Economic and Market Report –Week-ended July 16, 2021

Economic and Market Report –Week-ended July 16, 2021

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Global Economy
According to the Bureau of Labour Statistics (BLS), headline inflation in the US jumped by 40bps to 5.4% y/y in June (May: 5.0% y/y) – the sixth consecutive month of increase and the highest since August 2008 (5.4% y/y). Although the increase was concentrated in few categories, we note that it was also partly driven by the broader reopening of the economy after the pandemic-induced price slump in the prior year. Specifically, price pressure was most significant in Used cars and trucks (45.2% y/y vs May: 29.7% y/y), which contributed c.35.0% to the CPI increase. The increase in Gasoline prices (45.1% y/y vs May: 56.2% y/y) and Transportation services (10.4% y/y vs May: 11.2% y/y) also contributed to the uptrend in the headline index. On a month-on-month basis, consumer prices rose 0.9% (May: 0.6% m/m). Although we expect inflationary pressure to moderate in the coming months as the impact of low base effects dissipates, we expect it to remain above the Fed’s 2.0% target in short to medium term.

In line with our expectation, China’s economic growth increased slower in Q2-21 following the dissipating low base effect. According to the Chinese National Bureau of Statistics (NBS), China’s economy grew by 7.9% y/y in Q2-21 compared to the record growth of 18.3% y/y witnessed in Q1-21. The moderation in growth reflected the base effect from Q2-20 (+3.2% y/y) when the economy rebounded from the pandemic induced slump in Q1-20 (-6.8% y/y). Notwithstanding, the outturn was supported by the resilient external sector, robust industrial production and increased consumer spending. On a quarter-on-quarter basis, the economy grew faster by 1.3% q/q in Q2-21 (Q1-21: 0.6% q/q). Given the sustained steady recovery in the economy amidst the waning low base effect, China has less room to record double-digit growth over the rest of the year. Accordingly, we expect the economic growth to remain in high single-digit over H2-21, with the economy on track to meet the IMF’s 8.4% annual growth forecast.

Global Markets
Global stocks posted mixed performances this week as investors’ sentiments were shaped by (1) a slew of impressive quarterly corporate earnings in the U.S and Eurozone, (2) Fed Reserves Chairman’s dovish comments on monetary policy, and (3) concerns that rising Covid-19 cases will undermine global growth prospects. In the U.S, the DJIA (+0.3%) was set to close the week in green as investors traded cautiously ahead of U.S retail sales data. On the other hand, the S&P (-0.2%) gave up gains accumulated earlier in the week as higher-than-expected inflation data overshadowed the reaction to upbeat quarterly corporate earnings releases during the week. Likewise, European markets (STOXX Europe: -0.4% and FTSE 100: -1.4%) extended losses from the prior week as investors became increasingly worried about the spread of the Covid-19 Delta variant and its potential economic impact. In Asia, the Nikkei 225: (+0.2%) and SSE: (+0.4%) were on course for a weekly gain as risks sentiments strengthened after the People’s Bank of China unleashed USD17.00 billion liquidity through OMO amid a cut in the Bank’s reserve-requirement ratio. Similarly, Emerging markets (MSCI EM: +2.3%) stocks posted robust gains on the back of bullish sentiments in China (+0.4%). In comparison, Frontier market (MSCI FM: -0.1%) stocks declined marginally, primarily driven by the sell-off in the Vietnamese (-3.6%) market.

Nigerian Economy
Headline inflation decelerated for the third consecutive month, given favourable base effects from the prior year. According to the National Bureau of Statistics (NBS), headline inflation moderated by 18bps to 17.75% y/y in June (May: 17.93% y/y). The moderation in the consumer price index was due to the declines across the food (-45bps to 21.83% y/y) and core (-6bps to 13.09% y/y) baskets. Although the planting season affected food prices (+6bps to 1.11% m/m) on a month-on-month basis, the favourable base from the prior year led to a slowdown in food prices on a year-on-year basis. Meanwhile, the moderation in the core basket was supported by stable utility prices and a slowdown in health prices. While we expect food prices to remain elevated in the near term, given the beginning of the lean season, we expect stable fuel prices to keep the core inflation in check. Accordingly, we forecast the headline inflation to print 1.06% m/m in July, translating to a y/y reading of 17.54%.

