Global Economy
Consumer prices in the United Kingdom (UK) fell below the Bank of England’s 2.0% medium-term target for the first time since 2021. According to the Office for National Statistics (ONS), headline inflation in the UK eased by 50bps to 1.7% y/y in September (August: 2.2% y/y) – the lowest print since April 2021 (1.5% y/y). The slowdown was primarily driven by the contraction in transport costs (-2.4% y/y vs August: +1.2% y/y) due to lower costs of airfares and motor fuels. Additionally, energy prices (-16.2% y/y vs August: -12.2% y/y) declined further, reflecting lower petrol and diesel costs. Meanwhile, core inflation (+3.2% y/y vs August: +3.6% y/y) rose at a slower pace, while food prices (+1.8% y/y vs August: +1.3% y/y) accelerated for the first time in 19 months.
On a month-on-month basis, consumer prices were flat at 0.0% (August: +0.3% m/m). While we anticipate inflation to hover around the current level, we think the increase in the government’s energy price cap could introduce near-term upside risks. Additionally, we anticipate the Bank of England (BoE) will monitor inflation trends, particularly core and services inflation, as well as labour data before deciding on future policy actions. Overall, we envisage that the BoE will implement a rate cut in the near term in line with market expectations of a 25bps cut at the 7 November monetary policy meeting.
At the October monetary policy meeting, the Governing Council of the European Central Bank (ECB) voted to cut its key policy rates in line with market expectations. Accordingly, the Committee reduced the deposit lending facility, main refinancing operation, and marginal lending facility rates by 25bps apiece to 3.25%, 3.40% and 3.65%, respectively (previously: 3.50%, 3.65%, and 3.90%). Notably, the committee cited that the incoming inflation data shows that the disinflationary process is “well on track”, providing room to support the region’s faltering economy. However, near-term upside risks to inflation due to rising wages were acknowledged.
Additionally, despite weaker consumption and investments, which have dampened growth prospects amid the lingering geopolitical uncertainties, the committee expressed confidence that the bloc will avoid a recession in the medium term. All told, while no forward guidance was provided at the meeting, the council stated that future decisions will follow a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restrictive measures. Although we expect the council to maintain the monetary easing path, we believe they will closely monitor the tensions in the Middle East, particularly with regards to oil prices, which have the potential to drive up energy inflation. Thus, we anticipate the council will implement a further 25bps cut in December, aligning with market expectations that the committee will reduce rates at every monetary policy meeting until March 2025.
Global Equities
Global stocks generally traded higher this week as investors interest was supported by corporate earnings releases, strong economic data across the US and Europe, and additional stimulus support from China’s central bank. Accordingly, US equities (DJIA: +0.9%; S&P 500: +0.5%) were on track for another weekly gain, supported by encouraging third-quarter earnings reports from Netflix and big banks like Bank of America and Goldman Sachs, amid stronger-than-expected monthly retail sales data. Similarly, European equities (STOXX Europe: +0.4%; FTSE 100: +1.3%) were set to close the week higher, following positive reactions to (1) the latest European Central Bank’s interest rate cut, (2) robust UK retail sales data, and (3) China’s recent stimulus plans.
In Asia, Chinese equities (SSE: +1.4%) settled higher as the People’s Bank of China (PBOC) initiated its stimulus measures, offsetting concerns over slowing GDP growth. Conversely, Japanese equities (Nikkei 225: -1.6%) declined, pressured by slower domestic inflation and political uncertainties ahead of the general election. Finally, the Emerging Market and Frontier Market (MSCI EM: -2.1%, MSCI FM: -0.9%) indices declined, led by losses in India (-0.2%) and Romania (-0.9%), respectively.
Nigeria: Domestic Economy
According to the National Bureau of Statistics (NBS), headline inflation rose by 55bps to 32.70% y/y in September (August: 32.15% y/y) after two consecutive months of moderation. The increase in prices primarily reflect the impact of the rise in food prices and transportation expenses. Accordingly, food prices reversed the downtrend seen in the past two months, rising by 25bps to 37.77% y/y (August: 37.52% y/y) underpinned by below-average harvest cycles, while core inflation (15bps to 27.43% y/y) decelerated for the first time in ten months but remained elevated due to the combined impact of higher PMS prices (+50.5% to NGN855.00/litre), naira volatility, and increased transportation costs.
On a month-on-month basis, headline inflation increased by 30bps to 2.52% (August: 2.22% m/m). Looking ahead, we anticipate food prices will remain elevated as the flooding incidents in the food-producing states cap food supplies from the main harvest. At the same time, we expect the uptick in energy prices and transportation costs will push core inflation higher. Overall, we forecast headline inflation to settle at 2.34% m/m (September: 2.52% m/m) in October, leading to a 79bps increase in the y/y inflation rate to 33.49% (September: 32.70% y/y).
Based on data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) declined by 1.7% m/m to 1.54 mb/d in September (August: 1.57 mb/d) after five consecutive months of increase. We attribute the decline in the period to lower production volume recorded across the Forcados (-19.0% m/m), Akpo (-11.8% m/m) Qua Iboe (-7.8% m/m), Odudu (-4.7% m/m) and Escravos (-3.5% m/m) production terminals, while the Brass (+18.8% m/m), Bonny (+11.3% m/m) and Agbami (+2.5% m/m) terminals recorded increases.
