Global Economy
According to the Bureau of Labor Statistics (BLS), consumer prices in the United States increased by 20bps to 2.9% y/y in December (November: 2.7% y/y). The increase was primarily due to the slower decline in gasoline prices and higher food prices. Specifically, the decline in energy prices (-0.5% y/y vs November: -3.2% y/y) was much lower than the previous month as fuel and gasoline prices declined at a slower pace relative to the prior year.
Food inflation rose to 2.5% y/y (November: 2.4% y/y), marking the third straight month of acceleration. This was driven by higher costs of food at home (+20bps to 1.8% y/y), while the cost of food away from home remained steady at 3.6% y/y. On a month-on-month basis, the headline inflation rose by 0.4% (November: 0.3% m/m). In our view, the combined impact of high gasoline prices and elevated service costs will continue to exert upward pressure on overall inflation, keeping it above the 2.0% target in the near term.
Consequently, we expect the US Fed to adopt a cautious approach and hold the key interest rate steady at the next meeting while closely monitoring the potential effects of the anticipated tariff hikes on price levels. Indeed, the CME FedWatch tool indicates a 97.3% chance that the Fed will “HOLD” the funds rate at the 29 January monetary policy meeting.
In the United Kingdom, headline inflation pared below market expectations (+2.6% y/y) in December. According to the Office for National Statistics (ONS), headline inflation in the UK eased by 10bps to 2.5% y/y in December (November: +2.6% y/y). The slowdown was primarily driven by weaker restaurant & hotel prices (+3.4% y/y vs November: 4.0% y/y), supported by the moderation in recreation & communication (+3.4% y/y vs November: +3.6% y/y) and services (+4.4% y/y vs November: +5.0% y/y) costs.
Meanwhile, the price of food and non-alcoholic beverages was steady at 2.0% y/y. On a month-on-month basis, consumer prices increased by 0.3% (November: 0.0% m/m). Looking ahead, we expect inflation to remain above the Bank of England’s (BoE’s) 2.0% target over the short term on account of (1) rising energy costs, (2) the direct impact of the expansionary 2024 Autumn Budget, and (3) anticipated risks arising from Trump’s potential tariff hikes.
Nonetheless, the recent better-than-target inflation print is likely to offer the BoE some relief, potentially paving the way for a rate cut in the near term. Thus, the financial market anticipates a 25bps cut by the BoE in the 6 February monetary policy meeting.
Global Market
Positive sentiments prevailed in the global equities market this week, fueled by positive perceptions despite higher CPI print in the US, cooling inflation in UK, stronger-than-expected Q4-24 GDP from China, and easing geopolitical tensions in the Middle East. Accordingly, US equities (DJIA: +2.9%; S&P 500: +1.9%) were on course to close the week on a strong note, as a lighter-than-expected producer inflation report for December 2024 and cooler core CPI inflation revived some market participants’ hopes for additional Federal Reserve rate cuts this year. Furthermore, solid earnings from major US banks also contributed to market sentiment.
Similarly, European equities (STOXX Europe: +1.7%, FTSE 100: +1.7%) were set to end the week higher, reflecting market optimism on interest rate cuts following lower-than-expected UK inflation data. Meanwhile, Asian indices delivered mixed performances this week as Japanese equities (Nikkei 225: -1.9%) faltered following comments from the Bank of Japan (BoJ) Governor on the possibility of a rate hike at the upcoming policy meeting on January 24.
In contrast, Chinese stocks (SSE: +2.3%) advanced, buoyed by (1) a softer US inflation reading, (2) commitments from Chinese authorities to intensify policy support, and (3) stronger-than-expected Q4-24 GDP growth. Elsewhere, the Emerging Market (MSCI EM: +0.9%) and Frontier Market (MSCI FM: +0.9%) indices advanced, reflecting gains in China (+2.3%) and Vietnam (+1.2%), respectively.
Nigeria: Domestic Economy
According to the National Bureau of Statistics (NBS), consumer prices increased for the fourth straight month, rising by 20bps to 34.80% y/y in December (November: 34.60% y/y), bringing the average headline inflation for 2024FY to 33.18% (2023FY average: 24.52%). Parsing through the breakdown, food prices (-8bps to 39.84% y/y) slowed after three consecutive months of increase, driven in part by pre-emptive buying in anticipation of price hikes during the festive period and the delayed impact of the harvest season.
However, core inflation (+53bps to 29.28% y/y) increased for the third month in a row, primarily reflecting the impact of seasonal demand during the festive period and elevated energy costs on prices of core items. On a month-on-month basis, the headline inflation moderated by 20bps to 2.44% m/m (November: 2.64% m/m).
Looking ahead, we expect headline inflation to trend downwards in the near term, primarily due to (1) the stability of the naira, (2) reduced consumer demand and (3) ease in energy prices. Overall, we project headline inflation will moderate to 2.22% m/m in January, translating to a y/y reading of 34.30%. However, we note that the rebasing of the Consumer Price Index (CPI) could introduce a downside risk to our January inflation estimate partly due to proposed weight adjustments.
