Weekly Economic and Market Report for May 22, 2020-Cordros

May 22, 2020/Cordros Report

Global Economy

Japan’s GDP growth recorded its second consecutive quarterly decline in Q1-20, as the economy effectively nosedived into recession – the country’s first recession since 2015. Specifically, the preliminary data showed that Q1-20 growth declined by 0.9% q/q (Q4-19: -1.9% q/q). When annualized, the figure comes to -3.4% q/q, slightly above the consensus estimate of -4.6% q/q. As with other advanced economies, we believe the negative impact of the COVID-19 pandemic on economic activities and weaker external demand, weighed markedly on the country’s growth outturn. Analysing the breakdown, we noted that even as government expenditure (+0.4% q/q) rose slightly, it was not enough to offset declines across private consumption (-2.8% q/q), capital expenditure (-2.0% q/q), and public investment (-1.6% q/q). While the Japanese government’s policy responses to COVID-19 have led to a clearer sign of easing, we expect the Q1-20 contraction in growth to be the first of many to come, as rising COVID-19 cases in countries that are major trading partners continue to threaten the external sector. It is worth noting that in Q1-20 alone, exports of goods and services shrank by 21.8% q/q, the steepest move since Q2-11. 

Elsewhere, In the United Kingdom, headline inflation grew at a slower pace to 0.8% y/y in April 2020, from 1.5% y/y in the prior month. The combination of (1) the pass-through impact of lower crude oil prices to energy inflation and (2) slower growth in apparel and clothing prices, supported a 70bps deceleration in headline inflation, representing the sharpest decline in over 10 years. Beyond that, we recall that the BOE recently increased its bond-buying programme by another GBP200 billion; a move we believe greatly contributed to the depressed CPI movement in April. Going forward, we expect consumer prices in the UK to remain largely suppressed. Our view is hinged on the expectation that the BOE will sustain its dovish stance in a bid to limit the impact of the COVID-19 pandemic on economic growth. The BOE stated that it expects headline CPI to hit a 0.0% level in the next few months.

Global Markets

Global markets rallied following early results for an experimental vaccine that raised hopes of a faster economic recovery, as well as re-opening of some major economies. Stocks in the US (DJIA: +3.3%; S&P: +3.0%) were supported by this positive news early in the week, resulting in gains across some of the country’s major indices even as tensions between Washington and Beijing continue to escalate. Asian equities (SSE: -1.9%; Nikkei 225: +1.8%) returned mixed performances this week, as investors reacted to the early positive results from Moderna’s potential COVID-19 vaccine and the strained US-China relations. European equities (STOXX: +3.2%; FTSE 100: +3.0%) were buoyed by re-opening economies and optimism from fresh stimulus plans for the European Union. Emerging markets (MSCI EM: +3.2%) and Frontier markets (MSCI FM: +3.8%) also recorded gains, due to significant gains in Kuwait (+5.4%) and South Korea (+3.8%).


Domestic Economy

This week, the National Bureau of Statistics (NBS) released inflation data for April 2020, which showed that, for the eight consecutive months, headline CPI notched another yearly increase – 8bps to 12.34% y/y. Relative to our forecast, the outturn was 4bps higher, with the largest variance stemming from the core basket. For us, aside from the Naira weaknesses which filtered to both the core and food baskets, we believe that the impact of supply chain disruption, occasioned by the COVID-19 outbreak, is now becoming a lot more evident on Nigeria’s consumer prices, especially the food basket. To ascertain the impact of COVID-19 outbreak on April CPI, we note that m/m food inflation (1.18%) is now at the highest level seen since November 2019 (1.25%), where the blend of land border closure and festive induced demand, at the time, fanned higher food prices. 

The breakdown provided showed that the expansion in the food inflation was driven by all the sub-categories, with the processed food basket (+82bps) leading the pack, followed closely by farm produce (+21bps) and imported food (+2bps) baskets. Meanwhile, core inflation grew at a faster pace by 14bps to 0.94% m/m – the steepest monthly expansion in 22 months. For May, while the troika impact of planting and lean seasons in the North and South respectively, continued Naira downslide, and rising incidences of COVID-19 cases should have ordinarily pressure headline CPI in May, we believe that a favourable high base from the corresponding period of last year will place a ceiling of CPI uptrend. Against that backdrop, we now expect m/m headline CPI of 1.11%, cascading to a flat y/y inflation at 12.34%.

