Global Economy
United States – Inflation in the United States Maintains a Downward Trend, Nearing Benchmark Target
The United States Bureau of Labor Statistics recently published the inflation report for June 2023. As culled from the information, inflation increased by 3.0% year-on-year (YoY), a decline from the 4.0% YoY recorded in May 2023. In June, the Food Index experienced a year-on-year rise of 5.7% (compared to 6.7% YoY in May 2023), while the Core Index showed a growth of 4.8% YoY (versus 5.3% YoY in May). These figures indicate a deceleration in the inflationary trend, which we attribute to the impact of the previous aggressive rate adjustments implemented by the US Federal Reserve.
Furthermore, the Energy Index contracted by 16.7% YoY in June (compared to -11.7% YoY in May), primarily due to the moderation in oil prices compared to the corresponding period in the previous year. We anticipate that this downward trend in inflation will persist in the upcoming months as the consequences of the aggressive rate hikes continue to unfold. Consequently, we believe this will be a crucial factor for the US Federal Reserve to consider in its next monetary policy meeting.
Source: US BLS, Zedcrest Wealth
To further support our argument regarding the significance of the inflation trajectory in the monetary policy decisions of the US Federal Reserve, it is worth noting that historical trends show a tendency for the Fed to pause interest rate hikes when inflation figures fall below the monetary policy rate. This signals to the Fed that their desired goal for a more hawkish policy stance is approaching. However, in May 2023, the inflation rate (4.0% YoY) dropped below the monetary policy rate (5.25%). This deviated from the typical pattern.
Considering the continued downtrend in the inflation rate observed in June 2023, we deem the possibility of further interest rate hikes to be highly unlikely. We believe the disinflationary trend will persist in the coming months, reinforcing our belief that the US Federal Reserve will not pursue additional interest rate increases.
Source: US BLS, Zedcrest Wealth
China – Inflation Settles at 0.00% YoY in China
During the week, the National Bureau of Statistics, China released the inflation report for June 2023. Inflation printed at 0.00% YoY. For context, food prices increased by 2.3% YoY, while nonfood prices declined by 0.6%, consumer goods prices dwindled by 0.5% while Service prices increased by 0.7%. The decline in inflation can be primarily attributed to a decline in demand which has thrown a spanner to the wheels of economic activity growth in the country recently. To reiterate, In June, the Caixin/S&P Global Services Purchasing Managers’ Index (PMI) printed at 53.9 points, a decline from 57.1 points in May 2023 (the slowest pace of growth in the past five months). We opine that the disinflationary trend might persist in China. Although the Bank of China has remained dovish in its policy stance, we opine that economic activities might remain tepid as economic recovery from the impacts of the Zero Covid policy drag.
NBS China, Zedcrest Wealth
United Kingdom – Positive Labor Market Performance Casts Doubt on the Possibility of Pausing Further Rate Hikes.
According to a recent labor market report, wage growth in the United Kingdom has surged to an impressive 6.9% year-on-year (including bonuses). This robust expansion marks a historical milestone for this indicator since 2001, excluding the disruptive effects of the COVID-19 pandemic. The significant acceleration in wage growth sends a strong signal that the Bank of England may adopt a hawkish stance at the upcoming monetary policy meeting, particularly in light of the country’s precarious disinflationary trend.
In contrast to other nations such as Japan (with a 3.2% YoY inflation rate), the United States (4% YoY), France (4.5% YoY), or Germany (6.1% in May and 6.4% in June), the UK continues to grapple with an elevated inflation figure of 8.7% YoY as of May. These contrasting inflation rates further highlight the unique challenges faced by the UK and strengthen the case for the Bank of England to maintain a vigilant approach in addressing the ongoing economic landscape.
