January 11, 2019/Cordros Report
For the first time since August 2017, U.S inflation slowed, driven by a fall in fuel prices which masked sustained pressure in housing and healthcare costs. Specifically, the Labour department reported that consumer prices declined by 0.1% m/m in December relative to the flat reading in November. Meanwhile, year-on-year inflation increase by1.9% y/y slower than November reading of 2.2% y/y. Whilst the Fed has pulled back from its aggressive rate normalization, we expect the tempered inflation reading to provide additional respite to the monetary authorities.
Amidst slackening domestic demand largely underpinned by weaker economic growth, China’s inflation sustained its decelerating trend in December, printing 1.9% y/y against 2.2% in November. According to the breakdown provided, whilst the food basket (+2.5%) held steady from the November reading, non-food inflation moderated sharply on account of deceleration in gasoline and diesel prices. On a m/m basis, inflation slightly notched higher by 0.3% in December (November: -0.3% m/m). With recent economic data still pointing towards inherent weakness underpinned by both domestic and external concerns, we expect falling inflation to strengthen the case for looser monetary policy to stimulate growth.
Investments gushed back into equities as the dual impact of better trade prospects and U.S Fed accommodative undertone largely stoked renewed appetite for risky assets. Hence, gains were seen across our coverage universe led by U.S (DJIA: +2.1%, S&P: +2.6%), the Euro Area (FTSE: +1.2%, Euro Stoxx: +0.7%), and Asian (CSI 300: +1.9%; Nikkei: +4.1%) markets, respectively. Elsewhere, positive performance across developed markets acted to support sentiment across emerging (MSCI EM: +3.5%) and frontier markets (MSCI FM: +2.1%).
The Federal Government and the Nigeria Labour Congress reached an agreement that the Presidency would send the National Minimum Wage (Amendment) Bill to the National Assembly on or before 23 January. A committee of government representatives, employers and labor union leaders had agreed on a new national minimum wage (NMW) of NGN30,000 naira earlier on in November 2018, a 66% increment on the existing NMW. The FGN’s proposed 2019 budget allocates NGN4.04 trillion (46% of the budget size of N8.8trn) to recurrent expenditure. We expect a material increase in this figure if the new NWM is implemented in the current fiscal year, implying a structurally-wider budget deficit.
The Debt Management Office (DMO) revealed that the country’s total debt increased marginally by 0.2% q/q to NGN22.4 trillion in Q3-18, taking the nation’s debt as a percentage of its GDP to 24.2% as at 9M-2018. Domestic debt constituted 71% of the total debt stock with the bulk of it being federal government debt, while external debt constituted 29%. Widening debt profile amid (1) increasing vulnerability of the economy to external shocks, (2) government’s inability to effectively diversify its revenue base, and (3) frail economic growth, raises concern over the fiscal sustainability of the economy.
The Nigerian equities market continued to play a catch-up game as the ASI returned 1.06% at the close of the market today. However, significant losses at the start of the week masked gains from Friday and Thursday’s sessions, to leave the market down 2.64% w/w. Hence, the MtD loss notch higher to 5.09%. On sectoral breakdown, all sector indices closed in the red — save for the Industrial (+1.00%) index — with the Insurance (-7.00%) index leading the league, followed closely by the Oil & Gas (-6.28%), Consumer Goods (-3.56%), and Banking (-0.91%) indices respectively.
Our outlook for equities in the near-to-medium term remains conservative, in the absence of a near term positive catalyst and amidst brewing political concerns.
Fixed income and money market
The overnight lending rate moderated by 125 bps w/w to 22.50%, against last week’s close of 23.75%. Rates remained elevated throughout the week, amidst the CBN’s OMO (NGN353.93 billion) and FX (USD210 million) interventions. However, Thursday’s inflow of matured OMO bills (NGN375.35billion) offered some respite to liquidity, resulting in a slight rate decline towards the end of the week.
Next week, inflows totaling NGN666.96 billion – NGN560.92 billion in maturing OMO bills and NGN106.34billion in bond coupon payments – will offer support to system liquidity. However, liquidity mop-up and forex intervention by the CBN are likely to exert upward pressure on the overnight lending rate.
Activities in the treasury bills market were bullish amidst OMO inflows and reduced OMO intervention towards the end of the week. Consequently, yields fell 10 bps to close the week at 15.30% on average. Buy sentiment was at the short (-33 bps) and long (-9 bps) ends of the curve, amid demand for the 97DTM (-180 bps) and 244DTM (-92 bps) bills, respectively. Yield at the mid segment closed flat.
Yields are expected to be pressured, as the CBN is expected to maintain its aggressive OMO stance. At the NTB auction scheduled for next week, the CBN will offer NGN225.45 billion – NGN5.85 billion of the 91-day, NGN26.60 billion of the 182-day, and NGN193.00 billion of the 364-day – worth of bills to the market.
Activities in the bond market were mixed, albeit with a bullish tilt, as local players cherry picked high yielding bonds. As a result, average yield moderated by 3 bps w/w to close at 15.25%. Yield contracted at the mid (-9 bps) segment, following demand for the MAR-2027 (-17 bps) bond. On the flip side, yields widened at the short (+1 bp) and long (+3 bps) ends of the curve following selloffs of the JUN-2019 (+16 bps) and APR-2037 (+14 bps) bonds, respectively.
Our theme for the bond market continues to favour modestly higher yields in the medium term, anchored on (1) domestic monetary policy direction, (2) sustained uptick in inflation rate, (3) capital flight amid higher yields in safe haven assets, and (4) political uncertainty stemming from the upcoming general elections.
Reversing the depletion from last week, the CBN recorded foreign reserve accretion of USD85.9 million w/w to USD43.05 billion. The apex bank injected USD210 million into the FX market, allocating USD100 million to the wholesale window, and USD55 million apiece to the SMEs and invisibles segments. Thus, the naira appreciated by 0.11% to USD364.94 at the I&E window, but depreciated by 0.55% to NGN363 at the parallel segment. Meanwhile, total turnover at the I&E window surged by 97.3% to USD945.53 million with 99.93% of trades executed within the NGN360-369/USD band. At the forwards market, the USD/NGN depreciated at the 6-month (-0.20% to NGN387.33) and 1-year (-0.14% to NGN416.01) contracts, while it appreciated at the 1-month (+0.15% to NGN368.83) and 3-month (+0.13% to NGN374.74) contracts respectively.
Our view continues to favour currency stability in the medium to short term, as renewed crude price rally continues to underpin higher oil receipts, thereby supporting the CBN’s continued intervention.
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