Global Economy US – Retail Sales Show Strength in March, Reflecting Strong Consumer Confidence and Job Market
This week, the Commerce Department reported a 0.70% MoM increase in retail sales, slightly slower than the previous month’s revised 0.90% MoM gain but surpassing the market’s forecast of a 0.40% rise over the month. This positive trajectory underlines the steady consumer spending trend prevalent in the U.S economy. Notable contributors to the rise in sales include gas stations, surging 2.10% MoM, online sales rising 2.70%, and specialty stores and restaurants/bars also showing positive gains of 0.40% on the month. Despite declines in electronics, clothing, and sporting goods sales (down 1.20%, 1.60% and 1.80% respectively) from February, we remain optimistic about continued consumer spending, driven by lower unemployment prints (3.80 YoY: Mar vs 3.90% YoY: Feb) and growth in Non-Farm Payrolls (303K: Mar vs 270K: Feb).
Trend Analysis of YoY Retail Sales Inflation, Unemployment Rate and Non-Farm Payroll
Sources: Bloomberg & Zedcrest Research
Asia – China Q1 GDP Beats Forecasts, But Underlying Concerns Remain
Culled from data released last week, China’s Gross Domestic Product (GDP) in Q1:2024 printed higher than market forecast. Headline GDP surged to 5.3% (YoY), coming out stronger than the Q4:2023 reading of 5.2% (YoY). On QoQ basis, GDP printed at 1.6% in Q1:2024, as compared to 1.2% in Q4:2023. Industrial production growth printed at 4.5% (YoY) in March as compared to 7.0% (YoY) in February. Also, retail sales growth came out at 3.1% (YoY) in March as against 5.5% (YoY) in February. Continued liquidity injections and monetary easing, including mortgage rate and reserve requirement cuts, contributed to the surge in GDP.
Trend Analysis of China Gross Domestic Product
Sources: Bloomberg & Zedcrest Research
UK inflation falls less than expected to 3.2% in March
In March 2024, the UK’s inflation rate dropped to 3.2% year-on-year, slightly above market expectations of 3.1%, marking the lowest rate since September 2021. This decrease was primarily driven by a slowdown in food inflation (4.0% vs 5.0% in February) and a decrease in housing costs (-1.6% vs -1.7%). Transport prices rebounded by 0.1% after four consecutive months of decline, partly due to a softer decrease in motor fuel costs. The annual core inflation rate, excluding volatile items, fell to 4.2%, surpassing the market consensus of 4.1%. On a monthly basis, consumer prices rose by 0.6% in March, matching February’s pace. This indicates a slightly more stable inflationary environment, suggesting potential adjustments to trading strategies.
Trend Analysis of UK Inflation (YoY/MoM)
Sources: Bloomberg & Zedcrest Research
Domestic Economy
Inflation – Maybe “Sky is Not the Limit”
During the week, the National Bureau of Statistics released the inflation report for March 2024. According to the report, Headline Inflation surged by 150bps to settle at 33.20% YoY, there was a significant uptick in Food Inflation by 209bps settling at 40.01% YoY and Core Inflation increased by 77bps to 25.90% YoY. On a month-on-month basis, Headline (+3.02%) and Food (+3.62%) declined by 10bps and 17bps MoM respectively (reflecting the hawkish stance of the CBN, moderation in FX volatility and the Federal Government’s intervention to curb food scarcity in the country) while Core inflation (+2.54%) advanced by 37bps MoM. The major drivers of headline inflation are Food & Non-Alcoholic Beverages (17.20%), Housing, Water, Electricity, Gas & Other Fuel (5.56%), Clothing and Footwear (2.54%), Transport (2.16%) and Furnishings/Household Equipment (1.67%). We attribute this inflation levels to persistently high food prices, escalating costs of doing business, diminishing agricultural output due to heightened insecurity and price anchoring by business owners/managers to recover previous losses (given the recent FX volatility).
12 Month Trend Analysis of the Core, Food and Headline Inflation
Sources: NBS & Zedcrest Research
Food And Core Inflation
In March 2023, food inflation surged by 209bps to 40.01% YoY, compared to 31.7% YoY in February 2023. The major component drivers of food inflation are the prices of Garri, Millet, Akpu Uncooked Fermented (which are under the Bread and Cereals class), Yam Tuber, Water Yam (under Potatoes, Yam, and other Tubers class), Dried Fish Sardine, Mudfish Dried (under Fish class), Palm Oil, Vegetable Oil (under Oil and Fat), Beef Feet, Beef Head, Liver (under Meat class), Coconut, Water Melon (under Fruit Class), Lipton Tea, Bournvita, Milo (under Coffee, Tea and Cocoa Class). On the other hand, core inflation increased to 25.90% YoY in March (vs 25.13% in February). The Major component drivers of core inflation are bus journey within the city (under Passenger Transport by Road class), Actual and Imputed Rentals for Housing, Consultation Fee of a medical doctor (under Medical Services class), and pharmaceutical products.
