Focus for the week: May 2024 Inflation – Inflation may likely peak in June

In May, headline inflation rose by 26bps to 33.95% y/y (Apr’24: 33.69% y/y). The outturn was 55bps below the Bloomberg consensus estimate of 34.50% y/y (Vetiva: 34.28% y/y). We attribute the mild uptick to the fiscal intervention in the commodity market, and relative stability in the exchange rate and prices of petroleum products. Thus, headline inflation moderated to 2.14% m/m (Apr’24: 2.29% m/m), its slowest in 7 months.

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

Food inflation eased to 2.14% m/m, 15bps lower than the prior month (Apr’24: 2.29% m/m). This could be due to a 49bps decline in urban food inflation amid a meagre 3bps uptick in rural inflation. On a y/y basis, food inflation rose to 40.66% y/y (Apr’24: 40.53% y/y). According to the Famine Early Warning System Network (FEWSNET), conflict in food-producing regions and restricted access to floodplains induced a lean harvest season. Thus, despite the moderation, the outlook for food inflation remains hazy.

Core inflation sustains moderation momentum

Core inflation eased to 1.95% m/m in April (Apr’24: 2.10% m/m), despite the increase in power tariffs for a group of urban energy consumers. We attribute the descent to the relative stability in the exchange rate. On a y/y basis, however, core inflation rose by 18bps to 26.36% (Apr’24: 26.18% y/y).

Outlook: Inflation could peak in June

There are clear indications that inflation peaked in Q2’24. While most leading indicators point to a sustained ascent in June, base effects and relative stability in petroleum prices point to a decline. We regard the divergence in rural and urban food inflation as a warning sign on inflation outturn. Thus, we see room for a modest 2bps uptick in inflation to 33.97% y/y in June. We expect inflation to trend downwards thereafter. While we will not be surprised at a moderation, we note that we saw inflation peaking at 34%, as far back as June 2023. That said, we reduce our average FY’24 inflation forecast by 20bps to 32.8% y/y in 2024 (2023: 24.50% y/y).

Monetary outlook: Dependent on June inflation print

Should inflation peak in June and moderate in July, the Monetary Policy Committee (MPC) could deliver a terminal 100bps hike in its benchmark rate. On the flip side, a strong moderation in June and July could cause the Committee to retain policy rates at current levels. Upon receipt of $3.2 billion from multilateral institutions, the Bank could be under less pressure to raise interest rates in the quest for hot money.

What shaped the past week? 

Equities: This week, the local bourse closed in the red falling -0.18% w/w due to profit-taking in the banking counters. Of note, profit-taking in  FIDELITYBK (-4.81% w/w), FBNH(-6.42% w/w), and UBA (-1.57% w/w) dragged the banking index (-0.04% w/w) south. However, renewed buy-interest in GUINNESS (+16.18% w/w) lifted the Consumer goods index (+0.29% w/w) northwards. Similarly, gains in JBERGER (+3.02% w/w) and ETERNA (+6.67% w/w) drove the industrial (+0.10% w/w) and Oil & Gas (+0.21% w/w) indices north.

Fixed Income: This week, the CBN held two OMO auctions. At the first auction held on Wednesday, the CBN offered c.₦500 billion across maturities on the curve, while subscription levels came in at c.₦987 billion. Following this, stop rates at the mid and long ends of the curve printed at 19.58% and 22.229% respectively. In the second auction held on Friday, the CBN offered c.₦500 billion across the three tenors , while subscription levels came in at ₦322 billion. Meanwhile, in the secondary market, sell-side activity at the short end of the curve drove yields higher by 3bps on average in the bond market. However, buy-side action persisted across the curve in the NTB and OMO space, as yields contracted by 9bps and 10bps respectively.

Currency: At the NAFEM, the Naira depreciated by ₦2.81 w/w to close at ₦1485.53 per dollar.

Domestic Economy: In May, headline inflation rose by 26bps to 33.95% y/y (Apr’24: 33.69% y/y). The outturn was 55bps below the Bloomberg consensus estimate of 34.50% y/y (Vetiva: 34.28% y/y). We attribute the mild uptick to the fiscal intervention in the commodity market, and relative stability in the exchange rate and prices of petroleum products. Thus, headline inflation moderated to 2.14% m/m (Apr’24: 2.29% m/m), its slowest in 7 months. There are clear indications that inflation peaked in Q2’24. While most leading indicators point to a sustained ascent in June, base effects and relative stability in petroleum prices point to a decline. We regard the divergence in rural and urban food inflation as a warning sign of inflation outturn. Thus, we see room for a modest 2bps uptick in inflation to 33.97% y/y in June. We expect inflation to trend downwards thereafter. While we will not be surprised at a moderation, we reduce our average FY’24 inflation forecast by 20bps to 32.8% y/y in 2024 (2023: 24.50% y/y).

Global: U.S. stock indices recorded marginal gains this week owing to buy interests in Nvidia; however, on Friday, Nvidia lost its positive momentum and began to decline. Also, the U.S. fed comments about holding rates constant longer than expected spooked the market, which led to a marginal decline in the S&P 500 on Friday.

Meanwhile, in the U.K., the FTSE 100 closed the week about 1% higher, which comes after five consecutive weeks in the red as it slipped back from the previously elusive record highs it notched up.

Elsewhere, Asian stocks fell on Friday as new data showed weakness in the U.S. economy, and Treasury yields ticked higher on hawkish comments from Federal Reserve officials. Regional losses remained capped amid optimism that a slowing U.S. economy would help keep inflationary pressures in check.

What will shape markets in the coming week?

Equity market: We expect the market to trade in a rangebound manner, albeit with a bearish tilt, as investors retain a risk-off stance towards the equity market.

Fixed Income:  In the next trading session, we expect a similar trading pattern in the NTB space. Meanwhile, in anticipation of a moderation in inflation in H2’24, we see investors positioning ahead in the bond market.