March 2021 Inflation - Pandemic-shock lingers as inflation touches 4-year high

What shaped the past week?

Global: Sentiment across the global equities space remains mixed, with moderate gains observed in some major markets. Investors’ focus this week was on a slew of economic data releases across regions. Some of these data include inflation and trade balance numbers for the EU region as well as retail sales and industrial production numbers from the U.S. and China for March. Starting in Asia, sentiment in the region was largely mixed, with the Shanghai Composite easing 70bps w/w, while the South Korean Kospi rose 213bps w/w. Trading in the region ended the week on a positive note, following the release of China’s retail sales and industrial production numbers for March. Investors also reacted positively to the nation’s Q1’21 GDP growth, which printed at 18.50% (Q1’20: -6.8% and Q4’20: 6.5%). Meanwhile, European markets edged higher w/w, amid virus vaccine discussions. European Commission President, Ursula von der Leyen stated that EU would be getting 50 million doses of the Pfizer vaccine. Finally, in the U.S., the Census Bureau on Thursday revealed that retail sales jumped 9.8% in March; in addition to this, investors responded positively to the latest Q1’21 earnings releases for notable banks in the country.

Domestic Economy: The National Bureau of Statistics confirmed the nineteenth consecutive rise in headline inflation to 18.17% y/y in March. This is on the back of the continued pass-through impact of currency weakness and higher energy prices to commodity prices. For the tenth consecutive month, all segments that made up the index recorded higher inflation outcomes. Being the major driver, food inflation rose to a new all-time high of 22.95% y/y, reflecting the impact of pre-existing structural impediments and the side effects of the short-lived food blockade and fuel price hike. Core inflation, on the other hand, soared to 12.67% weighed down by Naira depreciation and higher energy prices. In the ongoing month, we expect the uptrend in inflation to persist, with demandpull inflation from the Naira 4 Dollar policy as well as Easter and Ramadan festivities acting as new pressure points.

Equities: The local equities market eased 15bps w/w, as broad based loses across the index weighed on its performance. The banking space was one of the worst performers this week, sinking 151bps w/w. Meanwhile, the Consumer Goods space also closed in the red, dipping 61bps w/w as losses in mid-cap stocks across the space weighed on its performance. Moving to the industrial goods space, the sector ended the week as the lone gainer across the space, rising 95bps w/w. Finally, in the Oil and Gas space, losses in OANDO weighed on the sector’s performance which lost 29bps w/w. For the week value traded and volume traded decreased 14.4% and 5.06% respectively w/w.

Fixed Income:

On Wednesday, the Central Bank of Nigeria (CBN) conducted an NTB auction where it offered 65.31 billion and sold

232 billion across the 91DTM, 182-DTM and 364DTM maturities at stop rates of 2.00%, 3.50%, and 9.00% respectively. Meanwhile, investors across the fixed income space maintained their mixed sentiment across the market. Investors in the bonds space remained sell-side driven at the across the curve. Yields on benchmark bonds rose 130bps w/w on average. Likewise, yields in the OMO space rose 47bps w/w on average, due to sell-side interest at the mid-long end of the OMO curve. Finally, in the NTB space, yields rose 7bps w/w, as investors remain sell-side inclined at the mid-long end of the NTB curve.

Currency: The Naira depreciated N2.00 w/w at the I&E FX Window to close at

411.00 and while closing flat w/w at 486.00 against the dollar in the parallel market.

What will shape markets in the coming week? Equity market:

We expect next week’s activity to follow the same pattern observed in the last few sessions, with mild sell offs followed by rallies. We anticipate similar levels of activity in the market, with the banking sector likely to dominate trading once more. Despite this, we do not see any improvement in investor sentiment, as most remain on the sidelines in anticipation of first quarter earnings releases. However, we do recognize the possibility of external, unforeseen shocks driving increased activity.

Fixed Income:

We expect the market to open the week on a mixed note, as we foresee investor focus shifting to this month’s bond auction. Meanwhile, we forecast similar sell-side actions in the OMO market, as investors are likely to remain swayed by developments in the global macro space.

Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week

March 2021 Inflation Pandemic-shock lingers as inflation touches 4-year high

Going by the recent release from the National Bureau of Statistics, consumer prices are yet to recover from the domino effects of the pandemic, as revealed by the recent ascent in headline inflation to 18.17% y/y (Vetiva: 18.01% y/y) in the month of March. Meanwhile, previous pump price adjustments continue to take its toll on commodity prices.

Short-term shocks fuel food inflation

The double whammy of the short-lived food blockade and fuel price hike contributed to a 1.90% m/m jump in food inflation (Feb’21: 1.89% m/m). We recall a blockade was declared on the Southern region of the country by the Northern Amalgamated Union of Foodstuff and Cattle Dealers. Despite the prompt intervention to nip the situation in the bud, food inflation rose to a new high of 22.95% y/y (Vetiva: 22.84% y/y) as pre-existing pressure points - weather conditions, tensions in food-producing areas and higher logistics costs – continued to stoke food prices. Imported food inflation rose 8bps higher to 16.86% y/y, reflective of the impact of FX restrictions on food imports.

Non-seasonal inflation continues to surge

All segments of the Consumer Price Index recorded higher index readings for the tenth consecutive month, as the pandemic-induced currency weakness and pump price adjustments kept core inflation elevated. As a result, core inflation rose to 12.67% y/y (Vetiva: 12.70% y/y). Inflation continues to rise beyond the Central Bank’s target across board, as all sub-segments recorded at least a 10% rise in inflation, with health inflation taking the lead. The pandemic-induced rise in global medical inflation has trickled down to Nigeria’s health inflation (Mar’21: 15.77% y/y). Meanwhile, other segments such as the transport (14.73% y/y), clothing (12.90% y/y) and furniture (12.23% y/y) segments continue to feel the heat of cost-push price pressures.

Low-base effect, religious activities to further drive inflation higher

With respect to energy prices, we recall PMS prices were adjusted downwards in April 2020, in line with deregulation efforts as oil prices plummeted to low levels and consequently created a low base for core prices. However, according to recent news reports, the Federal Government could bear the cost of subsidies for the next six months, even as oil prices remain at pre-pandemic levels. Despite this clarification, we expect the low-base effect to drive inflation higher in the current month, informing our expectations of 18.92% y/y in April. Thus, we raise our average headline inflation forecast to 19.04% for 2021 (2020: 13.21% y/y).

Customary with Easter and Ramadan festivities is the rise in inflation expectations. While prices may revert to earlier levels, the seasonal rise in prices could contribute to higher food inflation. With likely pent-up demand for fruits and vegetables as a result of the Muslim fast, we anticipate a further uptick in food inflation to 23.74% y/y this month. This translates to an average food inflation of 23.50% y/y for the current year (2020: 16.11%).

While the decision to keep fuel prices flat trumps higher inflation expectations, core inflation could still reel from currency pressures and a relatively higher fuel price (on a y/y basis). In addition, demand-pull inflation from the ‘Naira 4 Dollar’ policy could also swell inflationary pressures. Tying both together, we expect core inflation to rise to 12.78% y/y this month, amounting to a full year average of 13.04% y/y in 2021 (2020: 10.29%).

Mounting inflationary pressures could keep the apex bank on its toes in the next MPC meeting. Once the next GDP release confirms a recovery from the pandemicinduced recession, we expect price stability to attract greater attention in future MPC meetings, as inflation remains stuck in the teens.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.