According to the Bureau of Labor Statistics (BLS), consumer prices in the United States increased by 10bps to 3.2% y/y in February (January: +3.1% y/y) – above market expectations (+3.1% y/y). Analyzing the breakdown, energy prices (-1.9% y/y vs January: -4.6% y/y) settled lower than the previous month as gas and gasoline prices declined at a slower pace relative to the prior year. Meanwhile, Food prices (+2.2% y/y vs January: +2.6% y/y) moderated to a 33-month low influenced by a slowdown across costs of food at home (+1.0% y/y vs January: +1.2% y/y) and food away from home (+4.5% y/y vs January: +5.1% y/y). On a month-on-month basis, headline inflation rose by 0.4% (January: 0.2% m/m), driven by the spike in shelter and gasoline prices. While we expect the high energy prices and wage gains to keep broader inflationary pressures intact, we anticipate supply chain disruptions stemming from the Red Sea crisis to exert further upward pressure on goods prices in the near term. Also, given that inflation remains sticky and above the US Fed’s target, financial markets believe the Fed may maintain a ‘HOLD’ stance over its next two policy meetings as it awaits greater confidence in the sustainable return of inflation to the 2.0% target. Indeed, the CME FedWatch tool indicates probabilities of 99.0% and 89.1% that the Fed will keep rates unchanged at the March and May policy meetings, respectively.

According to the United States Department of Labor, the initial jobless claims in the US declined by 1,000 to 209,000 in the week ending 9 March (vs the week ending 2 March: 210,000), signaling a resilient labour market despite tight monetary conditions. We attribute the outturn to the improved economic activities and employers’ quests to retain workers. Although layoffs remain at low levels, we highlight that there has been an uptick in job cuts recently, mainly across technology and media firms. As a result, continuing claims for unemployment insurance rose by 17,000 to settle at 1.81 million (vs the previous week: 1.79 million claims). On a 4-week moving average, the initial jobless claims declined by 500 to 208,000 (vs week ending 2nd March: 208,500). In the short run, we anticipate that the labour market will maintain its resilience as economic activities remain strong. However, we opine that the labour market may begin to take a hit, pushing unemployment higher should interest rates stay elevated for an extended period.

Global Equities

Global stocks posted mixed performances as investors digested the higher-than-anticipated US inflation print and the latest producer price index (PPI) data for further clues on the path of the Federal Reserve interest rate cuts. As of the time of writing, US equities (DJIA: +0.5%; S&P 500: +0.5%) were on track to close higher as investors turned their focus to a fresh batch of corporate earnings despite the latest inflation reading. Likewise, European equities (STOXX Europe: +0.6%; FTSE 100: +1.1%) rebounded from last week’s losses in response to a softer-than-expected UK employment report, which fueled expectation for interest rate cuts from the Bank of England later this year. Elsewhere, in Asia (Nikkei 225: -2.5%; SSE: +0.3%), the Japanese market was weighed down by losses on semi-conductor linked shares amid increasing speculation that the Bank of Japan might end its negative interest rate cycle. Conversely, the Chinese market posted a marginal gain following signs of a demand pickup in the economy and hopes of share buy-backs from listed companies. Lastly, the Emerging market (MSCI EM: +1.1%) and Frontier market (MSCI FM: +0.6%) indices posted gains driven by positive sentiments in China (+0.3%) and Vietnam (+1.1%), respectively.

Nigeria

Domestic Economy

According to the National Bureau of Statistics, headline inflation remains elevated, rising by 180bps to 31.70% y/y in February (January: 29.90% y/y). The increased consumer prices synchronised neatly with the impact of (1) low food supply relative to demand, (2) lingering currency pressures, and (3) higher energy prices, amid the unfavourable base effects from the prior year. We highlight broad-based pressures across the food and core baskets. Precisely, food inflation (+251bps to 37.92% y/y) remained at a 19-year high, while the core inflation (+154bps to 25.13% y/y) settled at the highest level since March 2004 (32.60% y/y). On a month-on-month basis, consumer prices surged by 48bps to 3.12% (January: +2.64% m/m) – the highest print in 6 months. On our outlook, we identify the CBN’s efforts to stabilize the naira, recognizing the high pass-through effect on domestic prices. These efforts include (1) improved dollar supply from the CBN to the forex market, (2) monetary tightening, and (3) higher domestic interest rates. Based on the aforementioned, we expect the naira to be less volatile compared to previous months, thus moderating the impact of currency volatility on price increases in the coming month. Consequently, we forecast core inflation to print lower by 10bps to 1.98% m/m in March. On the other hand, we expect harvest depletion to sustain price pressures within the food basket, leading to a m/m increase of 3.29% for food inflation. Broadly, we forecast headline inflation to print at 2.69% m/m, resulting in a y/y increase of 107bps to 32.77%.

Based on the recently released data by the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 49.9% y/y to NGN1.13 trillion in Q4-23 (Q4-22: NGN753.88 billion), bringing the total CIT collection to NGN4.90 trillion in 2023FY (2022FY: NGN2.83 trillion). Analysing the breakdown, we highlight that the increase was due to broad-based growth across foreign CIT payments (+49.0% y/y to NGN596.10 billion) and local collections (+50.9% y/y to NGN533.93 billion). In our view, currency depreciation supported the substantial increase in foreign collections. However, on a quarter-on-quarter basis, the CIT collection declined by 35.4% q/q in Q4-23 (vs Q3-23: +13.0% q/q to NGN1.75 trillion) as the weak macroeconomic landscape influenced corporate earnings. Looking ahead, we expect CIT collections to increase in the near term in line with the tax provisions of the 2023 Finance Act and Fiscal Policy measures. Notwithstanding, we anticipate key risks including FX illiquidity, weak consumer demand, and high energy costs which could potentially weaken corporate earnings and CIT collections over the short to medium term.

