According to data from the Bureau of Labor Statistics (BLS), headline inflation in the United States (US) maintained its deceleration trend, slowing further by 40bps to 6.0% y/y in February (January: 6.4% y/y) – the lowest print since September 2021 (5.4% y/y). Perusing the breakdown provided, we highlight that the cost of used cars & trucks (-13.6% y/y vs January: -11.6% y/y) continued to decline while energy (5.2% y/y vs January: 8.7% y/y) and food (9.5% y/y vs January: 10.1% y/y) prices moderated further in the review month. On a month-on-month basis, consumer prices rose by 0.4% (January: 0.5% m/m). Although we expect prices to moderate further in the near term, given the lingering ease in energy prices and some improvement in supply chain bottlenecks, a low unemployment rate poses an upside risk to prices, keeping broad inflationary pressures intact. Accordingly, we expect the US Fed to maintain its priority of price stability over growth, in the short term, more so that the headline inflation is still ahead of its 2.0% target.

In line with its forward guidance, the European Central Bank (ECB) voted to increase the interest rates on the main refinancing operations, marginal lending facility, and deposit lending facility by 50bps each to 3.50%, 3.75%, and 3.00%, respectively. Accordingly, interest rates are now at the highest levels since September 2008. That said, in what seems to be a move to douse tensions arising from the insolvency of Silicon Valley Bank (SVB), the Governing Council stated that the Euro Area banking sector is resilient, with strong capital and liquidity positions. Furthermore, the Council highlighted that in any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the Euro Area’s financial system if needed. Considering that inflation is expected to remain elevated in the short term and given the Governing Council’s determination to return inflation to 2.0% in the medium term, we expect the ECB to raise the key policy rates further, albeit at a relatively moderate rate than at this meeting, at its next policy meeting on 4 May.

Global Markets

Global equities were largely weak this week, as worries of bank failures in the US and turmoil at Credit Suisse combined to drive key indices lower, even as, sentiments appeared to receive a slight boost later in the week after authorities in the US and Switzerland pledged to stem the crisis in the banking system with liquidity injection plans. In line with this, US equities (DJIA: +1.1%; S&P 500: +2.6%) rebounded as a rescue package by large US banks which pledged to deposit USD30.00 billion at First Republic Bank, to pre-empt the liquidity crisis, eased selling pressures. Meanwhile, sentiments across European equities (STOXX Europe: -2.7%; FTSE 100: -4.4%) remained sour, following a plunge in the shares of Credit Suisse amid fears of another bank failure. In Asia, Japanese equities (Nikkei 225: -2.9%) declined as turmoil around Credit Suisse heightened fears of a banking crisis in the region. Conversely, Chinese equities (SSE: +0.6%) traded higher tracking the rally on Wall Street. Conclusively, the Emerging (MSCI EM: -1.5%) and Frontier (MSCI FM: -1.8%) market indices declined following losses in Vietnam (-0.7%), and Taiwan (-0.5%), respectively.

Nigeria

Domestic Economy

Headline inflation increased for the second consecutive month after the moderation witnessed in December 2022, rising by 10bps to 21.91% y/y in February (January: 21.82% y/y). On the one hand, food inflation rose marginally by 3bps to 24.35% y/y in February relative to January (24.32% y/y) given the (1) passthrough impact of higher transport costs on food prices and (2) low food supply relative to demand. On the other hand, core inflation surprised positively, recording the first moderation in 11 months, as it eased by 32bps to 18.84% y/y. Analysing the breakdown provided, we note that the sub-baskets that moderated in the review period only contributed 23.6% to the core inflation basket. We expect domestic prices to remain pressured in the short term driven by (1) below-average cultivating activities, (2) Ramadan-induced food demand, and (3) intermittent PMS scarcity. Consequently, we expect an increase of 1.65% m/m to the headline inflation in March, which would translate to an 11bps slowdown in the y/y inflation rate to 21.80%.

According to the National Bureau of Statistics (NBS), Nigeria’s trade balance settled in a surplus position in Q4-22 (NGN996.78 billion) relative to the NGN409.39 billion trade deficit in Q3-22. The trade surplus was driven by higher aggregate exports (+7.2% q/q to NGN6.36 trillion) and lower imports (-15.5% q/q to NGN5.36 trillion). The higher exports did not come as a surprise to us given the higher crude oil production in the review period (1.34mb/d vs Q3-22: 1.20mb/d). Notably, crude oil exports contributed 77.2% to total exports in the review period. Overall, the trade surplus settled at NGN1.21 trillion in 2022FY (2021FY trade deficit: NGN1.94 trillion), driven by the faster growth in exports (41.7% y/y) relative to imports (22.8% y/y). Over the short-to-medium term, we expect crude oil production to rise faster than the 2022FY level while crude oil prices are expected to moderate compared to the prior year. At the same time, imports are likely to rise slowly, constrained by FX restrictions and local currency depreciation. On a balance of factors, we expect the trade surplus to moderate in 2023E.