Furtherout, we state that overall crude oil production remains below pre-COVID levels (Q1-20 average: 2.14 mb/d) due to the lingering effects of insecurity, infrastructure decay as well as low investment in the sector exacerbated by the exit of international oil companies (IOCs) and unresolved issues regarding the approval of oil asset transfers. While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that challenges plaguing the sector still pose downside risks to crude oil production in the near term. Thus, we maintain our average crude oil production estimate (including condensate) at 1.52 mb/d in 2024E (FGN budget: 1.78 mb/d).
Capital Markets: Equities
The Nigerian equities market ended the week on a positive note despite profit-taking activities dominating three of the five trading sessions. Particularly, strong buying interest in oil & gas stocks supported the market’s performance. Thus, the All-Share Index advanced by 0.5% w/w to 98,070.47 points, following demand for OANDO (+10.0%), TRANSPOWER (+19.3%), TRANSCOHOT (+7.8%) and DANGSUGAR (+13.1%). Consequently, the MTD and YTD returns settled at -0.5% and +31.2%, respectively. Trading activity levels were mixed, as total trading volume declined by 51.3% w/w, while total trading value surged by 135.5% w/w. Sectoral performance was mixed as the Oil & Gas (+1.1%) and Consumer Goods (+1.4%) indices advanced, while the Insurance (-1.2%) and Banking (-0.5%) indices declined. The Industrial Goods (0.0%) index closed flat.
We expect the direction of market performance to be shaped by the ongoing Q3 earnings season as investors cherry-pick fundamentally sound stocks.
Money Market and Fixed Income
The overnight (OVN) rate contracted by 44bps w/w to 32.6% following inflows from FGN bond coupon payments (NGN28.22 billion). Expectedly, the inflows were insufficient to provide support system liquidity, causing the OVN rate to remain elevated. Consequently, the average liquidity position declined, closing at a net short position of NGN1.51 trillion (vs a net short position of NGN643.66 billion in the previous week).
Next week, we believe the inflows from FAAC disbursements (NGN873.13 billion) will offset debits for the FGN bond PMA (c. 200.00 billion), thereby supporting system liquidity. As a result, we expect the OVN rate to trend lower.
Treasury Bills
In line with our expectations, trading in the Treasury bills secondary market remained bearish this week as market players sold bills to raise liquidity. Thus, the average yield across all instruments expanded by 63bps to 24.9%. Across the market segments, the average yield expanded by 100bps to 24.2% in the NTB segment and inched higher by 1bps to 25.9% in the OMO segment.
We believe the projection of a better liquidity position next week will boost demand for bills, thereby driving down yields in the secondary market. Also, the DMO is scheduled to hold an NTB PMA next Wednesday (23 October), with instruments worth NGN374.67 billion to be offered to investors.
Bonds
Similarly, activities in the FGN bonds secondary market were bearish this week, as most traders opened short positions ahead of this month’s bond auction amid the disappointing CPI print (+55bps to 32.70% y/y). Thus, the average yield inched higher by 20bps to 19.3%. Across the benchmark curve, the average yield expanded at the short (+35bps), mid (+22bps), and long (+17bps) segments driven by sell pressures on the MAR-2025 (+130bps), FEB-2031 (+58bps) bonds, and JUN-2038 (+156bps), respectively.
Next week, we believe the direction of yields in the secondary market will be shaped by the outcome of this month’s FGN bond auction scheduled to hold on Monday (21 October). At the auction, the DMO intends to offer instruments worth c. NGN200.00 billion through re-openings of the 19.30% FGN APR 2029 and 18.50% FGN FEB 2031 bonds, while the FGN MAY 2033 bond is now off-the-run. Nonetheless, we maintain our medium-term expectation of elevated yields consequent on (1) anticipated monetary policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
The naira appreciated this week by 2.5% w/w to NGN1,600.78/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) following the CBN’s intervention at the official window, selling c. USD64.00 million to authorized dealers. Notably, the country’s FX reserves maintained its upward trend, USD206.16 million w/w to USD38.88 billion (16 October), marking the 7th consecutive week of accretion partly due to FX purchases from Foreign Portfolio Investors (FPIs). Total turnover at the NAFEM as of 17 October decreased by 33.1% WTD to USD1.22 billion, with trades consummated within the NGN1,540.00/USD – NGN1,682.00/USD band. In the forwards market, the naira rates decreased across the 1-month (-1.5% to NGN1,699.15/USD), 3-month (-1.4% to NGN1,770.51/USD), and 6-month (-0.4% to NGN1,862.89/USD) contracts, while it increased on the 1-year (+0.9% to NGN2,067.69/USD) contract.
Barring any shock, we anticipate the naira will remain less volatile in the short term as the CBN maintains intervention in the FX market. This will also be supported by the improved FPI inflows into the FX market due to carry trade opportunities in the capital market.
Cordros
