January’s 16.47% inflation proves analysts on tap with projections
Analysts say despite rising inflation and positive market rally, marginal profit taking supported by robust liquidity of the system is highly expected
SWINGING IN LINE WITH EXPECTATIONS of economic analysts who projected January inflation to hang around the 16 per cent band (16.2% to 16.60%), the headline inflation accelerated again in January to 16.47 per cent year on year from the 15.75 per cent recorded in the previous month (December 2020) and standing as the highest since 2017 according to recent inflation report from the National Bureau of Statistics (NBS), Nigeria.
The upswing in the January consumer price index (CPI) can be attributed to the increasing rate of the food index to 20.57 per cent from 19.56 per cent in the prior month and indicating the highest rise in the index since 2009. Thus, there was sharp increase across non-food items, even as food pressures were unabating in the face of partial land border reopening amid lingering insecurity challenges in major farming areas and continued foreign exchange difficulties.
Consequently, during the month under review, price increases were recorded across food items like bread and cereals, potatoes, yam and other tubers, meat, fruits, vegetable, fish and oils and fats. Also, the imported food inflation rate rose to 16.72 per cent year on year from 16.65 per cent year on year in the previous month. As such, analysts have asserted that food prices will remain elevated due to the persistent structural impediments and aided by the base effect which bolstered recent higher readings.
However, the foregoing on the persistent increase in the headline inflation, it can be recalled that the CBN monetary policy committee (MPC) at their last January assembly where it left all policy parameters unchanged, noted that the increase in food inflation was primarily due to logistics challenges resulting from insecurity across the country, while the rise in core inflation was driven by the deregulation of the downstream oil sector and the upward revision of electricity tariff which is systematically biting hard on Nigerians. Meanwhile, it further noted that as output spring back, shored up by government efforts, inflationary pressure will probably begin to moderate in the near-term. However, underlying worries in the oil market and the likely second wave of the COVID-19 pandemic may pose some downside risks to this projection by the committee.
Inflation versus the markets: marginal gains expected with sustained selloff
Further revelation from the inflation data which has seen a momentous rise for the seventeenth successive month, hitting a forty-fivemonth peak has marked some pointers in the financial and fixed incomes markets.
In recent times, market investors have begun to pull back on equities due to a reversal of yields from their record lows and liquidity in the financial market which has stayed elevated. But, noticeably, there was an upward re-pricing of maturities in the fixed-income market, leading to an increase in the average Bond and Nigerian Treasury bill yield to 6.85 per cent and 0.54 per cent respectively, from 4.99 per cent and 0.37 per cent in the previous month. Outstandingly, it can be seen that at the last Primary Market Auction (PMA) in February 2021, the stop rate on the 364-day T-bills rose to 4.0 per cent.
However, analysts have asserted that despite the positive rally in the market in recent times and the rising inflation numbers, marginal profit taking supported by robust liquidity of the system is highly expected as investors will tend to act or err cautiously.
“Notwithstanding, we expect to see marginal gains in the near term, supported by a robust system liquidity and the release of full-year corporate earnings scorecards. In our view, we expect sustained selloffs in the near term amid pockets of the bargain hunting activities as investors await the outcome of the February Bond auction,” analysts at Greenwich Merchant Bank asserted.
The Nigerian local equities market opened the year solid as the excitement from 2020’s rally helped sustain buying interests while the market broadened its rally with the benchmark all-share index (ASI) advancing by 5.3 per cent year to date to close at 42,412.66 points. Though, the positive sentiment helped push the year to date return to as high as +10.69 per cent by January 20, 2021, market gains calmed at the end of the month resulting in a close of +7.46 per cent on a year to date basis.
Finally, as investor sentiment continues to be mixed, it is expected that the FY 2020 profit from companies begin flowing into the market from February till the end of the first quarter of 2021. Also, in line with the expectations of participants, decent earnings from the bellwethers and the hunt for dividend are expected to sustain the sentiments of investors for two years and consequently prodding buying interests.