Global Economy
United States – U.S. Inflation Subsides to 3.2% YoY in October 2023
During the week, the US Bureau of Statistics released the inflation report for October 2023. As culled from the report Headline Inflation advanced by 3.2% YoY, compared to 3.7% YoY in September. For more clarity, Food Inflation rose 3.3% YoY (vs rose 3.7% YoY in September) while Core Inflation rose 4.0% YoY (vs 4.1% YoY in September). The Energy Index further contracted by 4.5% YoY (vs -0.5% YoY in September).
Source: BLS, Zedcrest Wealth
The year-on-year decline in headline CPI is an offshoot of lower energy prices, declining home and rent prices, and a weakening labor market. For context, the energy index declined by 2.5% MoM in October compared to the consistent MoM increases we have seen since June. This we attribute to the decline in general oil prices amid slower demand (Brent Crude closed at USD80.61pb). Also, Shelter inflation moderated, rising by 0.3% MoM and 6.7% YoY (0.6% MoM and 7.2% YoY in September). For more clarity, Shelter inflation has been one of the stickier components of core inflation, running above 7.0% YoY for all of 2023 until this October reading. Real-time indicators of home prices and rent have moderated recently, suggesting this component of inflation could continue to fall over the coming months.
Source: BLS, Zedcrest Wealth
Given the factors listed above, we opine that disinflationary trends will remain pronounced in the United States. We base our prognosis on the weakening labor market which has prompted lower demand and bearish sentiments in the economy. On interest rate decisions, we do not expect the US Fed to hike interest further as the impacts of the previous hikes continue to unfold. We opine that conversations around rate cuts might occur around H2:2024.
Source: BLS, Zedcrest Wealth
United Kingdom – UK Inflation Eases to 4.7% YoY in October 2023
According to the October 2023 Inflation report released by the United Kingdom’s Office of National Statistics, the Consumer Price Index, including Owner Occupiers’ Housing Costs (CPIH), rose by 4.7%, compared to 6.3% YoY in September. Similarly, the Consumer Price Index (CPI) rose by 4.6% YoY (vs 6.7% YoY in September). For context, Core CPI — which excludes volatile food, energy, alcohol, and tobacco prices — tapered to 5.7% YoY in October compared to 6.1% in September 2023. The largest downward contribution to inflation came from housing and household services.
Despite the UK Prime Minister (Rishi Sunak) delivering on his commitment to halve inflation this year and Finance Minister Jeremy Hunt expressing intentions to stimulate economic growth ahead of the 2024 general election, we anticipate that the Bank of England (BoE) will refrain from further interest rate hikes in the upcoming meeting this year. There is a perceived necessity to thoroughly assess the economy before making decisions on rate cuts. The repercussions of previous rate increases, coupled with the downward impact of diminishing energy costs, are believed to have contributed to the observed decline. Looking forward, we foresee a continued disinflationary trend in the coming months.
Source: ONS, Zedcrest Wealth
Domestic Economy
The CBN, Currency Notes, and MPC Meeting
During the week, the Central Bank of Nigeria (CBN) announced the indefinite extension of the legal tender status of the old design Naira banknotes (N200, N500, and N1,000 denominations), originally set to cease on December 31, 2023. In a statement signed by the Director, of Corporate Communications, Isa AbdulMumin, on Tuesday, the apex bank stated that it is working with the relevant authorities to vacate the subsisting court ruling on the same subject. This marks the third statement the CBN has issued concerning naira notes amid uncertainties that have permeated the currency notes.
In other news, the Central Bank of Nigeria is poised to convene its 294th Monetary Policy Committee meeting on November 20th and 21st, 2023. Anticipating the imperative to curb inflation and stimulate enhanced investment, we project the apex bank to implement further rate tightening, ranging between 50bps and 100bps.
With inflation persisting at a notably high 27.33% YoY as of October 2023, the erosion of capital gains and real returns on investment has undermined investor confidence in the Nigerian economy. Concurrently, the challenges of FX scarcity, the devaluation of the Naira, and the depletion of FX reserves persist as significant issues. To attract foreign investors and improve returns on investment, we anticipate the Central Bank to maintain a hawkish stance during its upcoming meeting.
October 2023 Inflation – Adventures in the Heights: An Alpinist’s Story
During the week National Bureau of Statistics released the inflation report for October 2023. As culled from the report Headline Inflation advanced by 61bps to print at 27.33% YoY. For context, Food Inflation increased by 88bps to 31.52% YoY while core Inflation soared by 73bps to 22.58% YoY. On a month-on-month basis, Headline (+1.73), Food (+1.91%), and Core (+1.39%) all witnessed an uptrend albeit at a slower pace compared to the previous month. Elevated food prices remain the major driver of headline inflation.
