Global Economy
United States Consumer Price Index: The Eye of the Storm
Earlier this week, the U.S Bureau of Labor Statistics reported inflation data for January. The Consumer Price Index (CPI) rose 3.10% YoY (vs 3.40% YoY in Dec. 2023). For clarity, Food Inflation rose 2.60% YoY while Core Inflation rose 3.90% YoY. On the contrary, Energy Inflation further contracted by 4.60% YoY.
On a month-on-month basis, Headline, Food, and Core Inflation rose 0.30%, 0.40%, and 0.4% respectively while Energy Inflation dipped 0.90%. Analysts had expected a lower inflation figure (2.90% YoY). Whilst headline inflation is still a fair bit shy of the Federal Reserve’s inflation target of 2.00%, recent CPI trends have proved that the economy has come a long way from its peak of 9.10% in June 2022. Taking a closer look at the data, it could be observed that a major driver of inflation for the month was the continued surge in shelter prices which contributed greater than two-thirds of the monthly all items increase. Given the Fed’s hawkish stance since it began hiking rates in March 2022 combined with the progress seen in combating inflation, we opine that inflation would continue to decline going into H2:2024 where we may then see the first rate cut by the Federal Reserve.
Recession Hits Japan as GDP Drops for Second Consecutive Quarter
Japan encountered an abrupt downturn, slipping into a recession as both private consumption and business spending witnessed a decline, as indicated by recent data releases. In Q4 2023, Japan’s GDP declined by 0.40%, marking the second consecutive quarter of contraction after a substantial fall of -2.90% in Q3. The figures fell below expectations, reflecting challenges in economic recovery. Notably, private consumption, constituting over half of economic activity, fell by 0.20%, contrary to the market’s anticipation of a 0.1% gain. Additionally, capital expenditure saw a 0.1% decline against projections of a 0.30% increase. The GDP for Japan in 2023 amounted to $4.21 trillion, causing it to slip below Germany’s $4.46 trillion and securing Japan’s position as the world’s fourth-largest economy.
UK economy fell into Technical Recession just at the end of 2023
Over the week, Britain’s economy has fallen into a recession after experiencing two successive negative economic growth in the second half of 2023. The Gross domestic product (GDP) contracted by 0.3% in the three months to December. That followed a decline over the period between July and September of 0.1%, which saw the economy experience a technical recession. Although, the UK’s GDP increased by 0.1% in the first quarter of 2023 but started declining from Q2 of 2023. Britain’s Office of National Statistics declared that the Q4 fall in GDP was the biggest since the Q1 of 2021. The ONS further indicated that the manufacturing, construction, and wholesale sectors were the largest contributors to the decrease.
Domestic Economy
CBN Tightens Grip on Foreign Exchange: Cash Pooling Restrictions and E-Channel Travel
Allowances.
In line with the CBN’s bid to ensure optimal foreign exchange management and foster a more transparent financial system, the CBN on Wednesday added some more policy interventions into its cocktail of interventions aimed at boosting FX liquidity. These measures directly target the practices of International Oil Companies (IOCs) and individual travelers. Addressing the Cash Pooling Problem: The CBN has long observed the practice of IOCs repatriating their crude oil export proceeds and transferring a significant portion offshore for “cash pooling,” essentially draining foreign exchange from the domestic market. This, in turn, hinders economic growth and stability. The central bank pointed out that while it strongly supported the need for IOCs to have easy access to their export proceeds, particularly to meet their offshore obligations, such repatriations must be done with minimal negative impact on liquidity in the Nigerian foreign exchange market. To reign in this practice, the CBN has implemented stricter regulations. Banks are now only allowed to pool a maximum of 50% of repatriated export proceeds initially, with the remaining 50% held onshore for a mandatory 90 days. This extended holding period allows domestic businesses and individuals greater access to this valuable foreign exchange. Furthermore, the CBN has imposed stricter documentation requirements for further repatriation, demanding prior approval, detailed records of past cash pooling expenditures, and verifiable proof of foreign exchange inflow sources. These measures aim to ensure the responsible use of foreign exchange and prevent potential misuse. Embracing Electronic Channels for Travel Allowances: In a parallel move designed to enhance transparency and combat foreign exchange malpractices, the CBN has mandated the use of electronic channels for disbursing Personal Travel Allowances (PTA) and Business Travel Allowances (BTA). The circular is titled, “Allowable Channels for Payout of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA)”. Cash payouts are no longer permitted. Instead, authorized dealer banks must utilize debit or credit cards for these transactions. This shift to electronic channels fosters greater visibility and accountability, making it easier to track and monitor foreign exchange flows associated with travel activities. While this might require some adjustment for travelers accustomed to receiving cash, the long-term benefits of increased transparency and reduced potential for misuse outweigh the initial inconvenience.