Domestic Economy – Capital Importation Downtrend Persists
During the week, the National Bureau of Statistics released the Capital Importation data for Q1:2023. Total Capital imported into the economy decreased by 28.00% YoY to USD1.13bn (vs USD1.57bn in Q1:2022). We saw declines across the board as Foreign Portfolio Investment contracted by 32.20% YoY to USD649.28mn and Foreign Direct Investment (-69.28% YoY to USD47.60mn). Also, Other Investment declined 5.39% YoY to settle at USD435.76mn. Nonetheless, on a quarter-on-quarter basis, Total Capital Imported rose by 6.78% YoY. This can be attributed to the upsurge in Foreign Portfolio Investment (+127.61% QoQ to USD649.28mn) compared to USD285.26mn in Q4 2022
To enhance clarity, it is crucial to examine the key subcomponents of Capital Importation. Specifically, within the Nigerian context, Capital Importation can be categorized into three primary subsectors, namely:
1. Foreign Direct Investment – This often signifies the willingness of foreign investors to assume a stable and enduring investment stance within the Nigerian economy. It encompasses foreign investors’ acquisition of significant ownership interests in companies operating within Nigeria.
2. Foreign Portfolio Investment – This encompasses the investment of funds by foreign individuals, institutions, or entities into financial assets within Nigeria. These financial assets may include stocks, bonds, or money market instruments.
3. Other Investment – This category encompasses diverse forms of investment inflows that do not fit within the classifications of Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI).
Over the years, Nigeria has witnessed a significant decline in its capital importation figures. The trajectory of activities in this realm can be attributed, in part, to the far-reaching impacts of the Covid-19 pandemic that swept across the global economy from the end of 2019 to 2021. During this period, the global economy was plagued by substantial negative sentiment, resulting in the departure of numerous foreign investors from the Nigerian economy. Consequently, this led to a decline in total Capital Importation in 2020, with a year-on-year decrease of 59.97% to USD9.66bn, followed by another decline in 2021, with a decline of 30.61% YoY to USD6.70bn.
As the year 2022 commenced, economies were still in the process of recovering from the impacts of the Covid-19 pandemic. However, the outbreak of the Russia-Ukraine conflict introduced a fresh wave of concerns, which in turn precipitated another round of foreign investors exiting the Nigerian economy. To provide context, the Russia-Ukraine conflict had a far-reaching impact on the global energy supply. The imposition of sanctions on Russian oil, considering Russia’s standing as the second-largest oil producer globally, resulted in disruptions that reverberated across the energy sector. This led to an upward surge in energy prices, subsequently driving up the prices of other commodities. As a consequence, inflation experienced a significant upward trend worldwide.
In response to the mounting inflationary pressure, major central banks embarked on a course of aggressive monetary policy tightening. This led to an increase in interest rates, particularly in emerging markets. As a result, foreign investors initiated a departure from emerging and frontier markets, seeking safe havens and aiming to preserve their investments in advanced economies. This exodus of capital from emerging markets had a direct impact on Nigeria, a country grappling with its own domestic challenges, exacerbating the effects on its foreign investment position.
On the domestic issues that impact the declines in Capital importation, factors such as
1. Unfavorable monetary and fiscal policies by the CBN
2. Insecurity concerns
3. Unfavorable business conditions
4. FX illiquidity
The interplay of these factors, along with the aforementioned global events, contributed to the observed declines in capital importation figures over time.
Source: NBS, Zedcrest Wealth.
Moving ahead, our projections indicate that the Total Capital Imported for H1:2023 is likely to remain below the desired level due to the persistent prevalence of the aforementioned issues during this period. However, we anticipate a positive shift in H2:2023. We believe that
a. The elimination of subsidies on oil and electricity is expected to spark interest among international oil companies (IOCs) and foreign energy companies, resulting in heightened participation and involvement in Nigeria’s energy and Oil & Gas sector.
b. The liberalization of the foreign exchange (FX) market has the potential to reignite foreign investors’ interest in the Nigerian economy, owing to the increased transparency that accompanies such a policy and the facilitation of fund repatriation. This development may contribute to the resumption of foreign investment inflows into the country.
c. Additionally, we expect that the elimination of subsidies will bolster foreign investors’ confidence in the Nigerian economy, consequently fostering a surge in purchasing activity for Nigerian debt instruments. This development is anticipated to attract greater interest from foreign investors seeking investment opportunities in the country’s debt market.
