According to Eurostat, annual inflation rate in the Euro Area came in at 1.6% in Dec. 2018, unchanged from the preliminary estimate and below November's final reading of 1.9%. It was the lowest rate since April. According to the details, the super-core inflation – the prices that are responsive to the business cycle – continued to pick up and came in at 1.4% y/y in December. Annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco stood at 1.0%, the same as in November. Super-core inflation is expected to continue pick up relatively fast due to lagged effects of the much higher wage growth this year, while the rest of core is likely to remain low. Thus, the ECB is expected to leave rates unchanged until past 2019 summer (as earlier guided).
According to China's customs administration, Chinese trade slumped in December, as an unexpected fall in both exports and imports underlined the impact of the trade war and economic slowdown. Exports in dollar terms fell 4.4% from a year earlier, while imports dropped 7.6%. Both were the worst result since 2016, and left a trade surplus of USD57.1 billion. For the whole of 2018, exports rose by 9.9% in 2018 in dollar terms to USD2.48 trillion, while imports surged 15.8%, leaving a trade surplus of USD351.8 billion. The surplus with the U.S. rose more than 17% to USD323.3 billion in 2018, driven by an 11% jump in exports and flat imports. Progress and further delays in additional tariffs are expected as the US-China trade talks advance. However, due to persistent threat of higher tariffs and other related uncertainties, the positive impact of further tariff delays on overall economic growth will be limited.
For the second consecutive week, global equities investors continued to ignore negative headlines, as gains were seen across our coverage universe. Notably, amidst geopolitical concerns in the Euro Area, together with the ongoing government shutdown in the U.S, speculation of tariff reversal between the U.S and China, together with softer monetary statements by the U.S Fed acted to lift investors confidence. Thus, gains were seen in the U.S (DJIA: +1.6%, S&P: +1.5%), the Euro Area (Euro Stoxx: +0.8%), and Asian (CSI 300: +2.4%; Nikkei: +1.5%) markets, respectively. Elsewhere, the positive momentum also extended to the emerging (MSCI EM: +0.8%) and frontier markets (MSCI FM: +0.1%).
According to the Nigerian Bureau of Statistics (NBS), and in line with our view, Nigeria’s headline inflation extended its uptrend into December by 16bps to 11.44% y/y, against the 11.28% y/y reading in the prior month. True to our word, month-on-month food inflation tapered by 9bps to 0.81% driven by a sharp deceleration in processed and imported food, which neutered slight uptick in farm produce. With minimum wage increase still hanging in the air, we expect the dual impact of slight uptick in core inflation and faster deceleration in food basket to midwife a reversal in the headline inflation trend in January. Overall, we look for January m/m headline inflation of 0.73%, translating to y/y figure of 11.37%.
On Monday next week, the Monetary Policy Committee will commence its first policy meeting of the year amidst broadly unchanged economic landscape since its last meeting in November 2018. On the global front, trade protectionism, together with geopolitical concerns continued to weigh on global growth. At home, inflation has trended as expected, currency remained large in a tight range amidst foreign portfolio exodus, and growth recovery is still fragile. In our views, we believe currency and price stability remain at the fore of the MPC’s policy thrust especially as election period draws close. Hence, the need to sustain the tight policy environment. Therefore, we expect the MPC to hold its policy parameters unchanged, while it continues to leverage on the OMO channels in its liquidity management.
Capital Markets –Equities
It was a jolly ride for the Nigeria’s equity market as gains were recorded in all trading sessions of the week. Instructively, the ASI posted a whopping 3.94% w/w gain following buying sentiments across DANGCEM (+10.11% w/w), NESTLE (+3.49% w/w), and NB (+3.85% w/w) shares. Thus, the MtD loss is now at a tamer 1.35%. On sectoral breakdown, all sector indices closed positive – save for the Banking (-1.04%) index–, with the Industrial (+12.71%) index leading the pack, followed closely by the Insurance (+5.51%), Consumer Goods (+2.72%), and Oil & Gas (+0.59%) indices respectively.
In spite of this week’s rally, our view continues to favour cautious trading pattern in the equities market amidst brewing political jitters ahead 2019 elections, and the absence of a positive market trigger. However, we the positive macroeconomic fundamentals to drive recovery in the long term.
The overnight lending rate moderated by 633 bps w/w to 16.17%, against last week’s close of 22.50%. Rates remained elevated throughout the week, amidst the CBN’s OMO (NGN574.59 billion) interventions. However, inflows of matured OMO bills (NGN560.92billion), treasury bills (NGN73.45 billion), and bond coupon payments (NGN106.03 billion) boosted liquidity towards the end of the week, resulting in a rate decline.
Next week, inflows totaling NGN449.37billion – NGN381.54 billion in maturing OMO bills and NGN67.82 billion in bond coupon payments – will offer support to system liquidity. However, liquidity mop-up and forex intervention by the CBN are likely to exert upward pressure on the overnight lending rate.
Activities in the treasury bills market were bullish driven by (1) the increase in system liquidity, and (2) increased demand from foreign investors. Consequently, yields fell 40 bps to close the week at 14.91% on average. Buy sentiment was concentrated at the short (-128 bps) and mid (-1 bp) segments, amid demand for the 55DTM (-226 bps) and 132DTM (-220 bps) bills, respectively. Conversely, yield expanded at the long (+4 bps) end of the curve, following a selloff of the 237DTM (+106 bps) closed flat. At this week’s primary action, the CBN fully allotted NGN225.45 billion worth of bills – NGN5.85 billion of the 91-day, NGN26.60 billion of the 182-day and NGN119.55 billion of the 364-day – at respective stop rates of 11.00% (previously 10.899%), 13.10% (same as previous auction), and 15.00% (previously 14.50%).
Yields are expected to be pressured, as the CBN is expected to maintain its aggressive OMO stance.
Activities in the bond market were also bullish as market players sought to re-invest coupon payments. As a result, average yield moderated by 6 bps w/w to close at 15.19%. Yield moderated at the mid (-10 bps) and long (-16 bps) segment, following demand for the MAR-2027 (-34 bps) and MAR-2036 (-25 bps) bonds. On the flip side, yields widened at the short (+7 bps) end of the curve following a selloff of the FEB-2020 (+19 bps) bond.
Demand is likely to persist over the next week as market players seek to reinvest inflows from incoming coupon payments (NGN67.82 billion). However, theme for the bond market continues to favour modestly higher yields in the medium term, anchored on (1) domestic monetary policy direction, (2) sustained uptick in inflation rate, (3) capital flight amid higher yields in safe haven assets, and (4) political uncertainty stemming from the upcoming general elections.
With the influx of hot money into both fixed income and equities markets for much of the week, total FX turnover at the I&E window surged by 83.0% w/w to USD1.73 billion. Set against the foregoing, the naira appreciated by 0.59% to NGN362.79 and 0.28% to NGN362 at the I&E window and in the parallel market respectively. Furthermore, increased autonomous flows also bolstered FX reserves in the period as the CBN recorded foreign reserve accretion of USD42.57 million w/w to USD43.08 billion. As with the spot market, the naira appreciated across all contracts at the forwards market – 1-month (+0.69% to NGN366.32), 3-months (+0.78% to NGN371.84), 6-months (+90% to NGN383.89), and 1-year (-0.54% to NGN411.18) respectively.
With FX reserves comfortably sitting atop USD43 billion, we believe CBN has more than enough firepower to leave currency stable for much of the year. However, the still elevated maturity profile, combined with some speculative tendencies will drive mild depreciation as the progresses.