Inflation – A New Height
During the week National Bureau of Statistics released the inflation report for January 2024. As culled from the report Headline Inflation advanced by 98bps to print at 29.90% YoY. For context, Food Inflation surged by 148bps to 35.41% YoY while core Inflation rose by 53bps to 23.59% YoY. On a month-on-month basis, Headline (+2.64), Food (+3.21%), and Core (+2.24%) all witnessed an uptrend at a faster pace compared to the previous month. We attribute the increase to a flurry of factors such as foreign exchange volatility due to the aggressive depreciation of Nigeria, low agricultural output resulting from heightened insecurity, and rising logistics costs given the increased price of petroleum and diesel. 
Food And Core Inflation
Food inflation further soared by 148bps to 35.41% YoY in January 2024 compared to 33.93% YoY in December 2023. The major component drivers of food inflation were Food (+35.41% YoY), Food and Non-Alcoholic Beverages (+35.19% YoY), and Imported Food (+26.29% YoY). For specifics, the prices of Bread and cereals, Potatoes, Yam and other Tubers, Oil and fat, Fish, Meat, Tobacco, and Vegetable increased the most. This increase can be attributed to the surge in haulage cost owing to fuel scarcity and burgeoning Petrol and Diesel prices, increased cost of fertilizers, and persistent depreciation of the Naira. Food inflation grew by 3.21% MoM as Fuel Scarcity and Insecurity continue to weigh in on the sector. Core inflation rose by 53bps settling at 23.59% YoY in January 2024 compared to 23.06% YoY in December 2023. The NBS established that the highest price increases were recorded in the prices of Passenger Transport by Road, Medical Services, Actual and imputed Rentals for Housing, Pharmaceutical products, Accommodation services, and Passenger Transport by Air.
Inter-State Inflation Disparity – A Major Worry
In our previous inflation reports, we explained the causes of disparity in inflation rates across
states. This remains unabated as we still see the impacts of structural issues that have plagued
the economy over the years. As seen below, Inflation disparity across all states remains a major
factor that the government needs to consider.
Looking Ahead, we expect inflation to remain unabated in the coming months as stated earlier in last month’s inflation report. Our prognosis relies on the point below. Although the CBN is making efforts to stabilize the Naira, the current foreign exchange (FX) volatility is anticipated to exert more influence on prices as the economy is yet to be self-sufficient. Furthermore, the looming insecurity, increasing fuel prices, low agricultural output, and rising logistics costs are factors to be considered. Staying abreast of these factors, we maintain our outlook for unabated inflation, emphasizing the importance of addressing structural issues in the food sector, close monitoring of FX rates, and increasing the supply of Foreign Currencies in the economy.
The Nigerian Equities Market- Bulls Back in Charge?
Shaking off last week’s slump, the Nigerian stock market rebounded this week, closing on a bullish note. The NGX All Share Index (ASI) gained 3.76% week-on-week to settle at 105,722.78 points, with an impressive year-to-date return of 41.39%. Leading gainers were JULI (+45.54% to NGN1.47), GEREGU (+24.88% to NGN901), and BUAFOODS (19.57% to NGN357.50). In contrast, top losers included MEYER (-18.96% to NGN5.6), MORISON (-18.69% to NGN2.48), and ELLAHLAKES (-13.04% to NGN 3.00).
The Nigerian Fixed Income Market – A Bearish Close for the Fixed Income Market.
During the week, the Treasury bills secondary market exhibited a bearish trend, as the average yield edged up week-on-week by 12bps to settle at 15.48%. This trajectory is driven by a mix of selling interest for the short-tenor instruments and buying interest for the mid/long-tenor instruments by market participants to compensate for their unsuccessful bids from the last auction. The secondary bond market closed the week negative as the average yield soared by 63bps week-on-week to settle at 16.12%. This surge in yield can be attributed to low market participation as market participants anticipate the result of the upcoming 2.5 trillion bond auction. All in all, the Nigerian fixed-income market closed bearish as the average yield surged by 38bps settling at 15.80%. In the Eurobond Space, the FGN Eurobond closed bullish as average yield dipped by 11bps settling at 9.67%, driven by the buying interest across the Eurobond instruments.
