U.S. inflation prints higher! – An insight into Powell’s enigma
This week, the U.S. Bureau of Labour Statistics reported inflation data for February. The Consumer Price Index (CPI) resumed its uptrend as it rose 3.20% YoY (vs 3.10% YoY Jan. 2024). For clarity, Food Inflation rose 2.20% YoY while Core Inflation rose 3.80% YoY. On the contrary, Energy Inflation contracted by 1.90% YoY. On a month-on-month basis, Headline, Energy, and Core Inflation rose 0.40%, 2.30%, and 0.40% respectively while Food Inflation was flat at 0.00%.
Trend Analysis of Headline, Food, Core, and Energy Inflation
Source: BLS, Zedcrest Wealth
Our analysis showed that energy and shelter costs, which make up more than a third of the total weighting in the headline CPI index, were a major driver of headline inflation. For context, the energy and shelter index rose 2.30% MoM and 0.40% MoM respectively. Also, the Gasoline index soared 3.80% MoM an offshoot of increased geopolitical tensions.
Headline, Food, Core, and Energy Inflation Figures for February 2024
Source: BLS, Zedcrest Wealth
Looking forward, we expect inflation to continue its downward trend despite potential fluctuations. Decreased wage earnings and lower food and shelter prices are likely to contribute to a moderation in prices. However, recent geopolitical tensions may revive inflationary pressures.
Trend Analysis of US Inflation and Monetary Policy Rate
Source: BLS, Zedcrest Wealth
Drone Drama: Ukraine’s Strikes on Russian Refineries Shake Up Energy Markets
During the week, Ukraine carried out drone strikes targeting Russian oil refineries for the second consecutive day, resulting in a fire at Rosneft’s largest refinery. This marked a significant escalation in attacks on Russia’s energy sector as the incident led to a 2.00% increase in oil prices as concerns grew over potential supply disruptions. Notably, both Russia and Ukraine have utilized drones to target critical infrastructure, military sites, and troop concentrations throughout their prolonged conflict. In recent months, Ukraine has intensified its strikes on Russian refineries and energy facilities. Following the severe damage inflicted on Lukoil’s refinery in Nizhny Novgorod the day prior, Ukrainian drones targeted refineries in the Rostov and Ryazan regions. The attack in Ryazan, located 180 km (110 miles) from Moscow, resulted in a fire at Rosneft’s seventh-largest refinery. In Rostov, although there were no casualties reported, the Novoshakhtinsk refinery had to cease production, according to regional governor Vasily Golubev. These developments highlight the ongoing tensions and disruptions in the energy sector due to geopolitical conflicts in the region. We opine that the ongoing Russia-Ukraine war will continue to influence commodity prices, particularly in oil and wheat, given the significance of both countries in global trade. Russia ranks third globally in oil production, responsible for 12% of oil output, while Ukraine is the fourth-largest exporter of wheat.
Domestic Economy
Company Income Tax and Value Added Tax
During the week, the National Bureau of Statistics released the Company Income Tax (CIT) and Value Added Tax (VAT) for Q4 2024 and 2023FY. As culled from the report, total CIT for the 2023FY rose 73.02% YoY to NGN4.89trn while total VAT rose 44.91% YoY to NGN3.64trn.
Total domestic CIT payments for 2023FY was NGN2.51trn while total Foreign CIT payments amounted to NGN2.39trn. For VAT, the total Non-Import VAT from the domestic sector stood at NGN2.10trn while the total Non-Import Foreign VAT was NGN824.60bn. Total Nigeria Customs Import VAT printed at NGN714.51bn.
Domestic Company Income Tax Payments for 2023FY by Classification
Source: NBS, Zedcrest Research
Domestic Value-Added Tax Payments for 2023FY by Classification
Source: NBS, Zedcrest Research
Inflation – No Limits
This week, the National Bureau of Statistics released the inflation report for February 2024. According to the report, Headline Inflation soared by 180bps to settle at 31.70% YoY. For more context, Food Inflation surged by 251bps to 37.92% YoY while core Inflation rose by 154bps to 25.13% YoY. On a month-on-month basis, Headline (+3.12), Food (+3.79%), and Core (+2.17%) all witnessed an uptrend at a faster pace compared to the previous month. We attribute this notable uptrend to factors such as heightened FX volatility due to the aggressive depreciation of Nigeria (especially during the month), low agricultural output resulting from heightened insecurity, and sustained rise in logistics costs.
Trend Analysis of Core, Food, and Headline Inflation (YoY %)
Source: NBS, Zedcrest Wealth.
