Focus of the week: February 2024 Inflation – Inflation nudges to 31.7%, a new 27-year high

Headline inflation rose by +180bps to 31.70% y/y in February (January: 29.90% y/y). This outturn is a 40bps print above Bloomberg consensus’ estimate of 31.30% y/y (Vetiva: 31.12% y/y). We attribute the surge to sustained security challenges in food producing states. On a monthly basis, headline inflation rose to 3.12% m/m (Jan’24: 2.64% m/m) driven primarily by the food basket.

Food inflation: Insecurity continues to drive up food prices

Food inflation surged to a new 19-year high of 37.92% y/y (Jan’24: 35.41% y/y) on the back of sustained pressures on the prices of both farm produce (+68.27% y/y) and processed foods (+32.85% y/y). On a monthly basis, food inflation rose by 58bps to 3.79% m/m (Jan’24: 3.21% m/m), indicating underlying pressures on the food basket. This can be linked to the surge in farmgate prices (Feb’24: +7.34% m/m; Jan’24: +4.78% m/m). According to the Famine Early Warning Network System, conflict intensified throughout the dry season as government forces heighten counter-insurgency efforts amid persisting inter-faction fighting. This conflict, coupled with displacements of thousands of individuals, has limited access to floodplains for dry season cultivation activities.

Core inflation: Lower volatility in PMS prices moderate monthly outturn

Core inflation moderated to 2.08% m/m in February (January: 2.13% m/m). We attribute this to sticky increase in fuel prices. With national PMS prices receding by 0.5% m/m in January, pressure on non-food prices eased m/m. This is despite the sharp volatility in the foreign exchange market, which eventually abated late into the month. On annualized basis, core inflation rose by 123bps to 24.67% y/y in February

(Jan’24: 23.44% y/y).

Outlook: Festivities could spice up inflation in March

In March 2024, we see reduced exchange rate volatility and lower energy price increases as tailwinds for inflation. However, insecurity could continually pose a headwind to inflation from the supply side, while Ramadan activities could serve as a demand shock to food prices. Thus, we see inflation rising further to 32.62% y/y in March. With the disruption to dry season cultivation activities and the surprise acceleration in the month of March, we raise our average inflation estimate to 34.8% y/y in 2024 (2023: 24.50% y/y).

Monetary outlook: Price surge could call for additional rate hikes

On March the 20 – 21st, the Cardoso-led MPC will hold its second meeting of the year. After delivering a jumbo 400bps rate hike in February, we expect the Committee to retain its hawkish renditions as inflation surges beyond 30%. Already, short-term yields have risen above 20% in recent primary market auctions. This combined with other policies has made volatility in the foreign exchange market to recede. Nevertheless, due to the lag in monetary policy transmission, these rate actions may not impact inflation just yet. Thus, we do not rule out further rate hikes, especially as the Bank pivots to inflation targeting. Inflation targeting implies the Central Bank is bent on moderating inflation towards its desired target of 21.4% despite the fluctuations in output growth that could ensue from high and rising interest rates

What shaped the past week?

Equities: Profit taking in bellwether stocks such as MTNN (-12.25% w/w), NASCON (-7.81% w/w), NB (-6.04% w/w), DANGSUGAR (-3.67% w/w) and NESTLE (-0.11% w/w) dragged the local market south to close at -0.42% w/w.  However, gains in UBA (+11.11% w/w) and FBNH (+4.46% w/w) lifted the banking index by 4.19% w/w.  Similarly, price appreciation in BUACEMENT (+1.56% w/w), and OANDO (+6.52% w/w) lifted the Industrial goods (+0.57% w/w) and Oil & Gas (+0.30% w/w) indices respectively.

Fixed Income: System liquidity improved this week, hence, funding pressure eased, as the OPR compressed by 360bps to close at 26.22%. Similarly, in the NTBs space, bullish sentiments dominated as the yield on the 91-, 182-, and 364-days bills compressed 3bps, 10bps, and 14bps, WoW, respectively. Meanwhile, in the bond space, sell-side activity dominated as investors sold down on their bond holdings in anticipation of another rate hike in next week’s MPC meeting.

Currency: At the NAFEM, the Naira appreciated by N234 w/w to close the week at N1,431.49 per dollar.

Domestic Economy:

On March the 25 – 26th, the Cardoso-led MPC will hold its second meeting of the year. After delivering a jumbo 400bps rate hike in February, we expect the Committee to raise its benchmark rate by 200bps  to 24.75%, especially as inflation surges beyond 30%. Already, short-term yields have risen above 20% in recent primary market auctions. Following the release of the statements by the members of the MPC, we understand that tightening could persist until inflation begins to decelerate. Although the Deputy Governor of the CBN expects inflation to moderate from May 2024, we expect the Committee to remain hawkish in March.

Global: This week saw a continuation of the cautious mood in global markets, with inflation data taking center stage, hence, US stocks ended the week lower after hotter-than-expected inflation data caused a stir. The surprise inflation numbers led investors to reassess their expectations for the Federal Reserve’s monetary policy. The hope for interest rate cuts this year may be tempered as the Fed focuses on combating inflation.

In Asia, China’s stock markets took a tumble as hotter-than-expected inflation data stoked investor anxieties. The Shanghai Composite Index and the CSI 300, which tracks leading A-shares listed in Shanghai and Shenzhen, both ended the week significantly lower. In a landmark move, the Bank of Japan (BOJ) ended its era of negative interest rates on March 19th, 2024. This decision, the first rate hike in over 17 years, sent ripples through the Japanese economy and financial markets as the NIKKEI rose by 5.6% WoW.

In Europe, stocks managed to notch up gains for the eighth consecutive week, with several markets reaching record highs. This bullish sentiment was likely fueled by dovish signals from central banks, particularly the European Central Bank (ECB).

What will shape markets in the coming week?

Equity market: The market posted rebounds after three straight sessions of declines at the start of the week. Meanwhile, demand in the banking sector was not sufficient in cancelling out losses recorded in other sectors, as the ASI recorded a WTD loss of 42bps. Given the bullish close in banks this week, we might see profit taking action at the start of the week, while market trades tepid in anticipation of the second MPC meeting of the year.

Fixed Income: Looking ahead, we expect the decision of the CBN MPC meeting expected to hold on the first two working days of next week, to determine the direction of the market.