Global Economy
According to the Office for National Statistics (ONS), headline inflation in the UK rose to a 10-month high, increasing by 50bps in January to 3.0% y/y (December: 2.5% y/y). The inflationary pressure was primarily driven by the substantial increase in transport prices (+1.7% y/y vs December: -0.6% y/y), reflecting higher airfares and rising automotive fuel costs, as well as increased education costs (+7.5% y/y vs December: +5.0% y/y) following the inclusion of a 20.0% value-added tax (VAT) on private school fees.
At the same time, food (+3.3% y/y vs December: +2.0% y/y) and core (+3.7% y/y vs December: +3.2% y/y) inflation increased, while energy inflation (-6.6% y/y vs December: -6.0% y/y) dipped further into the negative territory. On a month-on-month basis, consumer prices declined by 0.1% (December: +0.3% m/m). Inflationary pressures are still biased to the upside in the near term, with the Bank of England expecting inflation to peak at 3.7% in Q3-25.
The preceding suggests that the inflation trend remains within the BoE’s projections, and the committee may continue with its monetary easing cycle to support the crawling economy amid downside risks arising from US protectionist policies. This synchronizes neatly with market expectations of two additional rate cuts in 2025. Nonetheless, given the mounting upside risks to inflation, including strong wage growth and elevated services inflation, we do not rule out the possibility of a temporary pause to the current policy cycle.
In Japan, data from the Ministry of Internal Affairs & Communications shows that headline inflation increased by 40bps to 4.0% y/y in January (December: +3.6% y/y). Analyzing the breakdown, food prices (+6.4% y/y vs December: +4.8% y/y) rose to a 16-month high in line with the passthrough impact of adverse weather conditions, weaker currency and labour shortages as food businesses passed their rising cost burdens to consumers.
At the same time, core inflation (+3.2% y/y vs December: +3.0% y/y) expanded further, amid a slower increase in electricity (+18.0% y/y vs December: +18.7% y/y) and gas (+6.8% y/y vs December: +7.8% y/y) prices. On a month-on-month basis, headline inflation eased by 0.5% m/m in January (December: +0.6% m/m). We believe inflationary pressures are on course to increase further in the months ahead on account of (1) increased import costs due to weak local currency and (2) higher wages. Accordingly, we expect the Bank of Japan (BoJ) to maintain its tightening cycle at the March policy meeting.
Global Market
Risk-off sentiments dominated the global equities markets this week as geopolitical and trade uncertainties, a series of disappointing earnings reports, and key economic data releases from Japan and the UK weighed on investor confidence. US equities (DJIA: -0.8%, S&P 500: 0.0%) were on track to close the week lower as investors analysed the Federal Reserve’s January meeting minutes, which signaled a hawkish stance, while also assessing President Trump’s planned tariff measures.
Market sentiment was further pressured by the higher-than-expected weekly jobless claims and a disappointing outlook from Walmart. Similarly, European equities (STOXX Europe: -0.3%, FTSE 100: -0.8%) were set to end the week in negative territory, breaking an eight-week winning streak, as investors scaled back expectations for interest rate cuts following higher-than-expected inflation data and rising wage growth in the UK.
Investors also reacted to a series of earnings reports and assessed geopolitical uncertainties in the region. Elsewhere in Asia, Japanese equities (Nikkei 225: -1.0%) closed the week lower as higher-than-expected inflation data reinforced expectations of further interest rate hikes by the Bank of Japan (BoJ). Meanwhile, Chinese equities (SSE: +1.0%) ended the week higher, driven by sustained optimism in the technology and AI sectors. Lastly, the Emerging and Frontier Markets (MSCI EM: +0.6%, MSCI FM: +0.6%) closed the week higher, driven by gains in China (+1.0%) and Vietnam (+1.6%), respectively.
Nigeria: Domestic Economy
According to the National Bureau of Statistics (NBS), consumer prices printed 24.48% y/y in January following the recent CPI rebasing exercise. The new CPI covers 934 product varieties classified into 13 divisions under the COICOP 2018 framework. The framework includes indices such as the Urban National Index, Rural National Index, Headline Index, Food Index, Core Index, Imported Food Index, Goods Index, Services Index, Energy Index, All Items Less Farm Produce Index, and Farm Produce Index.
2023 was adopted as the weight reference period, while 2024 was used as the price reference period (base year). Analyzing the breakdown, food inflation settled at 26.08% y/y while core inflation (All items less farm produce and energy) printed at 22.59% y/y. Additionally, urban and rural inflation settled at 26.09% and 22.15% y/y, respectively.
Although the January inflation print does not indicate a slowdown in the headline inflation from the previous month (December 2024: 34.80% y/y), given the adoption of a new methodology in the computation of the data, we believe inflationary pressures have begun to ease and will continue to moderate in the near term, supported by naira stability and a decline in energy prices. We expect subsequent data under the new CPI to offer more precise insights into underlying trends.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to hold the Monetary Policy Rate (MPR) constant at 27.50% (Previous: 27.50%) at the February meeting (first meeting of the year), marking the first pause in rate increases since May 2022. The Committee’s decision to hold rates was primarily driven by an optimistic inflation outlook, supported by the naira appreciation and the steady reduction in PMS prices.
