Weekly Economic and Market Report May 17, 2019-Cordros

17/5/2019/Cordros Report

Global economy

According to data from Eurostat, Eurozone GDP for Q1 -19 grew by 0.4% y/y from 0.2% y/y in previous quarter. This growth was largely driven by improved consumer spending and increased capital formation. Based on the available data of countries, Germany’s GDP increased 0.4% in Q1, following a rise in fixed capital formation (0.94%), household consumption (0.22%), disposal income (1.05%), and consumer saving (1.83%). Elsewhere, Italy exited recession as the economy advanced by 0.2% and this was largely driven by rise in exports, consumer spending and investment. Despite the positive data, there is clear evidence of a trade-related external shocks for the euro zone economy, which cannot be easily dismissed, amidst the recent flare up in Sino-US trade tensions.

Euro Area core inflation was revised higher in April, and is now showing the fastest reading since 2017. Updating its estimate for last month, Eurostat said the rate of underlying price growth was 1.3%, compared with 1.2% in an initial release. The April outcome was far higher than the 0.8% seen in March, but the big jump partly reflects the timing of Easter and its traditional impact on airfares, package holidays and hotel prices. Despite the increase, core inflation remains in a tight range and 1.3% has been a ceiling it hasn’t broken through in almost four years. The headline inflation rate was 1.7% in April, unchanged from the initial estimate. A closer look at underlying inflation shows price pressures clearly picking up. The recent bout of economic weakness in the euro area seems to have had little impact.

Global markets

Global equities market was mixed as concerns over an escalating trade war dragged performance across a segment of our coverage universe. Evidently, both the U.S (DJIA: -0.1%, S&P: +0.1%), and Asia (CSI300: -2.2%, Nikkei: -0.4%) markets closed the week in the red. Inother climes, improved macroeconomic data and expectation that Donald Trump will postpone tariffs on European cars and spare part imports, lifted risk appetite for risk assets, especially in Euro Area (FTSE: +2.1%, Euro Stoxx: +2.0%). Elsewhere, emerging (MSCI EM: -2.2%) and frontier markets (MSCI FM: +0.2%) indices closed negative in the week, driven by losses across Brazil (-3.3%), Taiwan (-3.1%), China, and Kenya (-5.2%).

Nigeria

Economy

To our surprise, headline inflation rose for the first time this year, advancing by 12 bps to 11.37%. Dissecting the breakdown, we note that renewed price pressure stemmed largely from the food basket, which masked the moderation in the core segment. Food inflation rose sharply by 25 bps driven by higher farm produce and imported food. On the other hand, core inflation tapered by 18 bps on account of lower energy prices. On a month-on-month basis, headline inflation notched higher by 16 bps to 0.94%, driven by both the core and food inflation. Looking ahead, while we remain largely sanguine on core inflation given stable exchange rate and lower energy prices, we expect food price pressure to persist in the near term driven by Ramadan-induced demand for grains. Overall, we now look for 11.38% y/y inflation reading in May.

On Wednesday, the federal government stated that it will pay the balance of the Paris club debt refund to the state governments of the federation. It is reported that the total sum confirmed by the office of the Minister of finance totaled NGN649.4 billion. For us, relative to a total state budget of more than NGN9.1 trillion for all the federating units, we believe this is a drop in the ocean. However, with a number of the states still facing chronic fiscal positions wherein recurrent expenditures are barely covered, this is certainly a respite, which should, in part, help fund salary payments, and thus, boost consumer demand.

Capital markets

Equities

It took only two trading sessions for MTNN to solely reverse Nigeria’s equities market fortune in the week. For context, MTNN was listed on the Nigeria’s premium board on Thursday and immediately flexed its influence on the market. Being the second largest capitalized company after DANGCEM, the stock returned 21% after two sessions, thus, effectively wiping off losses from the prior sessions. The ASI appreciated by 0.1% w/w to 28,871.93 points. Hence, the MtD and YtD losses moderated slightly to 1.0% and 8.1%, respectively. On sectorial performance, all sector indices closed in the red, with the Banking (-4.31%) index leading the pack, followed closely by the Consumer Goods (-4.13%), Industrial Goods (-3.88%), Insurance (-3.35%), and Oil & Gas (-2.32%) indices.

