.6% y/y). Barring any unexpected price shocks in the economy, we expect slowdown in consumer prices in the near term, given the weak energy prices. Nonetheless, the financial markets expect the Bank of England (BoE) to leave the key policy rate unchanged at its March and May meetings. This suggests that the BOE may opt to wait for additional confirmation of a deceleration in wage increases before contemplating policy easing. Overall, market projections now indicate a 72.0% probability of the first rate cut occurring during the June policy meeting.
 
Global Equities
 
Despite a shaky start to the week marked by concerns over higher-than-expected US inflation, global equity benchmark indices staged a rebound later in the week, driven by positive responses to upbeat corporate earnings. As of the time of writing, US equities (DJIA: +0.3%; S&P 500: +0.1%) extended last week’s gains as investors brushed off inflation and recession worries following robust corporate earnings and a dip in retail sales data, which raised hopes for potential early interest rate cuts by the Federal Reserve. Similarly, European equities (STOXX Europe: +0.8%; FTSE 100: +0.3%) traded with positive sentiments as upbeat earnings updates and softer-than-expected UK inflation data raised hopes of rate cuts by the European Central Bank (ECB) and Bank of England (BoE). Meanwhile, Asian markets (Nikkei 225: +4.3%; SSE: 0.0%) were mixed, with the Japanese market buoyed by a rally in tech stocks and expectations of a delay in interest rate hikes by the Bank of Japan, while the Chinese market remained closed for the observance of the Lunar New Year holiday. The Emerging market (MSCI EM: +1.2%) index closed higher, led by positive sentiments in India (+1.2%) and Taiwan (+2.8%), while the Frontier market (MSCI FM: +0.3%) index saw gains, driven by Vietnam (+0.9%).
 
Nigeria
 
Domestic Economy
 
According to the recently released data by the National Bureau of Statistics (NBS), headline inflation rose by 98bps to 29.90% y/y in January (December: +28.92% y/y). We highlight that the increased consumer prices synchronised neatly with the effect of (1) chronic FX pressures, (2) high food demand-supply gap, mainly attributable to below-average harvests, and (3) elevated diesel and gas prices, amid the unfavourable base effects from the prior year. Accordingly, we highlight broad-based pressures across the food and core baskets – food inflation (+148bps to 35.41% y/y) remained at a 19-year high whereas core inflation rose by 53bps to 23.59% y/y. On a month-on-month basis, the consumer prices surged by 35bps to 2.64% (December 2023: +2.29% m/m) – the highest print in 5 months. Over the short term, we expect the impact of the heightened conflicts in the North and the rising transport costs to (1) undermine food access and (2) disrupt distribution networks, amid the traditionally high purchase reliance for food during the post-harvest period across the country. At the same time, we expect the persistent currency pressures and elevated energy costs to keep the pressure on the core basket intact. Accordingly, we forecast consumer prices to settle at 30.34% y/y in February.
 
According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) increased for the second consecutive month, rising by 5.9% m/m to 1.64mb/d in January (December 2023: 1.55mb/d). Notably, the outturn represents a c.11.7% increase from the average crude production level recorded in 2023FY (1.47mb/d | 2022FY average: 1.38 mb/d). Interestingly, production at the Bonny terminal (+9.3% m/m) came in at 37-months high, with production volume also increasing across the Qua Iboe (+6.0% m/m), Forcados (+4.5%) and Escravos (+3.5% m/m) production terminals. We attribute the overall crude oil production increase to the impact of the government’s efforts to curb crude oil theft and vandalism. At the same time, we highlight that the NUPRC, in its endeavor to promote transparency and accountability, recently unveiled a three-year Regulatory Action Plan (RAP) for Nigeria’s upstream oil and gas sector, aimed at increasing crude oil production (including condensates) volumes to 2.60mbpd by 2026. Despite the FG’s efforts to combat crude oil theft and vandalism, we anticipate that (1) frequent leaks from pipelines and (2) intermittent oil terminal shutdowns for repairs could pose downside risks to crude oil production in the near term. As a result, we maintain our estimate that crude oil production (including condensate) will settle at an average of 1.59 mb/d in 2024E (vs FGN’s estimate: 1.78mb/d).
 
