Focus for the week: Inflation responds to fiscal intervention but remains elevated

In April, headline inflation rose by 49bps to 33.69% y/y (March: 33.20% y/y). The surprise outturn was 51bps below Bloomberg consensus’ estimate of 34.20% y/y (Vetiva: 34.80% y/y). We attribute the modest uptick to the huge food purchases by the government for distribution as palliatives to vulnerable citizenry. While this influenced a surge in inflation between February and March, the increased supply of these commodities resulted in milder food price increases in April. Thus, headline inflation moderated by 73bps to 2.29% m/m (March’24: 3.02% m/m).

Food inflation moderates for the second time in a row m/m

Food inflation surged to 40.53% y/y (Mar’24: 40.01% y/y). However, on a m/m basis, food inflation moderated by 111 bps to 2.50% m/m (March’24: 3.62% m/m). The moderation in food inflation was driven by lower farmgate inflation, induced by government intervention.

Core inflation moderates amid currency gains

Core inflation eased to 2.10% m/m in April (Mar’24: 2.43% m/m), due to the soothing impact of a stronger Naira. We reckon that the Naira experienced a c.33% appreciation from Q1 lows in the month of March. This is despite the increase in power tariffs for a group of energy consumers. On a y/y basis however, core inflation rose by 80bps to 26.18% (Mar’24: 25.39% y/y).

Outlook: Inflation may peak soon but upside risks abound

The near-term outlook for inflation has been blurred by many factors – fiscal intervention serving as a short-term support for food prices; higher power tariffs for a group of energy consumers, and the recent weakness in the Naira, all serving as price triggers. We understand that beyond fiscal intervention, the ongoing dry season harvest in the northwest is below average, while conflict is restricting access to farmlands in the northeast. Following recent incidences of fuel scarcity, we see headline inflation ascending further to 34.28% y/y. Following this surprise outturn, we now reduce our average FY’24 inflation estimates to 33.0% y/y in 2024 (2023: 24.50% y/y).

What shaped the past week? 

Equities: This week, the local equity market traded in a bearish manner, shedding 0.11% w/w to settle at 98,125.73 pts. Leading the sectoral losses was the Oil & Gas space (-6.49% w/w), as sell-offs in SEPLAT (-10.00% w/w) helped dragged the sector lower. Similarly, the Insurance sector closed in the red (-5.26% w/w), led by losses in AIICO (-3.88% w/w).  Also, the banking sector fell by 5.54% w/w dragged by sell-offs in UBA (-17.23% y/y), while the Consumer Goods index lost 1.29% w/w. On the other hand, the Industrial Goods sector closed in the green (+0.01% w/w), driven by gains in JBERGER (+9.53% w/w).

Fixed Income: This week, system liquidity was mostly depressed, as it opened on Monday at c.₦298 billion negative and opened on Friday at c.₦623 billion negative, owing to borrowings via the Standing Lending Facility (SLF) window. Hence, OPR rose 196bps to 29.96% w/w. Meanwhile, the secondary market was relatively quiet throughout the week, as cautious trading activity dominated.  Market participants elected to adopt a wait and see approach, as the MPC meeting draws near.

Currency: At the NAFEM, the Naira depreciated by ₦31.31 w/w to close the week at ₦1497.33 per dollar.

Domestic Economy:

In a surprising turn of events, headline inflation rose by 49bps in April to 33.69% y/y, representing the slowest uptick since October 2023. This modest uptick was driven by the soothing impact of earlier government-backed large food purchases, which resulted in lower staple prices. This resulted in a moderation in food and headline inflation on a month-on-month basis. Core inflation also moderated on the back of the strengthening of the Naira. Due to the sustained uptrend in year-on-year inflation and the need to anchor the Naira, we see room for a 100bps hike in the MPR at the May MPC Meeting.

In addition, Nigeria’s Q1’24 GDP numbers will be out on Friday. We upgraded our expectation from 2.81% y/y previously, to 4.01% y/y, on the back of sustained recovery in the oil sector, expected stellar performance in the financial services sector, acceleration in retail trade, and continued expansion in the telecom sector. We expect a rebound in the Agric sector, as the cash crunch of the election season paves the way for above-average growth in the Nigerian economy in Q1’24.

Global: Global investors reacted to major economic news; notably, the release of U.S. inflation data for April. On Wednesday, the U.S. Bureau of Statistics released its monthly inflation report, showing April inflation at 3.4% y/y (March: 3.5% y/y). On this note, we observed a strong investor outlook, due to a potential pivot in monetary policy from the U.S. Fed. The global stock markets experienced a week of gains mainly shaped by the economic reports. In the US, the Dow Jones notched an average gain of 4.3% in the month after crossing a 10,000-point milestone, well above the index’s average rolling one-month gain of 0.57%.  Also, the S&P 500, and the Nasdaq Composite earlier this week recorded a new high, as investors grow more confident that the U.S. is heading for an economic soft landing. Meanwhile, in the Eurozone, stocks closed at record highs, echoing moves in the US where signs of easing inflation boosted traders’ hopes the Federal Reserve could cut interest rates there sooner than expected.  The region-wide Stoxx Europe 600 rose 0.6% on Wednesday to close at a record high of 524.78. Germany’s Dax rose 0.8%, boosted by stronger-than-expected industrial output figures in the Eurozone, also France’s CAC 40 was up 0.2%. Similarly, the U.K.’s FTSE 100 hit a fresh record high, going up 0.2% to record 9.2% YTD. Meanwhile, the dollar weakened against most major currencies on Thursday after economic data showed more signs of softening in the U.S. labour market. 

What will shape markets in the coming week?

Equity market:  The 11bps w/w loss further confirms that the market will continue to trade rangebound as investors pursue safety in the fixed-income space. That said, we expect the market to trade in a similar pattern on Monday, as investors maintain their risk-off sentiment toward the equity market.

Fixed Income: In the next trading session, we expect a similar trading pattern in the NTBs market. Meanwhile, in the bond space, we expect cautious trading to persist ahead of next week’s MPC meeting.