Capital Markets

Equities

The domestic bourse extended last week’s gains as strong buying interests in MTNN (+21.0%) and Tier-1 Banking stocks drove the All-Share Index higher by 3.7% w/w to close at 105,085.25 points. Consequently, the MTD and YTD returns increased to +5.1% and +40.5%, respectively. Activity levels remained weak as trading volume and value declined by 17.8% w/w and 51.4% w/w, respectively. Meanwhile, sectoral performance was mixed, as the Banking (+12.8%), Insurance (+2.5%), Consumer Goods (+1.4%) and Industrial Goods (+0.2%) indices advanced, while the Oil & Gas (-0.1%) index declined.

We expect investors to continue to cherry-pick fundamentally sound stocks, given the absence of any significant positive catalysts. However, the awaited earnings releases from the banks and accompanying dividend declarations may catalyse another rush of positive sentiments, supporting buying activities on the bourse.

Money market and fixed income

Money market

The overnight (OVN) rate remained elevated this week, following the liquidity dearth at the start of the week. We highlight that the OVN rate trended to a five-year high of 33.0% as of Wednesday (March 13), before softening to 31.1% (+7bps w/w) owing to inflows of NGN771.11 billion from the maturing MAR-2024 bond with accompanying coupon payments. Consequently, the average system liquidity closed higher this week at a net long position of NGN2.50 trillion (vs a net long position of NGN1.37 trillion in the previous week). That being said, we note that the level was supported by DMBs’ elevated borrowing from the CBN’s SLF window (average for the week: NGN2.07 trillion).

The OVN rate is likely to remain elevated next week, with pressure stemming from the debits for the March 2024 bond PMA amid anticipated inflows from coupon payments (NGN134.70 billion).

Treasury bills

The Treasury bills secondary market was slightly bullish this week, as the average yield across the market dipped by 14bps to 18.7%. We attribute this week’s performance to market players (1) moving to the secondary market to cover for lost bids at the NTB auction, and (2) cherry-picking instruments with attractive yields. Across the market segments, the average yield declined by 18bps to 18.6% in the NTB segment and contracted by 4bps to 18.8% in the OMO secondary market. At the NTB primary auction, the CBN offered participants instruments worth NGN161.49 billion – NGN0.73 billion for the 91-day, NGN0.92 billion for the 182-day, and NGN159.85 billion for the 364-day bills. The auction was massively contested as the total subscription settled at NGN1.50 trillion (bid-to-offer: 9.3x). Eventually, the CBN allotted exactly what was offered – at respective stop rates of 16.24% (previously: 17.24%), 17.00% (previously: 18.00%), and 21.12% (previously: 21.49%).

Next week, we envisage possible lower demand for bills and subsequently, higher yields in the Treasury bills secondary market following the potential liquidity deficit in the financial system.
 
Bonds

The Treasury bonds secondary market traded with bearish sentiments as the average yield expanded by 39bps to 18.4%. Across the benchmark curve, the average yield advanced at the short (+9bps), mid (+11bps) and long (+16bps) segments due to sell pressures on the MAR-2027 (+30bps), JUN-2033 (+45bps) and JUN-2038 (+91bps) bonds, respectively.

Next week, we expect market participants to be focused on the March 2024 bond PMA scheduled for Monday (18 March), where the DMO will offer instruments worth NGN450.00 billion through new issuance of a 3-year paper (FGN MAR 2027) and reopening of the 18.50% FGN FEB 2031 (7-year) and 19.00% FGN FEB 2034 (10-year) bonds. Overall, we maintain our view that (1) expected monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics, will keep yields in the FGN bonds secondary market elevated over the short term.

Foreign Exchange

Nigeria’s FX reserves increased by USD209.89 million w/w to close at USD34.42 billion (14 March). Also, the naira appreciated by 1.5% to NGN1,602.75/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover (as of 14 March 2024) decreasing by 41.6% WTD to USD743.54 million, as trades were consummated within the NGN1,425.35 – NGN1,650.00/USD range. In the Forwards market, the naira rate for the 1-month (-0.1% to NGN1,601.14/USD) contract increased, but declined on the 3-month (+1.4% to NGN1,641.08/USD), 6-month (+1.7% to NGN1,694.97/USD), and 1-year (+1.3% to NGN1,817.32/USD) contracts.

We highlight the CBN’s initiatives aimed at stabilising the naira, which encompasses (1) addressing FX backlogs, (2) increasing domestic interest rates to make naira-denominated assets attractive, and (3) supplying dollars to BDCs. These efforts are beginning to manifest positive outcomes, as evidenced by the decreased naira volatility observed in the foreign exchange market. Although the apex bank has yet to fully clear the FX backlogs due to persistently low forex supply, we hold the view that the volatility of the naira will remain subdued in the short term. This expectation is underpinned by reduced currency speculation supported by the CBN’s ongoing monetary tightening measures and improved liquidity resulting from the uptick in forex inflows from FPIs.