March 2024 Headline, Core and Food Inflation
Sources: NBS & Zedcrest Research
Inter-State Inflation Disparity – Still a Major Worry
In our previous inflation reports, we explained the causes of disparity in inflation rates across states. This remains unchanged as we still see the impact of this structural imbalances that have plagued the economy over the years. As seen below, Inflation disparity across all states remain a major factor that needs to be addressed.
Top 10 States with the Highest Food Inflation for March 2024
Sources: NBS & Zedcrest Research
Top 10 States with the Lowest Food Inflation for March 2024
Sources: NBS & Zedcrest Research
Looking ahead, we expect sustained uptrend in inflation albeit with a moderation. Our prognosis relies on the points below:
- The recent hike in electricity tariffs will further drive inflationary pressure.
- The high interest environment which is currently crowding out funds from private sector would continue to increase operational cost and the general cost of doing business which may spur cost push inflation.
- Food scarcity may rebound given the commencement of the rainy season.
Staying abreast of these factors, we uphold our projection for a persistent albeit slightly subdued inflationary trajectory in the forthcoming months. We believe that a combination of economic developments including reduced FX volatility, increasing cost of capital, government involvement in the private sector, cautious monetary policies, and ongoing security concerns will influence the course of events in the macroeconomic landscape.
Price Watch (Diesel, Petrol and Gas) – Effects of the Geopolitical tensions
During the week, the NBS released the Price Watch for Automotive Gas Oil (AGO – Diesel), Premium Motor Spirit (PMS – Petrol) and Liquefied Petroleum Gas (LPG – Cooking Gas) for March 2024. According to the report, PMS surged by 163.65% YoY to NGN697, AGO soared by 59.51% YoY to NGN1,341, and LPG (12.5kg) increased by 55.22% YoY to NGN15,929. On a month-on-month basis, the PMS, AGO and LPG prices rose by 2.57%, 6.69% and 5.77% respectively.
Trend Analysis of the Diesel, Petrol and Cooking Gas Prices
Sources: NBS & Zedcrest Research
We believe the increase in diesel and gas prices correlates with recent energy price hikes due to geopolitical tensions, notably the Israel-Hamas/Iran conflict. Supply chain disruptions resulting from the war have contributed to this surge.
Looking ahead, we anticipate elevated prices for Cooking Gas and Diesel in the coming months. While reduced FX volatility may offer some relief, we expect the conflict’s impacts to persist.
The CBN revised the Loan-to-deposit ratio policy for Deposit Money Banks
In line with the current monetary tightening measures employed by the Apex bank to curtail inflationary pressure in the Nigerian Economy, during the week the CBN released a circular reducing the loan-to-deposit ratio (LDR) from 65% to 50%. All deposit money banks were advised to comply with this new regulation and maintain a strong risk management practice regarding lending operations to reduce future non-performing loans.
As seen that the CBN has rightly attributed inflationary pressures in the economy to increased money supply in the economy, the February 2024 CBN money supply data reveals that credit to private sector (CPS) surged by 4.57trn from 76.29trn (Jan. 2024) to 80.86trn (Feb. 2024).
Going forward, we anticipate a decline in the total credit to private/real sector and total money supply given this recent policy adjustment and other restrictive measures (including the increased cash reserve ratio requirement for commercial banks and merchant banks) employed by the CBN to mop up excess liquidity in the system. We opine that this may also curb inflationary pressures in the coming months.
However, we cannot overlook the ramifications of this policy on the real sector of Nigeria’s economy. It is evident that this will exacerbate the challenges faced by business owners, reducing access to loan facilities while simultaneously driving up the cost of borrowing. Coupled with other escalating business expenses, such as the recent electricity tariff hike, the operational landscape for business owners and managers will undoubtedly become more arduous.
Nigeria’s FX Reserves Drop Amidst Naira Defense Efforts
Nigeria’s foreign exchange reserves have seen a sharp decline of $2.16 billion in just 29 days. This comes despite the Central Bank of Nigeria’s (CBN) efforts to stabilize the naira. The reserves fell from $34.45 billion as at March 18th to $32.19 billion as at April 18th, marking the lowest level since September 2017.
