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NSE ASI down 0.93% WoW as bears emerge

By on June 23, 2014

Global Markets: Global markets kicked off the past week on a cautious note, with all eyes on the outcome of the Federal Open Market Committee (FOMC) held on Tuesday and Wednesday. Not surprisingly, the Fed trimmed another $10 billion from its quantitative easing program, citing a rebound in economic activity and an improvement in the labor market thus bringing total monthly bond purchases to $35 billion. Additionally, the U.S. Federal Reserve’s pledged to keep its benchmark interest rate low for a considerable time after the bond-buying program ends.

Domestic Economy: This past week, May inflation data was released by the National Bureau of Statistics, indicating a 0.1% rise in headline inflation to 8% y/y (year high); edging close to the upper limit of the Central Bank’s inflation target 6%-9%. The increase was driven by an increase in core and food inflation as a result of higher prices in breads, cereals, dairy, fruits and vegetables. Notably, m/m inflation has risen consecutively, since February. Please see “Focus of the week” for our thoughts.

Equities: Amidst waning volumes, the equity market opened this past week to mild declines across key sectors as sell pressure dominated large cap counters. Market sentiment on the NSE remained depressed for most of the week, save for Wednesday and Friday as gains in Consumer Goods sector (+87bps and +37bps respectively) solely lifted the All-Share Index to a positive close. However, the NSE ASI posted a 0.93% loss, subsequently pushing the year-to-date returns back to the negative. The Financial Services and Consumer Goods sectors were the hardest hit this past week, posting respective WoW declines of 3.52% and 2.33% respectively. Notably, OANDO touched a year high; reaching NGN30.37 on Friday, following news indicating that the approval from the Minister of Petroleum Resources for the acquisition of the Nigerian Upstream Oil and Gas Business of ConocoPhillips had been granted.

Fixed Income: The Central Bank announced the first OMO auction in two weeks following OMO maturities, and expectations of FAAC inflows. On offer was NGN30 billion on the 105DTM paper; total sales eventually amounted to NGN161 billion (stop rate 10.75%). With all eyes on the PMA, trading momentum in the secondary market softened, with preference to bid at the auction. Stop rates on the 91DTM, 182DTM, and 364DTM bills were pegged at 9.99%, 10.38% and 10.39% respectively, lower than the previous auction). Subsequently, demand spillover from the auction, coupled with increased liquidity improved demand, consequently pushing yields in the T-bills market lower. The bond market traded mostly quietly the past week, though yields dipped an average 6bps, courtesy of domestic appetite on the longer term bonds.

Currency: The Central Bank increased offer at the past week’s RDAS auction to US$700 million (c.8%). However, sales totaled US$660 million, with the stop rate at NGN155.73/USD. The Naira strengthened at the FX interbank market on oil company sales, hitting a week low of NGN162.74/USD though closing the week at NGN162.85/USD – a 0.67% appreciation WoW.

What will shape markets in the coming week?

U.S GDP, Housing Stats and U.S durable Goods data are some of the data expected this week, with the numbers to influence trading sentiments in global markets. Barring the presence of positive market catalysts on the domestic bourse, we expect the market to continue to trade sideways with a bearish bias in the sessions ahead.

The Central Bank would be conducting another Primary Market Auction on Wednesday 25th June, offering over NGN130 billion across the 91DTM, 182DTM and 364DTM bills. As such, we anticipate an active market with improved appetite for bills, driven by strong market liquidity. Demand may however by capped by the Central Bank’s OMO activities, as OMO sales are likely to accelerate to manage the looming FAAC disbursements whilst keeping rates firm.

NIGERIA: May Inflation at year high of 8%y/y

Headline Inflation up marginally, hits a year-high

Inflation in May rose marginally for the third consecutive month to 8.0%y/y (April: 7.9%y/y), coming in higher than our estimate of 7.9%y/y, driven by a 0.2ppts and 0.4ppts jump in core and food inflation to 7.7%y/y and 9.7%y/y respectively. On a monthly basis, inflation printed above the 5-year m/m May average of 0.61%, owing to stronger growth in core inflation and static growth in food inflation relative to previous years. Notably, whilst headline inflation advanced for the third consecutive month (since February), core and food inflation peaked at 5-month and 9-month highs respectively.

Higher import prices push food inflation to a 9-month high of 9.7%y/

Though m/m food inflation was static at 0.8%, we estimate that the growth in food inflation would have accounted for c.0.4% of the 0.7% increase in m/m headline inflation. Though the NBS reports price increases in bread and cereals, soft-drinks and meat sub-groups, we think the impact of these increases are muted, considering the contribution of food inflation to m/m headline inflation at 0.4% was unchanged from April. Nonetheless, it appears the sharp acceleration in imported food inflation (13.2% of Food Index) for the fourth consecutive month to 8.8%y/y (15-month high) pushed food inflation up to 9.7%y/y (March:9.4%y/y) – by our estimates, its contribution to headline inflation increased from 0.07%m/m (April) to 0.11%(May).

Core inflation accelerates sharply to a 5-month high

Contrary to the static growth in m/m core inflation in March/April (0.4%m/m), broad-based increases across key sub-subsectors accelerated May prices to 0.6%m/m. The disaggregated core CPI reveals the utilities, furnishing and household equipment maintenance and transport indexes (30% of the CPI) are responsible for 0.21% of the 0.6% m/m increase in core inflation as against 0.13% in April. We note that core inflation includes an ‘imported/processed food’ component which would have impacted prices, considering the recent exchange rate volatility (interbank: +1.1%m/m in May), thus pushing the index higher to 7.7%y/y (April: 7.5%y/y, January: 6.6%y/y). Nonetheless, we think that it is probable the increase in core inflation could be on the back of strengthening aggregate demand, considering the improved liquidity environment since the start of 2014; we will look to output-growth numbers to confirm that the core CPI is being influenced by demand-led pressures.

Looking ahead, what to expect?

With headline inflation tracking in line with our projections, our FY’14 expectation remains intact at 7.8% y/y (June Forecast: c.8.2%y/y). Nonetheless, risks to inflation are tilted to the upside as CPI continues to reflect the pass-through of the Naira’s weakening and implementation of electricity tariff increases (according to the Multi-Year Tariff Order framework, effective June), which could push core inflation towards the 8%y/y levels (15-month high).

 

 

[Punch]

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