Throughout the month, we observed a notable devaluation of the Naira, driven by heightened demand for the dollar and limited foreign exchange (FX) supply from the Central Bank of Nigeria (CBN). Additionally, the economy’s heavy reliance on imported food items and consumables exacerbated the significant decline in the exchange rate. Also, sustained insecurity problems, especially across the food-producing states in the country continue to escalate food scarcity across the country.
Contribution to Increase in Headline Inflation YoY (%)
Source: NBS, Zedcrest Wealth
Food And Core Inflation
Food inflation further advanced by 251bps to 37.92% YoY in February 2024 compared to 35.41% YoY in January 2024. The major component drivers of food inflation were Food (+37.92% YoY), Food and Non-Alcoholic Beverages (+37.70% YoY), and Imported Food (+29.81% YoY).
Core inflation increased by 154bps settling at 25.13% YoY in February 2024 compared to 23.59% YoY in January 2024. Core inflation was majorly influenced by the prices of passenger transport by road, actual and imputed rentals for housing, medical services, and pharmaceutical products.
February 2024 Headline, Core, and Food Inflation Figures
Source: NBS, Zedcrest Wealth
Inter-State Inflation Disparity – Same Old Story
As established in our previous inflation reports where we explained the causes of disparity in inflation rates across states. This remains unchanged 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 address through structural and industrial development schemes.
Top 10 States with the Highest Food Inflation for February 2024
Source: NBS, Zedcrest Wealth.
Top 10 States with the Lowest Food Inflation for February 2024
Source: NBS, Zedcrest Wealth
Outlook
Anticipating continued inflationary pressures in the upcoming months, we posit that the recent 400 basis point interest rate hike to 22.75% by the CBN, along with the recent moderation in Naira depreciation, will help mitigate the aggressive upward trend in inflation. However, factors such as looming insecurity, escalating fuel prices, low agricultural output, and rising logistics costs are expected to sustain inflationary pressures.
The Nigerian Equities Market- Bullish Week for Nigerian Stocks: Banks & Blue Chips Drive Market Higher.
The Nigerian Stock Exchange (NGX) witnessed a bullish week with gains recorded in every trading session. Investor anticipation for bank earnings reports in FY’23 fuelled the rally. The NGX All Share Index (ASI) rose 3.71% week-on-week, closing at 105,085.25 points. This positive performance pushed year-to-date returns for the ASI to 40.54%.
Heavyweight stocks were the major drivers of the market’s strength. Significant buying interest was seen in MTN (+20.96% WoW), GTCO (+17.88% WoW), ZENITH BANK (+16.76% WoW), FBNH (+14.20% WoW), ACCESSCORP (+14.14% WoW), and DANGSUGAR (+10.06% WoW).
Leading the price advancers were JBERGER (+30.58% to N72.60), OMATEK (+23.08% to N0.90), and MTNN (+20.96% to N267.80). On the flip side, leading the top price decliners were INTENEGINS (-27.38% to N1.22), SUNUASSUR (-19.11% to N1.27), and LASACO (-14.53% to N2.00).
The Nigerian Fixed Income Market – How long can the CBN maintain elevated rates?
At the Nigerian Treasury Bills auction this week, the Debt Management Office (DMO) offered NGN161.49bn worth of treasury bills, over three tenors (91-Day: NGN 5.73bn, 182-Day: NGN4.92bn and 364-Day: NGN150.85bn). For more context, the total bids summed to NGN 1.49trn (as against the NGN 161.49bn sold) resulting in a surge in the average bid-to-cover ratio by 801 basis points to 9.27x, compared to 1.26x at the previous auction. In consequence, the average stop rate saw a decline of 79bps to 18.12%. The stop rates for the three tenors (91-Day, 182-Day, and 364-Day) experienced a
sharp decline of 100bps, 100bps, and 37bps, reaching 16.24%, 17.00%, and 21.12%, respectively. The recent auction reveals that the DMO is quite cautious of a consistent increase in the stop rates.
The Secondary Nigerian Treasury Bills market closed the week bullish as the average yield declined by 14bps WoW to settle at 18.38%. We attribute this to the influx of unsuccessful bidders to the secondary market as they indicate their buying interest in the instruments. On the other hand, the secondary bond market closed the week bearish as the average yield advanced by 39bps WoW to close at 18.40%. This is following major selloffs across the curve. For the most part, the Fixed income market closed the week in negative territory as the average yield increased by 13 basis points WoW to settle at 18.39%.
In the Eurobond market, we saw a bearish week as the average yield rose by 37bps WoW to 10.08%. This selloff is driven by the sentiment amongst market players for increased yields in the Eurobond space following speculations around the Eurobond auction by the DMO.