Capital Markets
 
Equities

Positive sentiments returned to the local bourse this week as investors re-entered the market. Despite profit-taking activities on banking stocks earlier in the week, the market remained in the green territory due to bargain hunting in BUAFOODS (+20.8%), AIRTELAFRI (+10.0%) and GEREGU (+33.3%). As a result, the All-Share Index advanced by 3.8% w/w, with the MTD and YTD returns increasing to +4.5% and +41.4%, respectively. Activity levels remained weak, as trading volume and value declined by 36.8% w/w and 23.8% w/w, respectively. Analysing by sectors, the Consumer Goods (+11.0%), Oil and Gas (+5.2%) and Insurance (+2.7%) indices advanced while the Banking (-1.3%) and Industrial Goods (-1.8%) indices declined.

In the coming week, we expect sentiments to be determined by the movement of yields in the fixed income market. Also, as we move towards the earnings season, further earnings releases and possible dividend declarations may be the catalysts for another spurt of positive sentiment which supports buying activities on the bourse.
 
Money market and fixed income
 
Money market
 
The overnight (OVN) rate contracted by 7bps w/w to 16.9%, as the financial system remained buoyant from last week, further supported by inflows from OMO maturities (NGN40.00 billion) amid debits for CRR maintenance (32.5% of w/w increase of DMB deposits). Accordingly, the average system liquidity this week settled higher at a net long position of NGN302.20 billion (prior week: net long position of NGN242.23 billion)
 
Next week, we envisage an upward shift in the OVN rate as we believe the debits for next week’s FGN bonds auction (NGN2.50 trillion) and possible net NTB issuances will squeeze out all the liquidity in the system amid inflows from FGN Bond coupon payments (NGN112.67 billion).
 
Treasury bills
 
Activities in the Treasury bills secondary market closed on a negative note this week as the average yield across all instruments expanded by 9bps to 16.0%. Nonetheless, we note that sentiments were bullish for most of the week as market players cherry-picked instruments with attractive yield across the spectrum. Across the market segments, the average yield advanced by 12bps to 15.5% in the T-bills segment but declined by 10bps to 17.8% in the OMO secondary market.
 
Next week, we envisage reduced bill demand in the secondary market following our expectations of tight liquidity conditions. Thus, we believe yields in the secondary market will likely head northwards. Additionally, the CBN is scheduled to conduct an NTB PMA on Wednesday (21 February), with NGN265.50 billion worth of maturities available on offer.
 
Bonds
 
Bearish sentiments persisted in the Treasury bonds secondary market as the average yield increased by 63bps w/w to 16.1%. We attribute this week’s performance to (1) investors exiting positions ahead of the February 2024 bonds auction and (2) the underwhelming CPI data (January 2023 Inflation: +29.90% y/y) released by the NBS on Thursday. Across the benchmark curve, the average yield expanded at the short (+86bps), mid (+69bps) and long (+66bps) segments, following sell-offs of the JAN-2026 (+257bps), JUN-2033 (+125bps) and APR-2049 (+187bps) bonds, respectively.
 
Next week, we expect the outcome of this month’s FGN bond auction holding on Monday (19 February) to influence the direction of yields in the secondary market. At the auction, the DMO is offering instruments worth NGN2.50 trillion through new issuances of the FGN FEB 2031 (7-year) and FGN FEB 2034 (10-year) bonds. Nevertheless, based on our analysis of the factors expected to influence market direction in 2024E, including (1) expected money policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics, we anticipate yields in the FGN bonds secondary market will trend upwards over the medium term.
 
Foreign Exchange
 
Nigeria’s FX reserves recorded gains this week, as the gross reserves level increased by USD96.05 million w/w to USD33.21 billion (14 February). Meanwhile, the naira depreciated by 4.4% to NGN1,537.96/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the CBN sold c.USD170.00 million to banks during the week. At the NAFEM, total turnover (as of 15 February 2024) declined by 60.2% WTD to USD968.86 million, with trades consummated within the NGN922.38 – NGN1,607.00/USD limit. In the Forwards market, the naira depreciated across the 1-month (-2.5% to NGN1,505.23/USD), 3-month (-2.7% to NGN1,542.87/USD), 6-month (-3.2% to NGN1,595.69/USD), and 1-year (-3.4% to NGN1,702.07/USD) contracts.
 
Notwithstanding the recent policy actions by the CBN, the currency has remained under pressure given that the market supply remains frail. In our opinion, this will remain the case until the apex authority (1) completely clears the FX backlog, and (2) significant inflows are received from foreign sources through foreign borrwings or Eurobond issuances, and (3) the CBN intervenes meaningfully and supports system liquidity until market dynamics improve.