During a webinar organised by the Bureau of Public Enterprise (BPE) and the Nigerian Export Promotion Council (NEPC), the Central Bank Governor stated that the NGN15.00 trillion Infrastructural Corporation of Nigeria Limited (InfraCo) would begin full operation in Q3-21. Recall that the government, early in the year, approved the establishment of InfraCo with a seed capital of NGN1.00 trillion, expecting it would grow to NGN15.00 trillion over time. We understand that the FGN has now named the fund managers and transaction advisers for the Corporation. Given the substantial infrastructural deficit (estimated at USD3.00 trillion over the next 30 years) in the country, we align with the CBN Governor that it would be difficult for the government to close the gap given the constrained revenue amidst high debt servicing costs. Accordingly, we regard this as a welcome development that will harness funds from the private sector and help in improving long-term foreign investment inflows to the country.

Capital Markets
Bearish sentiments persisted in the local bourse for the second consecutive week, as investors booked profits on bellwether stocks. Cautious trading dominated the local bourse this week as investors await the release of Q2-21 earnings. Accordingly, the All-Share Index shed 0.1% w/w to close at 37,947.18 points. Consequently, MTD and YTD returns moderated to 0.1% and -5.8%, respectively. Activity levels were weak, as trading volume and value declined by 25.2% w/w and 10.0% w/w, respectively. Pertinently, sell-offs in bellwether stocks; NB (-3.3%), DANGSUGAR (-2.2%), ZENITHBANK (-2.0%) and BUACEMENT (-0.7%), drove the weekly loss. Sectoral performance was broadly negative as the Insurance (-1.1%) index led the losers’ chart, followed by the Consumer Goods (-0.9%) and Industrial Goods (-0.3%) indices. On the other hand, the Oil and Gas (+1.8%) and Banking (+0.1%) indices closed in green.

We believe the outcome of the bond auction scheduled to hold next week will shape market sentiments. As a result, we expect investors to trade cautiously while taking positions in stocks with attractive dividend yields ahead of H1-21 dividend declarations, which intermittent profit-taking activities would match. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money Market and Fixed Income
The overnight rate dipped by 15.75ppts w/w to 4.8%, as inflows from the maturing JUL-2021 bond (NGN561.05 billion), FGN bond coupon payments (NGN40.68 billion) and OMO maturities (NGN10.00 billion) saturated the system and outweighed funding pressures for net NTB issuances (NGN40.45 billion) and CBN’s weekly auctions (FX and OMO: NGN20.00 billion).

In the coming week, we expect the CBN to mop up the extra liquidity in the market. Thus, we envisage an expansion in the OVN to the double-digit region.

Treasury Bills
Trading in the Treasury bills secondary market was bullish, as average yield across all instruments contracted by 30bps to 8.1% following improved system liquidity. Across the market segments, the average yield at the OMO segment contracted by 57bps to 9.3%, given improved demand for these higher-yielding bills. The CBN sold NGN20.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions. Similarly, the average yield at the NTB segment contracted by 5bps to 6.7%, mirroring decline in the primary market and as participants sought to cover lost auction bids in the secondary market. On Wednesday at its bi-weekly PMA, the CBN offered NGN109.52 billion for sale and eventually allotted NGN150.00 billion – NGN5.24 billion of the 91D, NGN7.60 billion of the 182D and NGN137.30 billion of the 364D bills with stop rates of 2.50% (previously 2.50%), 3.50% (previously 3.50%), and 8.67% (previously 9.15%), respectively. With a subscription level of NGN574.68 billion, we highlight that this was the most subscribed auction this year (Bid cover ratio: 3.8x, previously 2.7x).

In the coming week, we expect yields to trend higher as we expect a shortfall in system liquidity.

Bonds
Bearish sentiments persisted in the Treasury bonds secondary market investors cherry-picked instruments across the curve. Specifically, average yields expanded by 50bps to 12.2%. Across the benchmark curve, we observed duration apathy as average yield contracted at the short (-88bps) end following demand for the JUL-2021 (-382bps), while it expanded at the mid (+11bps) and long (+39bps) segments following an upward re-pricing in the JUL-2030 (+20bps) and JUL-2034 (+79bps) bonds, respectively.

Next week, we expect the outcome of the bond auction to influence the direction of yields in the bonds secondary market. 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.

Foreign Exchange
Nigeria’s FX reserves declined marginally by USD17.05 million w/w to USD33.10 billion (as of 14th July 2021). Meanwhile, the naira appreciated by 0.3% to NGN410.38/USD at the I&E window (IEW) but depreciated by 0.2% to NGN506.00/USD in the parallel market. At the IEW, total turnover (as of 15th July 2021) decreased by 83.4% WTD to USD90.13 million, with trades consummated within the NGN411.80 – 423.90/USD band. In the Forwards market, the rate appreciated on the 1-month (+0.1 to NGN413.32/USD) and 3-month (+0.1% to NGN417.10/USD) contracts but depreciated on the 6-month (-0.1% to NGN424.04/USD) and 1-year (-0.3% to NGN437.00/USD) contracts.

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. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.

 

 

Cordros


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