Focus for the week: July 2024 Inflation review – Inflation moderates for the first time in 19 months

Inflation moderates for the first time in 19 months

Nigeria’s July 2024 CPI reading showed that prices rose at a slower pace for the first time since December 2022. Annual headline inflation moderated to 33.40% y/y in July (Jun’24: 34.19% y/y), 4bps lower than our in-house estimate of 33.44% (Bloomberg median estimate: 33.30% y/y). This implies that the current surge in inflation, which was induced by the removal of gasoline subsidies last year, has peaked at 34%, aligning with our July 2023 prediction.

The descent in inflation can be attributed to the decline in food and core inflation. Aggregate food price moderated in July, as the prices of some staple food items fell and stabilized after Sallah festivities in June. In specifics, food inflation moderated to 2.47% m/m (Jun’24: 2.55% m/m) and 39.53% y/y (Jun’24: 40.87% y/y). Non-volatile items recorded slightly higher price gains on a m/m basis (Jul’24: 1.99% m/m), up 11bps from the prior month (Jun’24:1.88% m/m). Due to the high base, core inflation moderated to 26.28% y/y on an annualized basis (Jun’24: 26.53% y/y).

Despite the supply chain disruption induced by the nationwide hunger protests during the first ten days of August, we still see inflation moderating further to 32.33% y/y, as base effects could remain strong. We expect the harvest season to override the disruptive impact of protests on food prices. Over the coming months, we see significant disinflationary triggers from (i) the 150-day duty-free importation of food, (ii) the ongoing harvest season, (iii) the reduction in petroleum prices due to the commencement of the domestic refining of PMS and the allocation of domestically produced crude to local refineries, and (iv) the introduction of the Retail Dutch Auction System (RDAS) by the Central Bank of Nigeria, which withdraws demand pressure from the unofficial foreign exchange market. Thus, we expect inflation to average 32.62% y/y in 2024 (2023: 24.52%). We believe the apex bank may retain all policy rates constant at its next rate decision meeting.

What shaped the past week? 

Equities: This week, the local market traded in a mixed manner, but the bears came out on top due to decline in some big cap names. The ASI lost 1.16% w/w to settle at 95,973.45 points. This downturn was driven by losses in the Industrial Goods (-4.94% w/w) and the Consumer Goods (-1.42% w/w) sectors. Losses in DANGCEM (-10.00% w/w) and BETAGLASS (-9.43% w/w) contributed to the decline in the Industrial Goods index, while losses in INTBREW (-5.49% w/w), DANGSUGAR (-5.29% w/w), and NASCON (-3.27% w/w), dragged lower the Consumer Goods sector.  On the flip side, positive sentiments continued to influence trading in the Oil and Gas space (+3.54% w/w) as OANDO jumped 33.47% during the week. Also, the Insurance (+1.90% w/w) sector closed in the green following gains in SOVEREINS (+12.00% w/w). Finally, the Banking Index (+0.37% w/w) marginally inched higher led by FIDELITYBK (+6.44% w/w) and ACCESSCORP (+4.18% w/w).

Fixed Income: This week, the DMO made three different offers – Naira bonds, a Dollar denominated bond, and Tbills.

At the Bonds auction, the DMO offered ₦190 billion and sold ₦374 billion across the three tenors on offer. Stop rates offered at the auction closed at: APR 2029: 20.30%, FEB 2031: 20.90%, and MAY 2033: 21.50% (Previous: APR 2029: 19.89%, FEB 2031: 21.0%, MAY 2033: 21.98%).

At the Tbills auction, the DMO offered ₦410 billion across maturities on the curve as against ₦216 billion offered in the previous auction, while subscription levels increased to ₦1,027 billion from ₦487 billion. At the end of the auction, the DMO allotted ₦291 billion. Following this, stop rates on the 364-day bills contracted by 99bps to 20.90%, while stop rates on the 182-day bill fell by 30bps to 19.20%, and stop rate on the 91-day bill declined by 30bps closing at 18.20%.

Finally, the DMO issued a US$500 million series one dollar bond under its US$ 2billion dollar bond programme. The offer opened on August 19 and will close on the 30th. The bond carries a coupon rate of 9.75% with a five-year tenor.

Trading patterns in the secondary market were dictated by auction results amid varying system liquidity levels. Given more liquidity on most days of the week when compared to last week, the market traded largely with a bullish bias.  At the of the week, yield movements were seen on the 91-Day bill (-1,280bps), 182-Day bill (-6bps), and 364-Day bill (-6bps). Also, the OPR fell below the 30% mark by 652bps w/w to settle at 25.78%. 

Currency: At the close of market trading on Friday, the Naira appreciated by ₦9.75 w/w to close at ₦1,570.14 per dollar.

Domestic Economy: African nations were priced out of international capital markets after global interest rates rose sharply in 2022 in response to mounting inflation, but several have returned this year including Ivory Coast, Benin, Senegal, Kenya and Cameroon. However, Nigeria’s Finance Minister Wale Edun said that market conditions had not been ripe to proceed with the Eurobond hence, the decision to issue a domestic dollar bond. So, the government will instead target Nigerians at home as well as the significant number who live abroad. The bond, which is available to Nigerians residing in the country and abroad as well as local pension firms, is targeting funds from domiciliary accounts, diaspora remittances and foreign investments. Dollar cash deposits will not qualify unless they were made into domestic accounts at least 30 days before the issue. The domestic dollar bond has a program size of $2 billion, with series one, at a size of $500 million. The offer opened on August 19 and will close on the 30th. It has a coupon rate of 9.75%. The bonds will have a five-year tenure. Finally, the minister said that Nigeria has not given up on tapping the Eurobond market but will wait for more attractive conditions.

Global: Stocks rallied across the board and bond yields tumbled, with Jerome Powell giving his clearest signal yet that the Federal Reserve will begin cutting interest rates in September.  During the week, the Dow Jones climbed 1.14%, to 41,175.08, the Nasdaq Composite advanced 1.47% to 17,877.79 and the S&P 500 gained 1.15% to finish at 5,634.61 points. With Friday’s gains, the three major averages also posted a winning week. The Dow surged nearly 1.3%, and the Nasdaq added 1.4%. The S&P 500 rose 1.45% for the period. European stocks closed the week higher as investors digested the Federal Reserve’s latest comments on the future path of interest rates. The pan-European Stoxx 600 index ended the week 1.06% higher, with other major bourses and most sectors in the green. The FTSE 100 was up 0.2% during the week to close at 8,327.28 points. It was also a green close in Asia as the Nikkei ended the week 2.97% higher to close at 38,624.27, while the Hang Seng ended the week 1.04% higher at 17,612.10.

What will shape markets in the coming week?

Equity market: Market breadth was overwhelmingly positive on Friday with a total of 32 advancers against 11 declines, as investors’ focus remain on the mid-low cap names. We retain a cautious outlook on the market in the coming week, as market participants hunt for attractive offers across the ASI.

Fixed Income: Following the plateauing of rates at the primary auctions, we expect system liquidity to determine market direction in next week’s sessions.