November 2021 Inflation review - Base effects override festive pressures

What shaped the past week? Global:

Global markets traded mixed this week as investors digested monetary policy decisions from several central banks. Starting in Asia, major markets in the region traded mixed w/w, with the Shanghai Composite, and Nifty 50, losing 0.93%, -3.00% respectively, while the Nikkei-225 gained 0.38% w/w after the Bank of Japan decided to maintain rates. Moving to the European region, amid the Bank of England’s decision to hike rates, fears of rising omicron cases and the ECB’s decision to hold rates, stocks traded lower this week. The French CAC lost 0.32% w/w, while the German Dax and London FTSE-100 also lost 0.24% and 0.15% w/w respectively. Finally, moving to the U.S., major indices traded lower at the start of the week but rallied after the Feds decided to double the pace of tapering on bond-buying and announced more aggressive steps to fight rising inflation. At the time of print, the Dow Jones was the best performer w/w, up 0.40%, while the Nasdaq and S&P indices lost 1.51% and 0.40% respectively.

Domestic Economy:

According to the National Bureau of Statistics, headline inflation fell to 15.40% y/y in November, 59bps lower than the previous month, owing primarily to the high base effects reinforced by the retention of fuel subsidies. While food inflation decreased to 17.21% y/y, induced by a high base and the harvest season, frontloading ahead of the festive season prompted a surge in m/m inflation. On the other hand, core inflation accelerated by 61bps to 13.85% y/y. While we see the recommendations of the World Bank - fuel subsidy removal and taxes on soft & alcoholic drinks - tilting pricing risks to the upside, we see electioneering subduing these risks as the economy enters a pre-election year.

Equities:

The equities market returned to positive territory this week rising 1.12% w/w. The Consumer goods sector closed the week as the best performer, rising 0.68% w/w, driven by interest in DANGSUGAR (+6.58% w/w), CHIPLC (+5.45% w/w), and UNILEVER (+1.14% w/w). The next best performer was the Industrial goods sector, gaining 0.38% w/w as demand for DANGCEM (+1.19% w/w) help offset losses in WAPCO (342bps w/w). Meanwhile, the Banking space, closed the week as the worst performer -1.82% w/w on the back of losses in GTCO (340bps w/w) and ACCESS (109bps w/w). Similarly, the Oil &

Gas sector sank -0.57% w/w due to sell-side activity in OANDO; (467bps w/w), and ETERNA (431bps w/w).

Fixed Income:

Trading in the fixed income space was largely quiet, amidst weak sentiment in the fixed income space. We observed mild-buy activity across the bond and OMO spaces, while the NTB segment remained flat w/w. Beginning with the OMO segment, mild demand across the curve caused average yields to decline 3bps w/w. Meanwhile, minimal activity in the NTB space resulted to a flat close w/w. Finally, in the bond market, trading was tepid but demand at the mid-end of the benchmark curve caused yields to decline 1bp w/w

Currency:

The Naira lost N13.92 at the I&E FX Window to close at 430.00

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

The market was able to recover from the bearish sentiment after DANGCEM reverted to 255 price level today. We still expect market to trade mixed at the beginning of the new week amid minimal activity levels

Fixed Income:

In the coming session, we expect the current weak sentiment to persist in all three segments of the secondary market, as investors remain focused on the FGN’s Sukuk issuance.

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

November 2021 Inflation review - Base effects override festive pressures

According to the National Bureau of Statistics, inflation trended downwards for the eighth consecutive month in November. Falling to 15.40% y/y (Vetiva: 15.24% y/y), headline inflation continues to benefit from the decision to retain fuel subsidies and the harvest season. On a monthon-month basis however, inflation rose at a faster pace (Dec’21: 1.08% m/m), amid the frontloading of household items ahead of the festive season.

Food inflation decelerates despite frontloading

Over the past four months, food inflation fell faster than headline inflation as base effects pulled food inflation downwards. In November, food inflation fell to 17.21% y/y, 21bps above our forecast (Vetiva: 17.0% y/y). On a month-onmonth basis, food inflation rose at a faster pace (Nov’21: 1.08% m/m), substantiating our views on demand frontload ahead of the festive season. While food inflation fell to a 14-month low in Nigeria, global food inflation rose to an all-time high in November as climate change held supply bound amid teeming import demand. While domestic intervention efforts alleviate the impact of global headwinds in Nigeria, insecurity continues to throw a spanner in the works of the apex bank.

Core inflation maintains zig-zag movement

In November, core inflation rose to a 4-year high of 13.85% y/y. For the past seven months, core inflation has remained stuck within the 13% region, oscillating between 13.0% and 13.7%. We attribute this to the resuscitation of the trade sector, which has improved supply, amid a weakening Naira, which has dragged purchasing power. However, the relative stability in the parallel market since July has provided some respite for core prices.

Proposed reforms pose upside risks in the coming year

In the ongoing month, we see festive pressures contributing to a build-up in inflation on a month-onmonth basis. However, we believe it is insufficient to lift headline inflation beyond current levels. Thus, we see inflation falling further to 14.73% y/y in Dec’21. That said, we retain our average forecast of 16.91% y/y for 2021 (2020: 13.21% y/y). Food inflation could fall towards 16.05% y/y in December, despite increased demand from year-end festivities. We expect the harvest season to continually provide support in the near term, barring any significant shock that could aggravate food prices. Thus, we expect food inflation to average 20.4% in 2021 (2020: 16.11% y/y).

Core inflation, on the other hand, could keep oscillating as the reintroduction of taxes on Liquified Petroleum Gas prices contribute to pressures on the Household, Water, Electricity, Gas and other fuels (HWGS) segment. Thus, we expect core inflation to print 13.51% in Dec’21, leading to an average of 13.11% y/y in 2021 (2020: 10.29% y/y).