According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) reversed the increase recorded in the previous month, declining by 1.4% m/m to 1.67 mb/d in December (November: 1.69 mb/d). The Escravos (-4.0% m/m) and Agbami (-19.9% m/m) production terminals experienced declines which offset production increases from the Brass (+13.8% m/m), Bonny (+3.1% m/m), Tulja-okwuibome (+1.4% m/m), Odudu (+0.9% m/m) and Forcados (+0.7% m/m) terminals.
The average crude oil production (including condensates) for 2024FY settled at 1.55 mb/d (2023 average:1.47 mb/d), which was slightly above our estimate (1.54 mb/d) but fell short of the FG’s 1.78 mb/d target by 0.23mb/d. In the medium term, we anticipate higher production following (1) improved oil pipeline surveillance, (2) the introduction of new oil fields, and (3) the FG’s approval of pending on-shore oil asset divestment deals between International Oil Companies (IOCs) and local companies. Consequently, we revise our 2025FY average crude oil production projection upwards to 1.65 mb/d (previous: 1.62 mb/d).
Capital Markets: Equities
Bearish sentiments dominated the Nigerian equities market this week, as sell pressures on DANGCEM (-16.5%), TRANSCORP (-8.8%), MTNN (-3.7%) and FBNH (-3.3%) weighed the All-Share Index down by 2.9% w/w to 102,353.68 points. As a result, Year-to-Date returns moderated to -0.6%. Trading activities were also subdued, with trading volume and value declining by 52.4% w/w and 31.2% w/w, respectively. Furthermore, sectoral performance mirrored the broader market trend, with declines across the Industrial Goods (-8.2%), Insurance (-6.2%), Oil & Gas (-0.8%), and Banking (-0.5%) indices, while the Consumer Goods (+1.3%) index advanced.
In the week ahead, we anticipate choppy trading activities in the market as investors continue to rebalance their portfolios for the year. Profit-taking is likely to persist in specific segments of the market, while undervalued and beaten-down names may see renewed buying interest.
Money Market and Fixed Income
The overnight (OVN) rate expanded by 489bps w/w to 32.8% as CRR debits offset inflows from OMO maturities (NGN252.50 billion) and FGN bond coupon payments (NGN410.70 million), thereby pressuring system liquidity. Accordingly, system liquidity settled at a net short position of NGN145.29 billion (vs a net long position of NGN401.74 billion in the previous week).
Next week, we expect inflows from FGN bond coupon payments (NGN162.42 billion) to support system liquidity amid no significant outflows, thus, driving the OVN rate lower.
Treasury Bills
The Treasury bills secondary market traded on a bearish note this week due to the tight system liquidity, with average yield in the market rising by 35bps to 26.6%. Across the market segments, the average yield pared by 1bp to 25.2% at the T-bills segment but expanded by 51bps to 28.3% at the OMO segment.
Based on our expectation of a better liquidity position in the coming week, we expect yields in the Treasury bills secondary market to trend lower. Additionally, the DMO is scheduled to conduct an NTB PMA next Wednesday (22 January) with NGN237.08 billion worth of bills on offer.
Bonds
Proceedings in the FGN bond secondary market were bearish, driven by (1) December’s CPI print (+20bps to 34.80%) and (2) traders opening short positions on the 2031 bond in anticipation of a price decline. Hence, the average yield increased by 21bps to 20.1%. Across the benchmark curve, the average yield increased at the short (+28bps), mid (+48bps), and long (+4bps) segments following selloffs of the JAN-2026 (+107bps), JUL-2034 (+139bps) and APR-2037 (+32bps) bonds, respectively. Notably, the DMO released the issuance calendar for Q1-25, which shows that a new 10-year benchmark bond (FGN JAN 2035) will be introduced.
Next week, we expect to see increased positioning by market participants in anticipation of the January FGN bond auction. Over the short term, we anticipate still elevated yields, consequent on (1) anticipated monetary policy administration and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
The naira depreciated by 0.3% to NGN1,547.58/USD at the Nigerian Foreign Exchange Market (NFEM) despite the intervention from the CBN, selling c. USD300.90 million to authorised dealers. As a result, the country’s FX reserves declined by USD330.12 million w/w to USD40.42 billion (15 January). In the forwards market, the naira rates increased across the 1-month (+0.2% to NGN1,589.78/USD), 3-month (+0.6% to NGN1,654.40/USD), 6-month (+1.4% to NGN1,751.59/USD) and 1-year (+3.0% to NGN1,935.72/USD) contracts.
We highlight that while naira yields have remained attractive, the existing geopolitical risks, which have now been compounded by the expectation of rising global trade protectionism, have continued to constrain capital flows, limiting FPI inflows to the FX market. With rising demand and still limited inflows, the naira is likely to face pressure in the near term, causing a gradual naira depreciation despite CBN interventions.
Cordros
