December 2023 Inflation – Inflation rises to 27-year high

Consumer price inflation ascended to 28.92% y/y, 20bps lower than our estimate (Vetiva: 29.12% y/y) and 72bps above the prior month (Nov23: 28.20% y/y). This represents the highest turnout since August 1996. We attribute the turnout to elevated transport prices, impediments in the agricultural sector, and year-end festivities. On a month-on-month basis, headline inflation rose to 2.29% (Nov’23: 2.09% m/m) amid broad-based increases in food and core inflation.

Food inflation: Festivities ride on existing triggers to push prices further

Food inflation nudged higher by 109 bps to 33.93% y/y (Nov’23: 32.84% y/y), the highest turnout since September 2005. The surge in food inflation was on the back of broad-based increases in farm produce (Dec’23: 60.73% y/y) and processed food (Dec’23: 29.59% y/y). Non-alcoholic beverage recorded price increases to the tune of 60.87% y/y in December, amid elevated festive demand, exchange rate weakness, and elevated energy prices. On a month-on-month basis, food inflation surged by 30bps to 2.72% (Nov’23: 2.42%).

Outlook: Higher PMS prices could keep inflation elevated in 2024

In January, we see headline inflation ascending to 30.03% y/y on the back of low base effects and the sustained passthrough of fuel subsidy removal to consumer prices.

The World Bank confirmed that the pump price of PMS at full recovery was ₦751/litre (using official exchange rate) and c.₦1,000 (using parallel market rate) by the end of October, suggestive of partial subsidy payments. While we do not expect large sizeable PMS price adjustments in 2024, we expect gradual increases in PMS prices over the course of the year. Thus, we see annual headline inflation rising for the fifth consecutive year to 30% y/y in 2024 (2023: 24.50% y/y).

Interest rate outlook: More hikes may be on the way

Following the sustained uptick in inflation and the apex bank’s commitment to inflation targeting, this suggests that more rate hikes could be on the way. However, the bank is yet to release its calendar for MPC meetings for 2024, suggestive of the fact that MPC meetings may be slightly irregular. Should a meeting hold in January, we could see sizeable increases (+75bps to +100bps) in the Monetary Policy Rate, else the anchor rates may remain the same.

What shaped the past week? 

Equities: Nigerian equities have sustained their impressive momentum in the early weeks of the year, driven by a notable shift in investment strategies among portfolio managers in the country. The local market surged by 10.66% w/w, with the Industrial Goods sector leading the charge, marking an exceptional 46.8% increase. Encouragingly, most sectors posted positive gains this week, with Consumer Goods, Oil and Gas registering increases of 8.1% and 8.8% respectively, whereas the Banking space fell by 0.12% to close out the week.

Investors have maintained a favorable outlook on the industrial goods space, evident from a widespread interest across the sector. Notably, in our coverage stocks, both DANGCEM and WAPCO saw significant weekly increases of 53.9% and 17.5%, bringing their YTD performance to 68.4% and 49.2%, respectively.

Fixed Income: 

For the fixed income market, it was a somewhat quiet week due to constrained liquidity levels. Funding challenges persisted, leading to Overnight rates fluctuating between 16% and 20% throughout the week. Additionally, the Central Bank conducted an OMO auction, offering 300 billion across 92DTM, 183DTM, and 365DTM at stop rates of 10%, 13.5%, and 17.5% respectively. Despite US dollars constrains, these rates are lower than what was offered in the previous week’s OMO auction. In the bonds market, investors mostly stayed on the sidelines as they awaited the yearly bond calendar and processed the latest inflation data. Selling pressure was observed in Thursday’s session, resulting in a 14bps increase in the yield on the FGN 10Y paper, reaching xx%. Due to the constrained level of liquidity, we saw little to no activity across the OMO and NTB segments of the market.

Currency: At the NAFEM, the Naira closed lower w/w at ₦902.45 per dollar.

Domestic Economy:

Over the course of 27 years, Nigeria has not experienced headline inflation rates as high as those observed in December 2023. The notable surge of 28.92% year-on-year in the overall Consumer Price Index resulted from widespread pressures affecting both food and non-food items. This led to a full-year average inflation rate of 24.5%, marking a 6% increase from the previous year’s figure of 18.77% in 2022. Upon closer examination, it was revealed that a combination of festive demand, heightened prices of Premium Motor Spirit (PMS), and longstanding structural challenges in the agricultural sector contributed to a remarkable year-on-year increase of over 60% in both farmgate and non-alcoholic beverage prices. Consequently, food inflation concluded the year at 33.93%, with a full-year average of 27.6% (compared to 2022’s 20.8% year-on-year). Core inflation also experienced a significant uptick, reaching 23.07% in December, marking a 20-year high. The average core inflation for the entire year stood at 20.9%, significantly surpassing the 16.0% recorded in 2023. Looking ahead to 2024, the persistence of insecurity in food-producing regions, coupled with the impact of elevated energy prices, may continue to exert upward pressure on inflation. Consequently, it is anticipated that inflation will range between 26% and 32% throughout the year 2024.

Global:  The week unfolded with heightened volatility in Asian stock markets, driven by unexpected central bank decisions, economic indicators, and corporate events. China’s economic performance and monetary policy decisions played a pivotal role in shaping market sentiment. The cautious outlook following the IMF report on Australia’s potential interest rate hikes added an additional layer of complexity for investors. As the week concluded, market participants remained vigilant, closely monitoring global economic developments and central bank actions for potential impacts on future market trends.

The week unfolded with European stock exchanges navigating through volatility, driven by a mix of economic data releases and central bank communications. Inflation concerns took center stage mid-week as consumer inflation figures for key economies exceeded expectations. The ECB’s decision to maintain interest rates and the subsequent positive market response on Thursday provided a temporary respite. However, the week concluded on a cautious note, with economic data from Germany, the United Kingdom, and Switzerland influencing the market sentiment. Investors will likely continue to monitor global economic indicators and central bank communications for insights into future market trends.

The week on Wall Street showcased a mix of market movements driven by economic reports, Federal Reserve commentary, and labor market data. Wednesday’s losses were influenced by the Beige Book report’s summary and additional economic indicators. Thursday’s significant rebound, fueled by upbeat jobless claims data, demonstrated the market’s sensitivity to economic indicators and central bank communications. As the week concluded on a positive note, investors were hopeful about the upcoming release of data on existing home sales and Michigan consumer sentiment. Additionally, the anticipation of fresh earnings reports next week added to the overall sentiment, leaving market participants eager for more insights into the trajectory of the U.S. economy.

What will shape markets in the coming week?

Equity market: Runaway inflation remains a risk to investor sentiment in the Nigerian economy. Local pension fund managers have increased their exposure to equity space, which outperformed inflation last year. With inflation providing deeply negative returns in the short-term, and central bank independence called into question, we expect investors to remain bullish on the equities market despite a challenging macro environment.

Fixed Income: Investors across the secondary market have maintained a cautious and risk-off stance to the market, as they assess the monetary direction of the new governor of the CBN. Guidance provided by the CBN through the rates offered at their auctions point to a less restrictive stance, and we anticipate this to sour investor sentiment in the market in the face of rising inflation.