Global Economy
United States – Inflation Stagnates at 3.7% YoY in September 2023
According to the U.S. Bureau of Labor Statistics, inflation stagnated at 3.7% YoY in September 2023. For context, Food Inflation rose 3.7% YoY (vs 4.33% YoY in August) while Core Inflation rose 4.1% YoY (vs 4.3% YoY in August). Energy Index contracted by 0.5% YoY (vs -3.60% YoY in August). The lower contraction in the energy index echoes the recent surge in energy prices following Russia, Saudi Arabia, and OPEC’s decision to extend its oil production cuts amid a gloomy economic outlook in China. On a seasonally adjusted monthly basis, the Headline, Food, Energy, and Core Inflation rose 0.4%, 0.2%, 1.5%, and 0.3% respectively.
Source: BLS, Zedcrest Wealth
Shelter Inflation played a significant role in driving overall Core inflation upward, with a monthly increase of 0.6% and a yearly rise of 7.2%. This accounted for more than 70% of the total core CPI increase. Notably, it’s the sixth consecutive month where the growth in shelter prices has shown a slowdown on a year-over-year basis. Furthermore, leading indicators of shelter prices, such as the S&P/Case-Shiller home price index, have trended lower over the past several months, suggesting that the shelter component in inflation should continue to moderate in the months ahead.
Looking ahead, we opine that Core inflation will remain tepid in the coming month as indicated by the declines seen in the S&P/Case-Shiller home price index. We expect food inflation to sustain a downtrend as indicated by the Food and Agriculture Organization’s (FAO) price index, which tracks the most globally traded food commodities. The Index averaged 121.5 points in September (10.7 % below its value a year ago and 24.0% below its all-time high reached in March 2022). For the energy index, we opine that the index will see further increase on a month-on-month basis given the recent uptrend in energy prices. For the most part, we see headline inflation seeing a weaker disinflationary downtrend.
China – Inflation Rate Remain Tepid Amid Gloomy Economic Outlook
According to the National Bureau of Statistics, China, consumer price Index was flat (0.0% YoY) for September 2023 (vs 0.1% YoY in August). On a month-on-month basis, CPI rose 0.2% (vs 0.3% MoM in August). This further depicts the gloomy growth outlook for the country amid the sustained impact of the Covid-19 pandemic and the troubles that have permeated the property sector of the country. For context, China’s Growth slowed from 8.9% in Q1:2023 (seasonally adjusted annualized quarterly rate) to 4.0% in the Q2:2023. Analyst believe that the sustained impact of the property sector woes will continue to put pressure on the country’s growth.
Domestic Economy – Oil Production Reaches Year Peak
During the week, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) unveiled its Oil Production Status Report for September 2023. Notably, crude oil production, which includes condensates, grew by 11.14% MoM to 1.57mbpd in September 2023. This marks the second consecutive monthly uptick in oil production and represents the highest production level for the year. The increase in oil production can be attributed to improved performance at terminals like Forcados (+85.0% MoM), Bonny (+6.3% MoM), and Erha (+22.8% MoM).
While this boost in oil production is favorable for the country’s revenue, particularly given the elevated energy prices in the international market, it’s worth noting that the previous prevalence of crude-for-cash arrangements by the Central Bank of Nigeria (CBN) may constrain the full benefits that could be derived from this production increase.
Source: NUPRC, Zedcrest Wealth
CBN Lift FX Restrictions on 43 Items
During the week, the Central Bank of Nigeria (CBN) released a 6-point circular that includes the removal of restrictions on 43 items, previously banned from the official market since a circular was issued in 2015. Importers of these formerly restricted items are now allowed to access FX through the official market. This decision by the CBN is aimed at ensuring that manufacturers and importers of these goods no longer need to rely on the parallel market for foreign exchange. Additionally, the central bank reaffirmed its commitment to addressing the existing foreign exchange backlog, which is estimated to be in the range of USD 7 to USD 10 billion, while also working towards enhancing overall market liquidity.
We opine that this bodes well for the FX market as it depicts the friendliness of the CBN to FX market participants. Nonetheless, the efficacy of this policy rest on ability of the CBN to make available required FX In the market.
Expected Positive Impacts of the Policy
1. The modification in this policy could potentially amplify foreign investors’ attraction to the Nigerian market, as the removal of restrictions signals the commitment to maintaining fairness and transparency in the foreign exchange market.
2. The importation of raw materials is poised for improvement, potentially leading to reduced production costs due to the trade-off between exchange rates and the cost of sourcing raw materials domestically.
3. Enhanced competition is anticipated, which may curtail excessive profiteering, as imported goods are likely to contend with locally manufactured products.
Expected Negative Impacts of the Policy
1. This policy change has the potential to stifle the growth of locally manufactured goods in the market since imported products may enter into competition with domestically produced items, potentially discouraging local producers.
2. There could be an increased strain on the Nigerian currency if imports surpass exports, further exacerbating the situation.
3. This might lead to a more pronounced devaluation of the currency.
4. The consequence could be a loss of both comparative and competitive advantages.
The Nigerian Equities Market – The Bulls Extend Dominance on the Nigerian Bourse
The Nigerian Equities Market sustained its bullish run as the NGX All Share Index added 112bps WoW to 67,200.69 pts. As a result, the year-to-date returns printed at 31.12% (vs 29.66% last week). The market gained four (4) out of the five (5) trading days of the week. The Industrial
Goods (+5.03% WoW), Consumer Goods (+1.39% WoW), Oil and Gas (+0.33% WoW) and Insurance (+0.92% WoW) sectors embraced the bulls. Leading the top gainers THOMASWY (+30.84% to NGN2.80), ABCTRANS (+23.08% to NGN0.80) and CHIPLC (+12.75% to NGN1.15). On the flipside, PRESTIGE (-10.0O% to NGN0.45), ROYALEX (-9.62% to NGN0.47) and PRESCO (-9.54% to NGN182.00). We expect mixed sentiments to permeate the market in the coming weeks.
The Nigerian Fixed Income Market – A Bullish Run in the Fixed Income Market
At this week’s NTB auction, the average stop rate dropped by 163bps to 6.01%, with a notable increase in the bid-to-cover ratio to 8.78%. The 364-day bill was in high demand with a bid-to-cover ratio of 9.94x. The bullish sentiment led to a 148bps decrease in the NTB market’s average yield to 6.52%. However, the FGN bond market had a bearish tone, pushing the average yield up by 4bps to 14.46%, mainly due to selloffs in the mid-end of the curve. Overall, the Naira Fixed income market closed on a bullish note, with the average yield decreasing by 72bps to 10.49%.
