January 2022 Inflation - Headline inflation reverts to trend

What shaped the past week?

Global: Following two consecutive weeks of gains across the global equities space, global investors were largely sell-side driven this week. In the Asia-pacific region, sentiment was mixed with the Shanghai (+0.80% w/w) and Australian (+0.06% w/w) markets closing in the green, while the Hong Kong (-2.32% w/w) and Japanese (-2.07% w/w) markets closed in the red. For Japan specifically, investor sentiment in the country was largely downbeat following the release of some macro numbers. On Tuesday, the country released the GDP report for Q4’21 which showed that gross domestic product expanded by 5.4% y/y, although on the other hand, Japan’s industrial production index printed at 100.4 in December, falling 1% m/m. Moving to the Eurozone, bearish sentiment dominated the region as the tension between Ukraine and Russia, remained in focus, raising uncertainties amid investors. Still in the region, the still-present coronavirus pandemic as well as supply chain and labor challenges have prompted the European Central Bank (ECB) to estimate that the Eurozone’s economy would “remain subdued” in the first trimester of the year. For the week, the German DAX eased 1.92%, while the French CAC and London FTSE were down 0.87% w/w and 0.60% w/w respectively. Finally, in the U.S., the U.S. trade agency has added Alibaba and Tencent to its “Notorious Markets List” saying that they engage in or facilitate substantial trademark counterfeiting or copyright piracy”. This addition could potentially impact their performances in the stock market. Meanwhile, major indices in the region traded lower w/w amid investor wariness concerning geo-political tensions in Europe. Consequently, the S&P 500, Nasdaq Composite, and Dow Jones indices were down 0.60%, 0.58% and 1.27% week to date at time of writing.

Domestic Economy:

According to the National Bureau of Statistics, headline inflation fell slightly to 15.60%. This was consistent with our expectations, as we noted that there were no strong drivers to keep inflation above current levels. The food segment was primarily responsible for the downward trend, as lower festive demand reduced pricing pressures. Core inflation, on the other hand, remained at elevated levels due to the weakness in the Naira. While the decision to retain subsidies for 18 months, presents a stronger case for further moderation in inflation, the ongoing fuel scarcity could slow down the pace of disinflation in February.

Equities: Investor sentiment across the equities space took a negative turn this week, as the NGX eased 13bps w/w. Starting in the Banking sector, the space eased 74bps w/w, driven by sell-side pressure observed in ACCESS (-1.43%) and UBA (-1.72% w/w). Moving to the Oil and Gas space, the easing of brent crude prices weighed on sentiment in the sector, as it lost 345bps w/w, weighed down by losses in SEPLAT (-5.88% w/w). Likewise, the Industrial Goods space, also suffered a downturn in sentiment as the sector lost 0.32% due to losses in WAPCO (-1.31% w/w). Finally, the Consumer Goods space reversed its fortunes, ending the week as the sole gainer rising 345bps w/w; its performance was fueled by persistent buyside interest in GUINNESS (+15.70% w/w).

Fixed Income: It was a week of positive trading across the fixed income space, as investor focus shifted to the monthly bond auction held on Wednesday. The Debt Management Office (DMO) of Nigeria, offered N150 billion across the 10-year and 20-year tenors, while selling 297.39 at stop rates of 10.95% and 13.00% respectively. Meanwhile, across the bonds space broad based interest across the bonds curve, saw yields ease xxbps on average w/w; notably, the yield on the 13.53% FGN-MAR-2025 and 12.50% FGN-JAN-2026 papers dropped 129bps and 72bps to settle at 10.47% and 11.49% w/w. Moving to the OMO and NTB spaces, pockets of demand over the course of the week saw yields ease 14bps and 10bps respectively across both spaces.

Currency: The Naira gained N0.33 at the I&E

FX Window to close at 416.00

What will shape markets in the coming week?

Equity market: We saw a slight recovery in the banking space today, however, market traded bearish as most of the sectors closed in the red. We expect the new week to start off with mixed sentiment, amid cherrypicking activities.

Fixed Income: In the coming week, we expect the bond market to trade on a tepid note ahead of Wednesday’s bond auction, while activity in the T-bills and OMO markets should pick up given current system liquidity levels.

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.

January 2022 Inflation Headline inflation reverts to trend

In line with our estimates, headline inflation fell slightly to 15.60% y/y (Vetiva: 15.60%) in January. As we posited in our December 2021 inflation report, there were no strong reasons for headline inflation to trend higher in January. We also note that the decision to retain subsidies for 18 months doused inflationary expectations. Most importantly, the fading festive demand fuelled a lower m/m print of 1.47% (Dec’21: 1.82%) in January.

Food inflation cools as festive demand subsides

Food inflation fell by 24bps to 17.13% y/y in January (Dec’21: 17.37% y/y). The decline in food inflation was anticipated, especially due to the decline in demand following the festive season. On a monthly basis, food inflation fell to 1.62% m/m, 57bps lower than the record level of 2.19% m/m seen in December. In January however, the rise in the food index was caused by increases in the price of staple items such as Bread, Tubers, Soft drinks, Fat & Oil, and fruits. Higher soft drink prices could be as a result of the excise duties on non-alcoholic drinks, which was easily passed on to final consumers.

Core inflation stays flat

Moving on to the core segment, we note that core inflation remained unchanged at 13.87% (Dec’21: 13.87%). However, m/m core inflation surged to 1.25%, 13bps higher than December’s figure of 1.12%. The highest pressures on the core segment were recorded in the prices of Electricity, Liquid fuel, cleaning, and clothing.

Fuel scarcity could slow down the pace of disinflation

An obvious risk, which has surfaced in recent times, is the higher cost of Premium Motor Spirit (PMS) occasioned by the importation of sub-standard PMS. Reports show the inelastic commodity is selling at significant premiums above the recommended pump price of 165/litre as the Nigerian National Petroleum Corporation (NNPC) moves to clean up the PMS saga. While this event is inflationary, we premise our estimate on timely intervention by the NNPC. While we believe this could lead to a higher m/m outturn in February, we expect the event to slow down the pace of deceleration in headline inflation to 15.44% y/y. Should the fuel scarcity persist throughout February, headline inflation could remain at a bear case scenario of 15.60% y/y.

Non-alcoholic food inflation could be unsettled by the implementation of taxes on non-alcoholic beverages. While this standalone factor is not strong enough to drive the entire basket, the passthrough of higher transport costs (because of fuel scarcity) to food prices could be a greater source of worry in the near term. While fuel scarcity could increase food inflation on a m/m basis, we still see room for a slight decline in food inflation to 17.0% y/y in February.

Despite the nascent inflationary pressures, we expect the Monetary Policy Committee (MPC) to maintain its accommodative posture in future meetings. The Committee could also consider the outcome of FY’21 GDP results and want to consolidate on its pro-growth policies thus far. We have revised our Q4’20 GDP estimates downwards to 2.5% - 3.0% y/y (previously 3.22% y/y). Therefore, we expect FY’21 GDP to remain within the bands of 2.8% and 3.1% y/y.

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.