At the same time, the Committee voted to keep all other parameters unchanged – Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 50.0% and 16.0%, respectively; asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30.0%. Looking ahead, we anticipate that future MPC decisions will be primarily influenced by developments in the FX market and the inflation trajectory. While a potential rate cut could be considered at the May policy meeting, we expect a measured approach aimed at balancing exchange rate stability with the anticipated disinflationary process.
Capital markets: Equities
The domestic stock market ended the week on a positive note as investors digested inflation data and the Central Bank of Nigeria’s (CBN) monetary policy decision. Notably, gains in BUAFOODS (+11.9%) and DANGSUGAR (+15.0%) drove the All-Share Index higher by 0.4% w/w to 108,497.40 points, with month-to-date and year-to-date returns rising to +3.8% and +5.4%, respectively. However, trading activity remained subdued, as total volume and value declined by 16.2% w/w and 10.1% w/w, respectively. Across sectors, the Consumer Goods (+6.5%) and Insurance (+1.5%) indices advanced, while the Banking (-3.2%) and Oil & Gas (-2.9%) indices declined. The Industrial Goods index closed flat.
Looking ahead, market performance is expected to be influenced by the upcoming economic growth report (Q4-24 GDP) and further corporate earnings releases, with Industrial Goods heavyweights DANGCEM, WAPCO, and BUACEMENT expected to release 2024 audited financials next week. In the medium term, we expect investor sentiments to be guided by macroeconomic trends and the movement of yields in the fixed income market.
Money Market and Fixed income
The overnight (OVN) rate expanded marginally by 3bps w/w to 32.8% amid inflows from FGN bond coupon payments (NGN904.93 billion) and OMO maturities (NGN10.00 billion). Nonetheless, the average system liquidity remained unchanged, settling at a net short position of NGN1.08 trillion in this week and the previous week.
Next week, we expect inflows from OMO maturities (NGN1.03 trillion) to boost system liquidity, causing the OVN rate to temper from current levels.
Treasury Bills
Bullish sentiments dominated the Treasury bills secondary market this week driven by the trifecta impact of (1) the lower-than-expectation January’s inflation data that printed 24.48% y/y, (2) the MPC’s decision to hold rates, and (3) market participants looking to fill unmet bids at the NTB PMA. Accordingly, the average yield declined by 174bps to 22.4%. Across the market segments, the average yield declined by 189bps to 20.2% in the NTB segment, while it declined by 145bps to 25.0% in the OMO segment.
At Wednesday’s NTB auction, the DMO offered bills worth NGN700.00 billion – NGN80.00 billion for the 91D, NGN120.00 billion for the 182D, and NGN500.00 billion for the 364D bills. Subscription level settled lower at NGN2.41 trillion (previous auction: NGN3.22 trillion), with a bid-to-offer ratio of 3.4x (previous auction: 4.8x). The auction closed with the DMO allotting NGN774.13 billion – NGN34.77 billion for the 91D, NGN34.98 billion for the 182D, and NGN704.38 billion for the 364D papers – at respective stop rates of 17.00% (previous: 18.00%), 18.00% (previous: 18.50%) and 18.43% (previous: 20.32%).
Next week, we expect continued downward repricing of yields in line with current market dynamics, further supported by the anticipated liquidity influx into the system.
Bonds
Similarly, the FGN bond secondary market was bullish this week as investors reacted to January’s lower inflation reading. Hence, the average yield decreased by 78bps to 19.4%. Across the benchmark curve, the average yield decreased at the short (-59bps), mid (-90bps), and long (-47bps) segments, driven by demand for the MAR-2027 (-165bps), FEB-2031 (-208bps), and JUN-2038 (-90bps) bonds, 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 holding on Monday (24 February). At the auction, the DMO is set to offer instruments worth NGN350.00 billion through re-openings of the APR-2029 and FEB-2031 bonds.
Foreign Exchange
The naira appreciated by 0.6% to NGN1,501.08/USD at the Nigerian Foreign Exchange Market (NFEM) as the CBN intervened, selling USD66.80 million to authorized dealers. Also, the FX reserves level declined by USD300.11 million w/w to USD38.74 billion (20 February), marking the 6th consecutive week of decline. In the forwards market, the naira rates increased across the 1-month (+0.8% to NGN1,541.90/USD), 3-month (+1.2% to NGN1,614.50/USD), 6-month (+2.0% to NGN1,715.15/USD) and 1-year (+2.2% to NGN1,906.24/USD) contracts.
In line with the CBN’s efforts to sustain carry trade opportunities and boost capital inflows, coupled with its ongoing market interventions, we expect FX liquidity to remain adequate, supporting naira stability in the short term.
