Global Economy
United States – Fed Chair’s Statement, Uptrend in Yields and Yield Inversion
During the week, the US Fed Chair Jerome Powell gave a rather balanced speech concerning the expectations for the November 1st FOMC meeting. He noted that the decision to hold or hike interest rates will be based on recent economic data and market realities. Analysts expect US Fed to hold rates steady given the recent concerns in the US. For one, the 10-year treasury yield jumped to 4.93% (for the first time since 2007). This depicts the recent negative sentiments that have permeated the US economy amid elevated borrowing emanating from the budget deficit, expectations for further hikes, and rising mortgage rates (30-year mortgage rates are near 8%, the highest since 2000). This event is believed to keep the US Fed from hiking rates further as such inversions usually signal a recession. 
Nevertheless, even with the inversion of the US yield curve since July 2022, the US economy retains its strength. The combination of substantial consumer savings during the COVID-19 pandemic, which has boosted consumer spending, and a labor market that has outperformed expectations, continues to propel the economy forward. As a result, we largely anticipate the US Federal Reserve to maintain interest rates at their current levels in the upcoming meeting.
China – China’s Economy Expands Amid Gloomy Outlook
According to the National Bureau of Statistics, China’s economy exhibited growth of 1.3% quarter-on-quarter and 4.9% year-on-year. The 1.3% quarterly growth reflects the positive impact of government stimulus measures aimed at bolstering the economy. Despite various challenges faced by the economy, including issues such as a domestic property crisis, high youth unemployment, diminished private sector confidence, a global growth slowdown, and tensions with the United States on trade, technology, and geopolitics, the economy demonstrated improved quarter-on-quarter growth, surpassing the 0.5% QoQ growth observed in Q2:2023.
Source: NBS China, Zedcrest Wealth
The favorable statistics have led significant banks to adjust their economic growth projections. Nomura has revised its forecast to 5.1% (previously 4.8%), JPMorgan now anticipates 5.2% growth (up from 5%), and Moody’s Analytics has raised its 2023 growth projection to 5% from 4.9%. We anticipate the continuation of this growth momentum into Q4 2023.
United Kingdom– Inflation Stagnates at 6.7% YoY
According to the September 2023 Inflation report from the United Kingdom’s Office of National Statistics, the Consumer Price Index, including Owner Occupiers’ Housing Costs (CPIH), exhibited a year-on-year increase of 6.3%, consistent with the figure reported for August 2023. Likewise, the Consumer Price Index (CPI) maintained its stability at 6.7% year-on-year, mirroring the August 2023 data. The upsurge in motor fuel prices outweighed the declines in food and non-alcoholic beverage prices, keeping inflation steady. Analysts suggest that the Bank of England may consider a future interest rate hike, but it’s still expected that rates will remain unchanged at the November 2nd, 2023 meeting.
Domestic Economy – Budget Deficit Remains Unabated
During the week, the Federal Executive Council presented a 2024 budget proposal estimated at N26.01trn, marking a 19.15% YoY increase from 2023. The budget primarily focuses on key areas such as infrastructure, human capital development, and economic diversification. The estimated total expenditure for the 2024 budget stands at N26.01 trillion, encompassing statutory transfers of N1.3 trillion, non-debt recurrent expenses of N10.26 trillion, debt servicing projected at N8.25 trillion, and N7.78 trillion allocated for personnel pension costs. The proposal assumes an average crude oil price of USD73.96 per barrel, oil production at 1.78 million barrels per day, and an exchange rate of N700/USD.
In light of the ongoing rise in debt servicing costs, coupled with the subdued oil production and lackluster oil revenue, we anticipate that the budget deficit will persist at elevated levels.
September 2023 Inflation Report
During the week National Bureau of Statistics released the inflation report for September 2023. As culled from the report Headline Inflation advanced by 92bps to print at 26.72% YoY. For more clarity, Food Inflation increased by 130bps to 30.64% YoY while core Inflation soared 69bps to 21.84% YoY. On a month-on-month basis, Headline (+2.10), Food (+30.64%), and Core (+2.22%) all witnessed an uptrend. We believe that the elevated food prices remain the major driver of headline inflation.
