Though the local bourse started the week sour, positive sentiments returned to the market as investors renewed buying interests in dividend-paying stocks. Accordingly, the All-Share Index inched up 0.1% to close at 38,943.87 points.
September 17, 2021/Cordros Report
According to the Bureau of Labour Statistics (BLS), headline inflation in the United States (U.S) eased to 5.3% y/y in August from the 13-year high of 5.4% reported in June and July – suggesting that inflation had peaked for the year. However, the inflation print remains significantly above the Fed’s 2.0% target, reflecting the impact of (1) pent-up demand, following the ease of COVID-19 restrictions, (2) supply chain disruptions on raw materials and (3) shortage of semiconductors. Consequently, prices of food (3.7% y/y vs July: 3.4% y/y), new vehicles (7.6% y/y vs July: 6.4% y/y) and energy (25.0% y/y vs July: 23.8% y/y) accelerated, while prices for used cars and trucks (31.9% y/y vs July: 41.7% y/y) and transportation services (4.6% y/y vs July: 6.4% y/y) maintained downtrend. On a month-on-month basis, consumer prices rose by 0.3% in August (July: +0.5% m/m) – the slowest rise since December 2020 (+0.2% m/m). Having come off its pandemic induced peak of 5.4%, we expect headline inflation to maintain a slow-paced deceleration as the pandemic related demand retrace to normal levels amid dissipating low base effect.
In line with our expectation, domestic prices in the United Kingdom (U.K) resumed an uptrend in August after the moderation recorded in July. According to the Office for National Statistics (ONS), headline inflation in the U.K rose to 3.2% y/y in August (July: +2.0% y/y) – the highest since March 2012 (+3.5% y/y). The increase was primarily due to the impact of low base effect from the prior year when the government’s Eat Out to Help Out Scheme resulted in discounted restaurant and café prices in August 2020. Accordingly, prices pressures were most significant in Restaurant & hotels (+8.6% y/y vs July: +2.2% y/y), Food & non-alcoholic beverages (+0.3% y/y vs July: -0.6% y/y) and Recreation & culture (+2.4% y/y vs July: +0.7% y/y). On a month-on-month basis, the headline inflation increased by 7bps to 0.7% (July: 0.0%). We expect the headline inflation to be above the Bank of England’s 2.0% target over the medium term due to the impact of (1) reversal of the temporary VAT reductions to the hospitality sector and (2) unfavourable base from the prior year.
Global stocks were broadly bullish as investors gauged the resilience of the global recovery to the prospect of reduced Federal Reserve stimulus amid increased regulatory risks from China. Accordingly, US (DJIA: +0.4%; S&P: +0.3%) stocks held steady as investors traded cautiously ahead of Fed’s Reserve meeting next week amid the stronger-than-expected retail sales data for August. Likewise, in Europe, the STOXX Europe (+0.5%) and FTSE 100 (+0.2%) were on track for weekly gains as news that Britain was mulling easing travel restrictions spurred a rebound in travel and luxury stocks. Asian markets posted mixed performances, as the Nikkei 225 (+0.4%) ended the week higher, on vaccination progress and hopes of possible stimulus under a new Prime Minister. Conversely, the SSE (-2.4%) declined as the debt crisis at China’s Evergrande Group and Beijing’s latest push to rein in private industries dented sentiments. Emerging markets (MSCI EM: -2.5%) stocks were undermined by losses in China (-2.4%). Elsewhere, Frontier (MSCI FM: +0.4%) market stocks were on track to close higher following gains in Kuwait (+0.9%).
According to the National Bureau of Statistics (NBS), headline inflation moderated by 37bps to 17.01% y/y in August (July: +17.38% y/y), marking the fifth consecutive month of decline. The print was 6bps higher than Cordros’ estimate (+16.95% y/y) but in line with Bloomberg’s median consensus estimate (+17.00% y/y). While the food basket (+20.30% y/y vs July: +21.03% y/y) maintained its deceleration for the fifth consecutive month, the core segment (+13.41% y/y vs July: +13.72% y/y) resumed a downtrend after the increase recorded in July. On a month-on-month basis, the headline inflation rose by 9bps to 1.02% m/m. We expect food prices to moderate in September, given the impact of early harvests amidst flood risk in some states. However, we expect currency pressure to increase prices in the core segment. Accordingly, we project headline CPI at 1.03% m/m in September, with the high base in the prior year cascading into a 52bps decrease in y/y inflation rate to 16.49%.