Capital Markets

Equities

Risk-off sentiments resonated in the Nigerian equities market this week as investors took profits following recent rallies. Particularly, sell pressures on – MTNN (-4.2%) and GTCO (-7.2%) led the benchmark index lower. Thus, the All-Share Index dipped by 1.5% w/w to close at 54,935.20 points. Accordingly, the MTD and YTD returns moderated to -1.6% and -7.2%, respectively. Analysing activity levels, trading volume, and value weakened by 16.6% w/w and 41.4% w/w, respectively. Across sectors, the Banking (-4.6%), Insurance (-2.4%) and Industrial Goods (-0.3%) indices declined while Consumer Goods (+1.4%) index was the sole gainer of the week. The Oil and Gas index closed flat.

Looking ahead, we believe investors will focus on the outcomes of the bond auction and the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the Fixed Income market. If the MPC increases the benchmark policy rate and there is a passthrough impact on yields in the FI market, there could be a realignment of investments between markets that would pressure the performance of the equities market. As a result, we expect cautious trading from domestic investors in the short term. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the uninspiring macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

In line with our expectations, the overnight (OVN) rate expanded by 299bps w/w to 13.8%, as the debits for banking sector CRR alignments offset the inflow from FGN bond coupon payments (NGN128.40 billion). We highlight that the average system liquidity this week settled at a net long position of NGN331.98 billion (vs a net long position of NGN294.52 billion in the previous week). We note that this week’s average system liquidity does not reflect today’s CRR debits.

We believe the OVN rate will head northwards, as the outflows for next week’s auctions (FGN bond & FX) will put further downward pressure on the financial system liquidity and offset the impact of the anticipated inflow from FGN bond coupon payments (NGN80.56 billion).

Treasury bills

The Treasury bills secondary market traded with bearish sentiments this week, as the average yield across all instruments expanded by 163bps to 5.2%. Across the segments, the average yield increased by 173bps to 5.4% in the NTB secondary market but remained at 3.0% in the OMO segment. At the NTB auction, the CBN offered NGN161.87 billion – NGN1.10 billion of the 91-day, NGN918.38 million of the 182-day, and NGN159.85 billion of the 364-day – in bills. Demand at the auction was higher than the previous PMA, as the total subscription level settled at NGN1.03 trillion (bid-to-offer settled at 6.4x) with more interest on the longer-dated bills (NGN1.01 trillion translating to 97.6% of the total subscription). The auction closed with the CBN allotting precisely what was offered at respective stop rates of 2.55% (previously 1.44%), 5.00% (previously 6.00%), and 9.49% (previously 10.00%).

Given the expected tight liquidity in the system next week, we anticipate an increase in T-bills yields from current levels.

Bonds

Trading in the FGN bonds secondary market was bearish, as investors stayed on the sidelines in anticipation of the bond PMA scheduled to hold next week Monday (20 March). As a result, the average yield expanded by 20bps to 13.3%. Across the benchmark curve, the average yield inched higher at the short (+58bps) and long (+6bps) ends as investors took profit on the MAR-2024 (+191bps) and APR-2049 (+28bps) bonds, respectively. Meanwhile, the average yield was flat at the mid segment.

In the coming week, we expect the outcome of the March 2023 FGN treasury bond auction to influence the sentiments in the Treasury bond secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037 and 14.80% FGN APR 2049 bonds. Notwithstanding, we maintain our medium-term view that the FG’s frontloading of significant borrowings for the year will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

This week, Nigeria’s FX reserves decreased by USD311.24 million w/w to USD36.08 billion (15 March). The naira depreciated by 0.1% to N462.83/USD at the I&E window (IEW), with total turnover at the window (as of 16 March 2023) decreasing by 22.2% WTD to USD431.12 million, as trades were consummated within the NGN445.96 – NGN476.96/USD band. In the Forwards market, the naira rates appreciated across the 1-month (+0.2% to NGN465.63/USD), 3-month (-+0.1% to NGN481.90/USD), and 6-month (+0.5% to NGN506.17/USD) contracts, but depreciated at the 1-year (-1.1% to NGN548.84/USD) contract.

We believe FX liquidity issues will remain over the short-to-medium term as we do not see any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production and (2) elevated PMS under-recovery costs, FPIs who have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.