12-Month Trend Analysis of Core, Food, and Headline Inflation (YoY %)
Source: NBS, Zedcrest Wealth
Food And Core Inflation
Food inflation surged by 88bps to 31.52% YoY in October 2023, (its highest level since March 2004 – 32.64% YoY) compared to 30.64% YoY in September 2023. This increase can be attributed to elevated food prices, heightened haulage costs following subsidy removal, and the lingering effect of the FX volatility. Notably, food inflation’s growth slowed month-on-month (+191bps vs +210bps in September 2023). We believe that this is on the back of improved food supply owing to the commencement of harvest season. Nonetheless, the inadequacy of infrastructural development, insecurity, and elevated haulage costs continue to impede the food supply in the country.
Core inflation advanced to 22.58% YoY in October (vs 21.84% in September). The increase in sub-indices such as Transport (+27.04% YoY), Restaurant & Hotels (+23.77% YoY), Health (+23.32% YoY), and HWEGoF (+22.93% YoY), and remain the major drivers. We believe that FX fluctuations and Naira devaluation remain the major driver of growth in this space.
September 2023 Headline, Core and Food Inflation Figures
Source: NBS, Zedcrest Wealth
Inter-State Inflation Disparity
In our previous inflation report, we noted the disparity in inflation rates across states. We focused on food inflation given its prominence in its contribution to headline inflation. Our analysis continues to point in the same direction as Food Inflation in the Northern regions remained relatively lower compared to the Southern and Western regions. Poor road infrastructure continues to hamper efficient goods transfer nationwide. Furthermore, challenges persist in the agricultural sector, as shortage of modern farming equipment, skilled farmers, and ample farmlands in other parts of the country compared to the Northern regions continue to remain the major cause of food inflation disparity across states.
Top 10 States with the Highest Food Inflation for October 2023
Top 10 States with the Lowest Food Inflation for October 2023
Source: NBS, Zedcrest Wealth
For the most part, we expect inflation to remain unabated in the coming months. Our prognosis relies on the following points.
- Elevated food prices are expected to persist, as the underlying structural issues in this sector remain unaddressed.
- The FX volatility will continue to influence prices. Additionally, the characteristic price changes in Nigeria, where the price of items do not normalize, even when the cause of the increase has tapered will contribute to sustained high general prices.
The Nigerian Equities Market – The Bulls Extend their Stay on the Local Bourse
The Nigerian equities market closed the week on a positive note, as the NGX All-Share Index (ASI) advanced 37bps WoW to settle at 71,112.99 points. The market saw gains in four (4) out of the five (5) trading days of the week as the Year-to-date (YTD) returns settled at 38.75%. Sectoral performance was mixed as the Banking (-4bps WoW) and Industrial Goods (-1.18% WoW) sectors closed in the red. On the flipside, the Oil and Gas (+2.61% WoW), Insurance (+0.91% WoW), and Consumer Goods (+0.20% WoW) closed with a bullish tone.
Leading the gainers chart are DEAPCAP (+54.84% to NGN0.48), CILEASING (+49.55% WoW to NGN4.98) and MECURE (+46.17% WoW to NGN5.73). The top losers for the week were JAPAULGOLD (-14.14% WoW to NGN1.70), BETAGLAS (-9.92% WoW to NGN54.00) and TIP (-9.80% WoW to NGN0.92).
The Nigerian Fixed Income Market – Bullish Momentum Caps Off the Week
The Nigerian Treasury Bills market closed the week on a bullish note as the average yield declined by 40bps WoW to settle at 12.31%. The secondary bond market closed the week negative as the average yield rose by 6bps WoW to close at 15.73%. This is following major selloffs at the long end of the curve. For the most part, the Fixed income market closed the week in the positive territory as the average yield shed 17bps WoW to settle at 14.02%.
At the November primary bond auction, the Debt Management Office (DMO) successfully auctioned NGN434.5bn worth of bonds, reopening four instruments (APR-2029: NGN31.47bn, JUN-2033: NGN33.19bn, JUN-2038: NGN47.07bn, and JUN-2053: NGN322.77bn). The average bid-to-cover ratio increased by 17bps to 1.24x, compared to 1.06x in the previous auction. Similarly, the average stop rate saw a significant rise of 136bps to 17.13%, up from 15.76% in the last auction. The stop rates for the four instruments (APR-2029, JUN-2033, JUN-2038, and JUN-2053) experienced notable increases of 110bps, 125bps, 170bps, and 140bps, reaching 16.00%, 17.00%, 17.50%, and 18.00%, respectively.
