Global Economy United States – Inflation printed higher in March
During the week, the U.S Bureau of Labor Statistics released the inflation figured for the month of March 2024. The Consumer Price Index (CPI) came in hot as it rose 3.50% YoY (vs 3.20% YoY in Feb. 2024). For more clarity, Food Inflation rose 2.20% YoY while Core Inflation rose 3.80% YoY. Similarly, Energy Inflation rose by 2.10% YoY after a 1.90% contraction in February. On a month-on-month basis, Headline, Food, Energy and Core Inflation rose 0.40%, 0.10%, 1.10%, and 0.40% respectively.
United States Key Inflation Figures (YoY) for the Month of March 2024
Source: Bloomberg, Zedcrest Research
The major indices that contributed to the increase in inflation are Shelter (+5.7% YoY) and Gasoline (+1.30% YoY). Analyst believed that companies and service providers hiking their prices may have cause the resurgence in the inflationary trend. We opine that the recent geopolitical tensions have also been a reason for the increase.
Looking ahead, we expect lesser rate cuts this year as we review our expectation that inflation might become harder to curb in the coming months. We foresee another round of inflationary pressures following the recent escalation of the Israel–Hamas’s conflict which has seen countries like Iran, Jordan and possible Lebanon join the conflict. We opine that Iran being one of the major producers of oil with majority of its exports going to China, India and some parts of Europe and Asia may lead to another supply disruption in the oil space.
Trend Analysis of US Inflation and Monetary Policy Rate
Source: BLS, Bloomberg, Zedcrest Research
Euro Area – ECB Maintains Rates and Indicates Imminent Cut
During the week, the European Central Bank (ECB) decided to maintain interest rates at record-high levels for the fifth consecutive time. The committee decided to maintain the key interest rate at 4.00%, alongside the main refinancing rate at 4.50%, and the marginal lending facility at 4.75%. Despite ongoing disinflationary pressures in both the Eurozone (2.80%: Feb. 2024) and Euro area (2.60%: Feb 2024), with Euro area inflation projected at 2.40% in Mar. 2024, the committee hinted at the potential for a rate cut in the next meeting. However, we hold a cautious stance on the likelihood of a rate cut due to the prevailing resurgence in geopolitical tensions.
Trend Analysis of Euro Area Inflation and ECB Main Refinancing Rate
Source: Bloomberg, Zedcrest Research
Oil Prices Surge Amid Possible Supply Disruption
During the week, oil prices surged due to escalating tensions in the Israel-Hamas conflict. Brent crude price rose by 40 cents to $90.78 per barrel, while U.S. West Texas Intermediate (WTI) crude edged up 35 cents to $86.78. Israeli Prime Minister Benjamin Netanyahu’s plans to enter Gaza’s Rafah enclave contributed to the increase, with no progress on a ceasefire agreement. The recent inclusion of Iran in the conflict may further drive oil prices higher, given Iran’s status as a major oil producer. These developments dashed hopes for reduced conflict intensity, coinciding with OPEC+ reaffirming production cuts until June’s end and Ukrainian strikes on Russian oil infrastructure causing disruptions.
Trend Analysis of Brent Crude Price
Source: Bloomberg, Zedcrest Research
Domestic Economy
CBN Updates: Foreign Currency Regulations
During the week, the Central Bank of Nigeria (CBN) issued two key circulars as regards operations in the FX market and the use of foreign currency transactions as collateral for Naira denominated loans.
Forex Sales to Bureau De Change (BDCs): The CBN announced the sale of $10,000 to BDCs at the rate of N1110.1/$1. These BDCs are then expected to sell this forex to eligible customers at a maximum spread of 1.5% above the purchase price. This move aims to meet retail demand for foreign currency for legitimate invisible transactions (expenses incurred outside the country that don’t involve physical goods).
Restrictions on Foreign-Currency Collateral for Naira Loans: In a separate circular, the CBN has restricted the use of foreign currency (FCY) as collateral for naira loans. The only exceptions allowed are Eurobonds issued by the Nigerian government or guarantees from foreign banks (including Standby Letters of Credit). Existing loans secured by other types of dollar-denominated collateral must be restructured within 90 days. Failure to comply will result in stricter capital adequacy requirements and potential regulatory sanctions.
Probable Impacts of the Circulars on the Economy
- We anticipate that the sale of dollars to BDCs will enhance the local currency’s performance, considering the rate of NGN1,110.1/USD1, which is below the parallel market rate. This move is expected to increase supply and decrease market volatility.
- Restricting FCYs as collateral for naira loans will curtail speculative activities, and force players to sell off their dollar assets.
The Nigerian Equities Market – Nigerian Stocks Slide in Shortest Week of 2024
Amid a truncated trading week due to festivities, the Nigerian equities market ended the week on a bearish note. Market capitalization, dropped to N57.86trn from N58.50trn the prior week. As a result, the year-to-date return declined to 36.83%.
Market sentiments was mixed during the week as the Banking sector witnessed notable sell offs, pulling back by 7.22% WoW. Other sectors also closed in the red. Sell offs in major tickers such as GTCO (-13.75%), FBNH (-11.15%), and ZENITH (-5.88%) overwhelmed any buying interest on the bourse. Nonetheless, TRANSCORP (+10.33%), FIDELITY (+3.09%), and OANDO (+10.57%) witnessed buying interest.
Leading the price advancers for the week were MORISON (+20.75% to N2.56), OANDO (+10.57% to N12.55), and TRANSCORP (+10.33% to N14.95). On the flipside, leading the top price decliners were ACCESSCORP (-14.60% to N19.30), UCAP (-13.92% to N20.10), and GTCO (-13.75% to N41.40).
The Nigerian Fixed Income Market
At the end of the week, the Debt Management Office (DMO) successfully sold NGN951.83bn worth of treasury bills, over three tenor (91-Day: NGN27.11bn, 182-Day: NGN22.67bn and 364-Day: NGN902.04bn). For context, the total bids summed to NGN1.82trn (versus NGN951.83bn sold) resulting in a decline in the average bid-to-cover ratio by 28 basis-points to 1.92x, compared to 2.20x at the previous auction. We noticed a decline in the average stop rate by 14bps to 17.98%. For clarity, the 91-Day and 182-Day rate printed at 16.24% and 17.00% respectively while the 364-Day printed at 20.70% (vs 21.12% at the last auction). We opine that the DMO is now more cautious of subsequent high stop rates in Q2:2024 given that the expected treasury bill rollovers for Q1:2025 prints as high as NGN 4.95trn. Furthermore, the auction saw lesser participation due to the market illiquid state and the imminent bond auction scheduled for the following week.
The Secondary Nigerian Treasury Bills market closed the week bullish as the average yield further declined by 5bps WoW to settle at 18.86%. We noticed buying interest on the long end of the curve particularly the 13-MAR-2025 and 06-MAR-2024 as the yield declined by 10bps and 9bps WoW respectively. On the other hand, the secondary bond market closed the week bullish as the average yield dipped by 4bps WoW to close at 19.27%. This follows major buying interest on the short to mid-end of the curve particularly the MAR-2027, FEB-2028 and MAR-2028 as the yields declined by 87bps, 46bps and 38bps WoW respectively. For the most part, the Fixed income market closed the week bullish as the average yield decreased by 5bps WoW to settle at 19.06%.
In the Eurobond market, we saw a bearish week as the average yield advanced by 16bps WoW to settle at 9.74%. This performance is driven by selloff across the curve particularly the FEB-2030 and NOV-2027 Eurobonds as their yields increased by 22bps and 21bps WoW respectively.