Trend Analysis of External Reserves
Source: CBN, Zedcrest Research
This trend highlights the pressure on the naira and the CBN’s proactive measures to manage the foreign exchange market. Despite the appreciation of the naira, the declining foreign exchange reserve has raised concerns from all ends. Some analysts believe that the Central bank has been selling dollars more aggressively to support the naira, which depletes reserves. Debt repayments and low oil production are also contributing factors. Looking ahead, we believe this news might send a negative sentiment to the market which may spur a suppression on Naira appreciation.
Concerns and The CBN’s Response
The declining reserves raised concerns about Nigeria’s ability to meet its international obligations and could lead to a weaker naira. The IMF projects a further drop to $24 billion in 2024. However, a recovery to $38 billion by 2028 is anticipated.
At the IMF Spring Meetings, Nigeria’s CBN Governor, Olayemi Cardoso, addressed the recent decline in reserves. He clarified it stemmed from meeting debt obligations, not defending the naira. The CBN prioritizes a market-driven exchange rate with a “willing buyer-willing seller” principle. While the naira is expected to appreciate, possibly below N1000/$, this appreciation may occur alongside a continued decline in reserves. The bank, he says, is not planning to defend the naira with reserves, favoring a market-driven approach.
The Nigerian Equities Market – Profit Taking Dampens NGX as Banking Recapitalization Looms
The Nigerian Stock Exchange (NGX) endured a third consecutive week of losses, with every trading session ending in the red. Investor sentiment around upcoming bank recapitalization plans by month-end fueled the decline, as some investors opted to take profits before potential market adjustments.
The NGX All Share Index (ASI) dipped 2.71% week-on-week, closing at 99,539.75 points. As a result, the NGX ASI slid to 35.38% year-to-date. Selling pressure dominated the market, particularly in Tier 1 banks. GTCO (-19.08%), FBNH (-10.33%), and ZENITH (-11.25%) all experienced significant price drops. While some buying interest emerged in other sectors, it wasn’t enough to offset the losses in banking stocks.
On the bright side, some companies experienced notable price gains. MORISON led the advancers, surging 45.31% to N3.72 per share. GUINNESS (+45.31% to N55.00) and ACADEMY (+9.77% to N1.91) also saw impressive increases. Conversely, GTCO (-19.08% to N33.50) suffered the most significant decline, followed by UNITYBNK (-19.00% to N1.62) and LIVESTOCK (-18.99% to N1.45).
The Nigerian Fixed Income Market
This week at the April Bond Auction, the Debt Management Office (DMO) successfully sold NGN626.8bn worth of bonds, over three instruments (17-APR-2029 (New): NGN 79.92bn, 21-FEB-2031 (Reopening): NGN85.05bn and 21-FEB-2034(Reopening): NGN461bn). Although the system liquidity was short NGN537.25bn, more market players outside the CBN lending window participated in the auction leading to a surge in the total bids from NGN615.02bn (at March Auction) to NGN 920.09bn. Given that NGN 626.8bn was sold, this resulted into an uptick in the average bid-to-cover ratio by 17 basis-points to 1.47x, compared to 1.29x at the previous auction. Despite the uptick in the bid-to-cover ratio, we saw a significant decline in the stop rates of the 7-year and 10-year maturity instruments by 25 basis-points and 45 basis-points respectively. This significant decline in stop rate signifies that more market players bid at levels lower than the last stop rate and the DMO is still cautious of the increasing debt servicing cost.
The Secondary Nigerian Treasury Bills market closed the week bearish as the average yield soared by 527 basis-points WoW to settle at 24.13%. We noticed more selloffs across the curve particularly on short end as 09-MAY-2024 and 23-MAY-2024 as the yield surged by 814bps and 804bps WoW respectively. We attribute this selloff to system illiquid state and the selling action of some market players to settle their bond auction winnings. On the other hand, the secondary bond market closed the week bullish as the average yield declined by 23 basis-points WoW to close at 19.04%. This follows major buying interest on the short to mid-end of the curve particularly the MAR-2025 as the yield declined by 112bps WoW. For the most part, the Fixed income market closed the week bearish as the average yield increased by 305 basis-points WoW to settle at 22.11%.
In the Eurobond market, we saw a bearish week as the average yield advanced by 20 basis-points WoW to settle at 9.94%. This performance was driven by selloff across the curve particularly the MAR-2029 and FEB-2030 Eurobonds as their yields increased by 28bps and 25bps WoW respectively.
