Tuesday, July 20,
2021 08:00 AM / by Coronation Research/ Header Image
Credit: Coronation Research
Last week, the National Bureau of Statistics (NBS) Consumer Price Index (CPI) report for June 2021 showed a moderate decline in the headline inflation to 17.75% from 17.93% recorded in May 2021. We attribute the slowdown to the effect of the high base from the previous year. The trend over the last three months suggests that, barring any significant shocks, inflation hit its peak in March (18.17%).
Last week, the exchange rate at the Investors and Exporters Window (I&E Window) appreciated by 0.33% to close at N410.38/US$1. In the parallel (or street) market, the Naira weakened by 0.20% to close at N506.00/US$1. Currently, the gap between the I&E window and the parallel market stands at 23.30%. Last week, the CBN's reported FX reserves fell by 0.01% to US$33.10bn, the lowest level since October 2017. At levels of liquidity in the I&E Window and NAFEX markets well below what they were early last year (before the divergence between the NAFEX and parallel rates), we expect the parallel and the I&E Window rates to remain under pressure over the months to come.
Last week, trading in the secondary market for FGN bonds remained bearish. The yield of an FGN Naira-denominated bond with 10 years to maturity was up by 20bps to 12.65%, the yield on the 7-year bond fell by 1bp to 12.35%, while the yield on the 3-year bond fell by 10bps to 11.10%. The overall average benchmark yield rose by 50bps w/w to close at 12.16%. Selloffs were focused at the mid and long segments of the curve as investors, while demand was seen at the short end of the curve as investors reinvested bond coupon and maturity payments. In today's bond primary auction, the Debt Management Office (DMO) will be reopening the FEB 2028, MAR 2036 and the MAR 2050 bonds, offering N150bn across the tenures. We expect relatively strong subscription levels, given the liquidity boost from the JUL-2021 bond maturity (N561.0 bn) and other coupon receipts (N40.68bn). Consequently, yields are expected to decline, in line with secondary market levels.
Activities in the Nigerian Treasury Bill (T-bill) secondary market were bullish, following improved system liquidity. The annualised yield on a 349-day T-bill in the secondary market closed flat at 9.44%, while the yield on a 242-day OMO bill fell by 2bps to 10.31%. However, the average benchmark yield for T-bills fell by 20bps w/w to close at 6.69%, while the average yield for OMO bills fell by 59bps w/w to close at 9.29%. At the T-bill primary auction held on Wednesday, the DMO allotted N150bn in instruments. The stop rates on the 91-day bill (2.50%) and the 182-day bill (3.50%) were unchanged from the previous auction, while the stop rate on the 364-day bill fell by 48bps to 8.67%. The auction recorded a total subscription of N574.68bn, the highest level this year, with a bid-to-cover ratio of 3.8x (2.7x at the previous auction. We expect a slight uptick in yields in the T-bill secondary market this week in the absence of any significant inflows to boost liquidity
The price of Brent crude fell by 2.59% last week, the largest weekly loss since May 2021, closing at US$73.59/bbl and showing a 42.07% increase year-to-date. The average price year-to-date is US$66.10/bbl, 52.96% higher than the average of US$43.22/bbl in 2020. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) has agreed to gradually add more oil supplies to the market by boosting output by 0.4 mbpd each month from August. It plans to continue this until all its 5.8 mbpd of halted production has been revived. Amidst the still tight market and recovering global oil demand, we reiterate our view that Brent oil is likely to remain well above the US$60.00/bbl mark for several months.
The NGX All-Share Index (NGX-ASI) was down by -0.12% last week. Consequently, the year-to-date return fell to -5.75%. FBNH -5.19%, Nigerian Breweries -3.33%, and Dangote Sugar -2.24% closed negative last week, while Oando +4.44%, Fidelity Bank +3.90%, and UBA +3.33% closed positive. Sectoral performances across the sectors had a bearish tilt with the NGX Insurance -1.07%, NGX Consumer Goods -0.85%, NGX Industrial index -0.30%, and the NGX 30 -0.19% index declining. Conversely, the NGX Oil and Gas +1.81% index and the NGX Banking +0.09% index were the sole gainers. The Model Equity Portfolio will resume next week
Inflation on the Decline
The latest inflation report for June 2021, released by the National Bureau of Statistics (NBS), showed a moderate decline in the All Items/headline inflation to 17.75% from 17.93% recorded in May 2021. This year, headline inflation peaked at 18.17% in March. The consecutive moderation in the Headline inflation can be attributed primarily to the slowdown in food inflation (down by 45bps to 21.83% y/y) - the primary driver for inflation.
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