Clearly, the gain was not broad-based, at such we reiterate our cautious trading pattern. Meanwhile, we believe that the blend of positive macroeconomic fundamentals and compelling valuations still supports a near term recovery.

Fixed income and money market

Money market

The overnight lending rate declined by 471 bps w/w to 5.29% – lowest since Jan 30, 2019 – as system liquidity remained relatively buoyant following inflows from matured OMO bills (NGN117.12 billion), and in the absence of any liquidity mop-ups by the apex bank.

Next week, we expect the buoyant liquidity to persist early on in the week, supported by inflows from maturing OMO bills (NGN106.92 billion) and bond coupon payments (NGN17.87 billion). However, bond auction debits, as well as forex intervention by the CBN at the tail-end of the week are likely to exert upward pressure on the overnight lending rate.

Treasury bills

Activities in the treasury bills market were significantly bullish, in the absence of any OMO auctions by the CBN, and increased liquidity levels at the end of the shortened trading week. Consequently, yields fell 10 bps, WtD, to close at 13.25% on average. Yields contracted at the mid (-4 bps) and long (-17 bps) segments, driven by demand for the 105DTM (-84 bps) and 350DTM (-51 bps) bills, respectively. Conversely, a selloff of the 63DTM (+172 bps) bill led to yield expansion at the short (+10 bps) end of the curve. At this week’s primary auction, the CBN fully allotted NGN33.84 billion – NGN4.38 billion of the 91DTM, NGN12.92 billion of the 182DTM, and NGN16.54 billion of the 364DTM – worth of bills at respective stop rates of 10.00% (same as previous auction), 12.30% (previously 12.49%), and 12.49% (previously 12.77%). Stop rates declined by an average of 16 bps amidst relatively strong demand (and a much smaller offering compared to the previous auction), with auction recording a bid-cover of 5.65x (vs. 2.11x previously).

Yields are expected to maintain their downward trend next week, amidst the still buoyant system liquidity.

Bond

Bond Bullish sentiments were sustained in the bond market, with renewed demand coming on the back of continued downtrend in money market yields (yield on the 364DTM now fell below 14%), and the slowdown in OMO issuances by the CBN. Consequently, average yield compressed by 6 bps, WtD, to close at 14.08%. Buy sentiment was concentrated at short (-18 bps) and mid (-5 bps) segments, with respective yields on the FEB-2020 (-44 bps) and MAR-2027 (-22 bps) bonds contracting significantly. Conversely, a selloff of the JUL-2034 (+15 bps) bond led to yield expansion at the long (+12 bps) end of the curve.

We expect yields to take a cue from auction stop rates in the coming week. However, our theme on the bond market continues to favour modestly lower yields in the medium term, anchored on (1) domestic monetary policy direction, (2) near term moderation in inflation, and (3) a resurgence in FPI inflows. At the FGN bond auction scheduled for Wednesday, 22nd May 2019, the DMO plans to offer NGN100 billion – NGN35 billion of the APR-2023 (re-opening), NGN35 billion of the APR-2029 (re-opening), and NGN30 billion of the APR-2049 (re-opening) – in bonds to investors.

Foreign exchange

For the first time since September 2018, Nigeria’s FX reserves crossed the USD45 billion mark. For context, CBN recorded FX reserve accretion of USD129 million w/w to USD 45 billion. In spite of that stellar performance, USDNGN depreciated by 0.28% to NGN361 at the parallel market, but appreciated by 0.11% to NGN360.50 at the IEW. Meanwhile, total turnover in the IEW improved significantly, jumping by 48.0% to USD1.44 billion. Taking a cue from the spot market, all contracts at the FX forwards market appreciated over the week – 1-month (0.08% to NGN363.36), 3-month (0.23% to NGN369.01), and 6-month (0.22% to NGN380.69), and 1-year (0.34% to NGN402.90), respectively.

Going forward, we remain largely confident of naira stability in the short to medium term. Our view is hinged on the combination of the still elevated crude price and stable production, both of which should continue to underpin higher oil receipts, thereby supporting the CBN’s continued intervention.

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