United States – Earnings Results, Rate Cut Uncertainties
During the week, approximately 10% of the S&P 500 companies released earnings reports for Q4 2023, revealing mixed results. While it’s still early in the earnings season, current data shows that 84% of companies have surpassed earnings expectations, but only 45% have exceeded sales estimates. As a result, the S&P 500 closed positive at 4,839.91 (+1.17% WoW).
Source: Bloomberg, Zedcrest Wealth
Despite the challenges faced in 2023FY, we anticipate that Q4:2024 earnings results might surpass expectations, buoyed by the economy’s resilience despite interest rate hikes and improved demand. Moreover, our outlook for the equities market in 2024FY is optimistic, anticipating improved performance as disinflationary pressures persist, and the US labor market demonstrates resilience.
Regarding the monetary policy decision, we maintain our forecast that the US Federal Reserve will keep interest rates unchanged at the FOMC meeting on January 31, 2023.
United Kingdom – A Short-Term Uptick in Inflation
During the week, the Office of National Statistics, United Kingdom released the inflation report for December 2023. As culled from the report, the December Consumer Price Index printed at 4.0% YoY (vs 3.9% YoY in December 2023), the first uptrend in Inflation in 10 months. Furthermore, Core CPI rose 4.2% YoY (same as November 2023). On a month-on-month basis, CPI rose 0.4% (vs -0.2 in November 2023). We noticed that the largest upward contribution to the monthly change in both CPIH and CPI annual rates came from alcohol and tobacco while the largest downward contribution came from food and non-alcoholic beverages.
Source: ONS, Zedcrest Wealth
The uptrend in inflation can be attributed to heightened spending during the festive period and seasonal influences. As we look forward, we believe that the inflation figures for January 2024 will offer a more comprehensive perspective on the inflation trend in the upcoming months. Nevertheless, we anticipate a continuation of disinflationary trends in the following months as the effects of prior rate hikes materialize. Additionally, we do not anticipate the Bank of England to implement rate cuts during the initial monetary policy meeting of the year. However, we foresee the possibility of rate cuts coming into play in H2 2024.
China – Economic Expansion Still Way Below Expectations
During the week, the National Bureau of Statistics, China released the GDP report for Q4:2023. As culled from the report, China’s economy grew 5.2% YoY in Q4 2023 (vs 4.9% YoY in Q3 2023). The slight increase can be attributed to policy support measures implemented by the government. However, the growth still fell short of analyst expectations, registering at +5.3% YoY. Additionally, in December, Industrial Output experienced a 6.8% YoY increase (compared to 6.6% in Nov. 2023), while Retail Sales showed a slower pace of growth at +7.4% YoY, down from +10.1% YoY in Nov. 2023.
Based on the data presented in the GDP report, it is our perspective that the Chinese economy in 2023 was influenced by factors such as a prolonged property crisis, weakened consumer and business confidence, escalating local government debts, and subdued global growth. These elements collectively contributed to the lackluster performance of the economy in the past year. Nevertheless, we anticipate a potential rebound in the economy in 2024, considering the projected global growth for the year.
Domestic Economy
Inflation! Can We Get a Moment to Breathe?
During the week, the National Bureau of Statistics released the inflation report for December 2023. Headline Inflation advanced by 72bps to print at 28.92% YoY. Food Inflation soared 109bps to 33.93% YoY (an all-time high since the reconstitution of the inflation basket in 2009). Similarly, Core Inflation rose 68bps to 23.06% YoY. On a month-on-month basis, Headline (+2.29), Food (+2.72%), and Core (+1.82%) all witnessed an uptrend at a faster pace compared to the previous month. We attribute the rise to enhanced spending during the festive period, exacerbated by foreign exchange (FX) volatility and fuel scarcity.
Food And Core Inflation
Food inflation surged by 109bps to 33.93% YoY in December 2023, (its highest level since the reconstitution of the inflation basket in 2009) compared to 32.84% YoY in November 2023. This increase can be attributed to structural issues such as high haulage costs, insecurity, and inadequate infrastructure in the agricultural space. Furthermore, the scarcity of petrol in December 2023 amid FX volatility and improved demand due to the festive period further galvanized the situation.
On a similar note, Core inflation rose 68bps to 23.06% YoY in December (vs 22.38% in November). The increase can be attributed to consumers’ needs and demands towards the festive period.
Inter-State Disparity in Food Inflation – A Major Worry
Concerning Food Inflation, the primary contributor to headline inflation in the country, we maintain our perspective on the key factors such as logistics issues, insufficient infrastructure, and manpower disparities in the agricultural sector that have persistently hindered the smooth transportation of food items. As these challenges persist, we believe that the situation will persist unless the government implements policies to address the substantial disparities in interstate inflation.
Source: NBS, Zedcrest Wealth
Looking ahead, our forecast for Inflation for 2024 remains relatively pessimistic as we do not see a disinflationary trend on the horizon at the moment. We base our prognosis on the points listed below.
1. The over-dependence of the Nigerian economy on food item importation will keep food inflation on the rise. Furthermore, given the poor state of infrastructural development in the agricultural sector and the inadequate funding needed to revive the sector, we believe that the sector’s growth will remain in the woods.
2. Ongoing insecurity in the country will continue to discourage farmers from returning to their fields confidently.
3. The Central Bank’s inability to adequately address foreign exchange demand will contribute to the continued depreciation of the Naira.
4. The lack of effective policies from both the CBN and the Federal Government to control inflation while keeping government spending in check poses a significant barrier to mitigating inflationary pressures.
Taking into account the outlined factors, our projections indicate an inflation rate of 35.46% in a Base Case Scenario, 37.23% in a Bear Case Scenario, and 33.42% in a Bull Case Scenario by December 2024.
The Nigerian Equities Market – Will this Rally Persist Beyond January?
The Nigerian equities market closed the week on a positive note after recording 5 trading days of bullish run. As a result, the NGX All-Share Index (ASI) advanced 13.54% WoW, crossing 91,000 points to settle at 94,538.12 points. The Year-to-date (YTD) returns settled at 26.43%.
Topping the gainers chart were TIP (+59.78% to NGN2.94), DANGCEM (+53.94% WoW to NGN538.80), and HONYFLOUR (+50.77% WoW to NGN5.85). The week’s top losers were ROYALEX (-22.45% WoW to NGN0.76), IKEJAHOTEL (-10.57% WoW to NGN7.70), and LINKASSURE (-8.16% WoW to NGN1.35). Despite the equities market’s performance exceeding expectations, we maintain optimism that the bullish trend will persist in the upcoming months.
The Nigerian Fixed Income Market – Visited by the Bears
At the Open Market Operation (OMO) auction this week, the average stop rate fell by 42bps to 13.67% (compared to 14.08% in the last auction). Conversely, the average bid-to-cover ratio increased by 35bps to 1.73x, up from 1.38x in the previous auction, indicating heightened demand, particularly in the 365-day instrument (+88bps to 3.26x).
The Nigerian Treasury Bills market ended the week on a bearish note, with the average yield rising by 11bps WoW to 3.93%. Similarly, the FGN Bond market closed bearish as the average yield increased by 27bps WoW to settle at 13.56%, driven by sell-offs across the yield curve.
Overall, the Naira Fixed Income market concluded the week negatively, with the average yield climbing by 19bps to settle at 8.47%. Anticipating continued bearish sentiment, driven by CBN efforts to reduce liquidity, in the coming week.