Sectors such as Shares, Banking Financing, Production, Servicing, and Telecoms have the highest Capital Importation figures on a 10-year average. Banks such as Stanbic IBTC, Standard Chartered, Citibank Nigeria Ltd, Rand Merchant Bank, and Ecobank have the highest capital importation contributions on average (2019–2022).
In a significant development, the Central Bank of Nigeria (CBN) recently issued a circular introducing the Naira as an additional payout option for diaspora remittances. This circular grants recipients of diaspora remittances the flexibility to choose between receiving payments in Naira, US Dollars, or E-Naira, thereby expanding their choices. To ensure the smooth processing of funds, the circular mandates Deposit Money Banks (DMBs) and International Money Transfer Operators (IMTOs) to utilize the exchange rate at the Investors’ & Exporters (I&E) Window. The primary objective of this measure is to guarantee an ample supply of foreign exchange within the banking system. By providing multiple currency options for diaspora remittances, the CBN aims to enhance the accessibility and convenience of remittance transactions while ensuring the availability of foreign exchange in the country. Furthermore, the Central Bank also released another circular, announcing a reduction in the Cash Reserve Requirement (CRR) for Merchant Banks. The CRR for Merchant Banks has been lowered from 32.5% to 10.0%. This decision is motivated by the goal of enabling banks to provide long-term financing, thereby stimulating and enhancing the Nigerian economy. We believe that this reduction in the CRR for Merchant Banks will have several positive implications. Firstly, it is expected to bolster the already robust system liquidity in the market. Additionally, this move is anticipated to improve the financial performance and strengthen the balance sheets of merchant banks in the third and fourth quarters of 2023, further supporting their ability to provide long-term financing and contribute to the overall economic development of Nigeria.
For the most part, the Nigerian Upstream Petroleum Regulatory Commission released the oil production report for June 2023. Total Oil production rose to 1.48Mbpd (vs 1.42Mbpd). This depicts the possibility of the Oil GDP sector exiting the abyss in Q2:2023 as oil prices remain relatively high.
Source: NUPRC, Zedcrest Wealth
The Nigerian Equities Market – A Bearish Close on the Local Bourse
The Nigerian bourse halted its 6-week bullish run as the NGX All Share Index gained 75 basis points (bps) week on week (WoW) to settle at 62,569.73 points. The market gained two out of the five trading days of the week as the year-to-date returns settled at 22.08% (last week’s print: 23.00%). This can be attributed to profit-taking activities by investors following the initial surge in the equities market during the first and second trading days of the week. In terms of sectoral performance, the Banking (-14.32%), Consumer Goods (-2.29%), and Insurance (-11.53%) sectors ended in negative territory, while the Industrial Goods (+9.01%) and Oil and Gas (+1.43%) sectors closed with gains. Among the top gainers, this week were DAARCOMM (+50.0% to NGN0.30), JOHNHOLT (+44.8% to NGN1.81), and DEAPCAP (+34.6% to NGN0.35). On the other hand, CHAMPION (-31.5% to NGN3.15), ACADEMY (-26.8% to NGN1.83), and STERLING (-25.8% to NGN3.11) led the decliners’ chart.
The Nigerian Fixed Income Market – A Bullish Close
During this week’s primary Nigerian Treasury Bills (NTB) auction, the average bid-to-cover ratio advanced by 85 basis points (bps), to 4.88x (compared to 4.03x at the previous auction). As a result of enhanced demand and a robust financial system, the average stop rate decreased by 39bps to 4.10% (compared to 4.49% at the last auction). Notably, the 182-day bill instrument experienced significant demand, with its average bid-to-cover ratio surging by 18.89% to 21.07x compared to 2.18x at the previous auction. Consequently, its stop rate declined by 87bps to 3.5% (versus 4.37% at the previous auction). The positive sentiment observed at the primary auction carried over to the secondary Nigerian Treasury Bills market, leading to a 4bps week-on-week (WoW) reduction in the average yield, settling at 6.25%. Similarly, the secondary bond market concluded the week on a positive note, with the average yield decreasing by 21bps WoW to 12.74%. This favorable trend was driven by increased buying interest observed across the yield curve.