Capital Markets


The Nigerian equities market rallied this week, on the back of significant interests in banking stocks and market heavyweights BUACEMENT (+23.4%), MTNN (+5.0%) and DANGCEM (+4.5%). Thus, the All-Share Index advanced by 5.6% w/w, to settle at 25,204.75 points. Thus, the MTD return increased to 9.5%, as the YTD loss moderated to -6.1%. Performance across all sectors were positive, reflecting the positive performance in the market. The Industrial Goods (+15.5%) index led the return chart, followed by the Banking (+7.2%), Oil and Gas (+4.9%), Insurance (+2.0%), and Consumer Goods (+0.9%) indices.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Fixed income and money market

Money market

The overnight (OVN) rate expanded by 13.63ppts, w/w, to 15.6%. The OVN steadied at c.2.0% levels for most of the week, as system liquidity was supported by inflows from FAAC allocation (c. NGN300.00 billion) and FGN bond coupon payments (NGN17.87 billion). However, debits for Wednesday’s FGN bond PMA (NGN295.37 billion) and CRR debits caused the eventual expansion in the OVN rate to its current level.

We expect the OVN rate to trend southwards next week, as inflows from OMO maturities (NGN319.72 billion) and FGN bond coupon payments (NGN5.63 billion) come into the system.

Treasury bills

Trading in the Treasury bills secondary market was bullish, as the average yield across all instruments contracted by 177bps to 4.9%. The contraction was majorly influenced by trading activity at the OMO segment (average yield: -242bps to 6.0%) as market participants demanded mid and long tenor instruments due to no sales at the last auction. At the NTB segment, the average yield contracted by 11bps to 2.2% due to piqued investors’ interest following improved rates in the space.

In the coming week, we expect healthy demand for T-bills, as system liquidity improves with expected inflows in the week. In the NTB segment, we expect the focus to be shifted to next week’s PMA. While there is no indication of the amount to be offered, we expect a similar result from the last NTB PMA.


Trading in the FGN bonds secondary market was bullish, as investors covered for lost bids at the PMA. Consequently, the average yield across instruments contracted by 15bps to close at 10.4%. At the auction, instruments worth NGN60.00 billion were offered to investors through re-openings – 12.75% APR 2023 (Bid-to-offer: 4.09x; Stop rate: 9.2%), 12.50% MAR 2035 (Bid-to-offer: 7.71x; Stop rate: 11.7%), and 12.98% MAR 2050 (Bid-to-offer: 9.46x; Stop rate: 12.6%). Despite subscriptions across instruments settling at NGN425.18 billion, the DMO eventually allotted instruments worth NGN152.11 billion, resulting in a bid-cover ratio of 7.09x.

We expect improved demand for instruments next week in the Treasury bonds secondary market, following lost bids at the auction, and as investors seek investible securities for OMO maturities coming in.

Foreign Exchange

For the third straight week, the CBN recorded another FX reserves buildup, with the country’s external balance growing by USD514.92 million WTD to USD35.67 billion. We attribute the driver of the reserve accretion to the inflow of RFI facility by the IMF, which continues to outweigh FX outflows. Consequently, the Naira gained some ground against the USD by 0.20% w/w to NGN385.94/USD at the I&E window but slid by 2.17% w/w to NGN460.00/USD in the parallel market. In the Forwards market, the naira appreciated against the USD across all contracts, save for the 1-month (-0.02% to NGN388.21/USD). Notably, the 3-month (+0.2% to NGN391.62/USD), 6-month (+0.5% to NGN396.74/USD), and 1-year (+1.0% to NGN414.48/USD), contracts all recorded stronger naira values against the greenback. 

We still hold the view that the RFI inflow will continue to provide short-term support for the FX reserves. Nonetheless, we expect the currency market to remain largely volatile, especially in the parallel as the CBN’s suspension of FX sales to BDCs continues to create a backlog of unmet FX demand.

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