September 2022 Inflation – Headline inflation rises, albeit softer pressures
What shaped the past week?
Global: With Q3’22 earnings season in full swing, global investors continued to digest and react to the latest earnings releases of listed companies on the world’s major indices. Starting in the Asian-pacific region, rising tensions between the United States and China, over new trade restrictions put in place by the U.S., to undermine the Chinese semiconductor industry, remains in focus for investors given how critical semiconductors are to the global economy. The Shanghai Composite sank 1.98% w/w, while the Hang Seng index sank 2.27% w/w, on the back of increased sell-side activity from foreign investors. Moving to the European region, where investor focus on the latest data releases out of the region, key markets closed higher w/w, despite rising inflationary pressures across the region. Starting in the U.K. Prime Minister Liz Truss announced her retirement from the position, following backlash over measures in her mini budget, most of which her government later reversed. For the week, the German Dax climbed 2/13% w/w, while the FTSE 100 and French CAC gained 1.94% and 1.62% respectively. Finally, North American equities closed the week higher, amid softer Q3’22 earnings and economic concerns. Snap recorded a net loss OF $359 million for Q3’22, worsening by 400% compared to the net loss of $71.96 million y/y. On the other hand, American Express Company saw its revenue in rise 24% y/y to reach $13.6 billion. For the week, the NASDAQ composite was the best performer in the region, up 3.38% w/w, while the Dow Jones and S&P 500 rose 3.06% and 2.84% respectively.
Domestic Economy: The National Bureau of Statistics reported that the disruptions in the food supply, expensive imports, and high production expenses caused headline inflation to rise to 20.77% y/y in September. In light of the harvest season, however, month-on-month headline inflation slowed to 1.36%. Similarly, food inflation benefited from the harvest, falling 55bps m/m. The food index did, however, increase year-on-year to 23.34% due to higher prices for bread, cereal, and oils. Core inflation rose to 17.60% y/y due to pre-existing energy pressures, while the index remained steady at 1.59% m/m due to the trade-off between diminishing energy pressures and persisting currency pressures. We expect annualized headline inflation to rise in the short term due to underlying energy shocks and recent flooding incidences.
Equities: The Nigerian equity market ended the week deep in the red (-6.67% w/w), as sell-offs in AIRTELAFRI weighed on the market’s overall w/w performance. The counter recorded steep selloffs this week, sinking 27.10% w/w, to settle at N1312.20/share; the counter, which was the most capitalized stock on the NGX, was the main catalyst of index’s red w/w close. Meanwhile, a review of the sectoral performances, revealed a mixed performance, with the Banking and Industrial Goods sectors extending their weeks of green closes to a second one, whereas the Oil and Gas and Consumer Goods sectors closed lower for a second consecutive week. In the Banking space, broad-based buy-side interest help the index rise 1.15% w/w; likewise, in the Industrial Goods space, interest in BUACEMENT again was the primary driver of gains recorded in the space. On the other hand, losses in the oil marketing space dampened the performance of the Oil and Gas sector; TOTAL lost 6.68% w/w to settle at N197/share. Finally, moving to the consumer goods space, losses recorded in brewer NB, was the main catalyst behind the sector’s weak w/w close.
Fixed Income: With system liquidity largely constrained throughout the week, sell-side activity gained momentum over the course of the week, with investors digesting the latest bond auction results. The DMO through the CBN, had N150 billion on offer and sold N107 billion across the 5-Year, 10-Year, and 15-Year tenors, at stop rates of 14.50%, 15.00%, and 16.00%. As a result, this led to a repricing in the bonds market, as yields on benchmark bonds rose 40bps w/w on average. As earlier mentioned, system liquidity was tight throughout the week, this weighed on buy-side activity across the NTB segments of the market; yields across the NTB space rose 5bps w/w on average across the curve.
Currency: The Naira depreciated N2.71 w/w at the I&E FX Window to ₦441.67.
What will shape markets in the coming week?
Equity market: As expected, sectoral performance closed mixed amid demand for banking counters as the top 4 traded names by volume (FIDELITYBK, ZENITHBANK, GTCO, and ACCESSCORP) were all banking names and we expect this trend to filter into next week’s trading sessions.
Fixed Income: We expect the market to kick off the week on a relatively tepid note, on the back of tight system liquidity. Meanwhile, we foresee another mixed session in the bonds space, albeit with a bearish tilt.
September 2022 Inflation – Headline inflation rises, albeit softer pressures
The uptrend in inflation persisted in September, reaching 20.77% y/y (Aug’22: 20.52%). The National Bureau of Statistics attributes the uptick in y/y inflation to disruptions in food supply, local currency depreciation, and general increase in the cost of production. Despite the uptick, the outcome was slightly lower than our in-house estimate of 20.84% y/y and Bloomberg Consensus estimate of 21.00%. From our perspective, the lower-than-expected print can be linked to the cooling impact of harvest season and the easing of earlier energy shocks. This is evident in the substantial decline in month-on-month inflation to 1.36% (Aug’22: 1.77% m/m), the lowest m/m outcome since November 2021.
Food inflation continues the harvest ride
On a month-on-month basis, food inflation fell 55bps to 1.43% m/m (Aug’22: 1.98% m/m). This moderation was driven majorly by the harvest season and the absence of new shocks. On a year-on-year basis however, food inflation rose by 22bps to 23.34% y/y in September (Aug’22: 23.12% y/y), as underlying energy shocks keep food prices elevated. The food items that influenced the surge include bread & cereals, potatoes, yams, tubers, oils, and fats. A look at August 2022 food price watch data revealed that the prices of these food items are up by over 30% y/y – bread and cereals (+33.12%), and yams (+32.13%), as well as oils (+34.08%).
Core inflation ticks up in September
Core inflation increased by 40bps on a year-on-year basis in September to 17.60% y/y (Aug’22: 17.20% y/y). The uptick in the core index was triggered by the prices of gas, liquid and solid fuels, and transport. Despite easing energy pressures, persistent currency pressures kept core inflation unchanged at 1.59% m/m (Aug’22: 1.59% m/m).
Outlook: Ravaging floods pose new risk as energy shock subsides
In October, we see room for a sustained uptick in headline inflation to 21.37% y/y. We note that the rising incidence of flooding across the country poses a threat to our outlook, as both farms and storehouses were devastated by the floods. According to news sources, floods have occurred in 29 out of 36 states of the federation. We expect the impact of the floods to reflect fully in outer months, as we await guidance on the impact of the floods on consumer prices. In the meantime, we maintain our average 2022 inflation forecast of 18.83% y/y (2021: 16.98%).