12-Month Trend Analysis of Food Core and Headline Inflation (YoY %)
Food And Core Inflation
Food inflation surged by 130 basis points, reaching an all-time high of 30.64% year-on-year in September 2023, compared to 29.34% YoY in August 2023. This increase can be attributed to elevated food prices during the rainy season, heightened haulage costs following subsidy removal, and inadequate infrastructure. Notably, food inflation has consistently shown an upward trend, surpassing both Core and Headline inflation since January 2017. This trend is primarily due to the country’s inability to produce an adequate supply of essential food items to meet the demands of its over 210 million citizens. The heavy reliance on imported goods has exacerbated the issue.
Core inflation rose to 21.84% YoY in September, up from 21.15% YoY in August. This increase can be attributed to significant surges in sub-indices such as HWEGO (+22.5% YoY), Health (+23.1% YoY), Transport (+27.2% YoY), and Restaurant and hotels (+23.8% YoY). We opine that this can be linked to the devaluation of the Naira stemming from the unification of operations in the foreign exchange market.
September 2023 Headline, Core and Food Inflation Figures
The Disparity in Inter-State Inflation
During our analysis, we conducted an in-depth examination of the data and observed significant variations in inflation rates between different regions of the country. Notably, we observed that Food Inflation in the Northern regions remained relatively lower compared to the Southern and Western regions. This discrepancy underscores the adverse effects of poor road infrastructure, hindering the efficient transfer of goods between different parts of the country. Additionally, the lack of modern farming equipment, skilled and sufficient farmers, and extensive farmlands compared to the Northern regions, along with ongoing security challenges, continue to pose significant obstacles to the growth of the agricultural sector.
Top 10 States with the Highest Food Inflation for September 2023
Top 10 States with the Lowest Food Inflation for September 2023
Given the points mentioned above, we remain less optimistic that inflation will subside in the coming months. We base our prognosis on the points listed below.
1. We believe the food prices will remain elevated as the cost of transporting food items from one region of the country to another remains notably high.
2. The recent uptrend seen in global energy prices will keep fuel prices elevated and as such increase transportation and production costs.
3. The current devaluation of the Naira will continue to put pressure on the prices of goods and services that are exposed to currency fluctuations. Also, producers who source for FX to purchase raw materials will have no choice but to shift the cost burden to the final consumers.
The Nigerian Equities Market – The Bears Revisit the Local Bourse
The Nigerian Equities Market closed on a negative note this week as the NGX All Share Index shed 42bps WoW to 65,915.41 pts. As a result, the year-to-date returns printed at 30.56% (vs 31.12% last week). The market lost three (3) out of the five (5) trading days of the week. Sectoral performance was bearish al through as the Banking (+3.52% WoW), Insurance (-0.96% WoW), Consumer Goods (-0.46% WoW), Industrial Goods (-0.07% WoW), and Oil and Gas (-0.02% WoW) sectors all closed in the red. Leading the top gainers are THOMASWY (+29.64% to NGN3.63), DAARCOMM (+9.52% to NGN0.23) and JBERGER (+9.09% to NGN36.00). On the flip side, SOVRENINS (-17.50% to NGN0.33), CADBURY (-16.00% to NGN12.60), and STANBIC (-13.06% to NGN69.55) led the laggards. We foresee a bullish performance in the upcoming week.
The Nigerian Fixed Income Market – A Bearish Close in the Fixed Income Market
The NTBills market closed the week with a 40bps increase in average yield, settling at 6.92%. In the October primary bond auction, the DMO successfully sold NGN334.74bn worth of bonds, with strong demand reflected in an improved bid-to-cover ratio of 1.06x (compared to 0.81x at the last auction). However, this led to a 33bps increase in the average stop rate, reaching 15.76%. The secondary bond market saw a 1bp decrease in average yield, closing the week at 14.45% due to buying interest in specific instruments. In summary, the Naira Fixed Income Market concluded the week with a 20bps increase in average yield, settling at 10.68%.