In line with our expectations, the Monetary Policy Committee unanimously voted to keep the MPR at 11.5% at the September policy meeting. The Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, liquidity ratio at 30.0% and asymmetric corridor around the MPR at +100bps/-700bps. Although the Committee left rates unchanged at this meeting, we highlight that it feels that the liquidity ratio and CRR at current levels are tightening measures that should be maintained further on. For clarity, the overnight lending rate had remained elevated since January (average of 12.5% YTD as of 17th September vs 8.3%YTD in September 2020). Consequently, we believe the CBN will continue to use CRR debits, OMO auctions and the special bills to monitor system liquidity to nullify the indirect and direct channels through which system liquidity amplifies inflationary pressures. Overall, we believe concerns about stagflation will compel the MPC to push back hiking rates until H1-2022, when the Committee may feel that substantial progress has been made in supporting economic recovery.
Though the local bourse started the week sour, positive sentiments returned to the market as investors renewed buying interests in dividend-paying stocks. Accordingly, the All-Share Index inched up 0.1% to close at 38,943.87 points. Consequently, the Month-to-Date and Year-to-Date return moderated to -0.7% and -3.3%, respectively. However, activity levels were weaker than the prior week, as trading volumes and value declined by -40.3% w/w and -17.9% w/w, respectively. Notably, buying interest in GTCO (+3.5%), MTNN (+1.5%), and ACCESS (+1.1%) drove the weekly gain. On the other hand, sectoral performances were broadly negative following losses in the Oil and Gas (-3.4%), Banking (-0.8%), Insurance (-0.6%) and Consumer Goods (-0.2%) indices. Elsewhere, the Industrial Goods index closed flat.
We expect the lull in the local bourse to persist until positive triggers in the form of lower FI yields and improved dollar liquidity spur buying interest from domestic and FPI investors. That said, we expect risk-averse investors to recalibrate their portfolio towards fundamentally sound stocks with attractive dividend yields in the week ahead. However, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.
Money market and fixed income
The overnight (OVN) rate expanded by 325bps w/w to 17.8% as funding pressures for CRR debits, CBN’s weekly OMO (NGN20.00 billion) and FX auctions outweighed inflows from FGN bond coupon payments (NGN100.67 billion) and OMO maturities (NGN38.00 billion).
In the coming week, we expect the OVN rate to remain elevated following system debits for the September FGN bond auction and CBN’s weekly auctions, which are likely to offset the sole inflow from FGN bond coupon payments (NGN59.54 billion).
Bearish sentiments persisted in the Treasury bills secondary market, in the absence of bids to support the increased supply following the two consecutive weeks of NTB auctions. Thus, the average yield expanded by 39bps to 6.0%. Across the market segments, the average yield expanded by 12bps and 66bps to 6.3% and 5.6% at the OMO and NTB segments, respectively. At this week’s NTB PMA, the CBN offered and eventually allotted bills worth NGN155.88 billion – NGN0.96 billion of the 91D, NGN3.61 billion of the 182D and NGN151.31 billion of the 364D bills – at respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 7.20% (unchanged). Notably, there was no over allocation at this auction despite the significant demand (subscription level: NGN244.57 billion; bid-to-offer ratio: 1.6x) recorded.
Considering the expected strain on system liquidity and the prevailing bearish sentiments in the FI market, we expect average yields on T-bills to trend higher in the coming week.
Trading in the Treasury Bonds secondary market was also bearish, following sell-offs in the early parts of the week from local and offshore investors, amid the uncertainty on the direction of yields. We highlight that the result of the NTB auction eased the sell-offs, as the uptrend in yields reversed on Thursday and Friday. Consequently, the average yield expanded by 22bps to 11.3%. Across the benchmark curve, the average yield expanded at the mid (-46bps) and long (+25bps) segments as investors sold off the MAR-2027 (+68bps) and APR-2049 (+63bps) bonds, respectively. Conversely, it declined at the short (-13bps) end following demand for the APR-2023 (-49bps) bond.
In the coming week, we expect the outcome of the bond auction to shape market sentiments and the direction of yields. At the auction, the DMO will be offering instruments worth c.NGN150.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.40% FGN MAR 2036 and 12.98% FGN MAR 2050 bonds.
Nigeria’s FX reserves sustained its weekly accretion as it closed higher by USD507.08 million w/w to USD35.37billion (16th September 2021) – its highest level in six months. Meanwhile, the naira depreciated by 0.2% w/w and 4.4% w/w to NGN412.88/USD and NGN570.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 16th September 2021) increased by 20.1% WTD to USD847.54 million, with trades consummated within the NGN400.00 – 439.54/USD band. In the Forwards market, the rates on the 1-month (-0.8% to NGN416.25/USD), 3-month (-0.9% to NGN420.90/USD), 6-month (-1.6% to NGN429.67/USD), and at the 1-year (-2.5% to NGN445.4/USD) contracts reflected depreciations relative to the USD.
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil inflows in line with the rise in crude oil prices and (2) inflows from FCY borrowings (USD6.18 billion) and IMF SDR (USD3.40 billion). Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.