Tuesday, August 16, 2011 8:51 PM / Vetiva Research
Further to the release of July 2011 Inflation data by the National Bureau of Statistics (NBS) today, we provide below our thoughts:
· Finally, it’s single digit…: July inflation came in at a surprise to the market, recording a new 3–Year low at 9.4% YoY; the second consecutive decline from 10.2% YoY in June. Notably, the CPI rose 0.32% MoM, a huge deviation from the 5–Year historical average for July (1.58% MoM); the trend amongst other factors which formed the basis of our 11% forecast. Interestingly, urban inflation slowed 6.6% (versus 8.3% in June), while rural inflation eased marginally to 11.7% (versus 11.8% in June).
· …apparently on the back a significant ease in food inflation: Whilst current price levels suggest an uptrend in food prices, data reveals a pullback in the Food & Non–Alcoholic Beverage index (51.8% of CPI), from 8.4% YoY in June to 7.3% YoY in July. Furthermore, the imported food inflation seems to have received some support from the relatively stable currency in the month of July (Naira appreciation of 0.88% to N150.46/$1).
· Nonetheless, inflation remains a challenge: Despite this feat, we still see risks to the sustainability of this trend in the short to medium term. Non–Food inflation remains sticky at 11.5% YoY (same in June) with notable YoY increases in some components of the Non–Food index when compared with the month of June. Housing, Electricity and Other Fuel (+16.56% vs +16.03%), Furnishing, Household equipment and Maintenance (+7.89% vs +5.06%) and Transport (+12.28% vs 10.34%) mirror the challenges with the high prices of building materials and fuel costs (Diesel). Going forward, we expect these challenges, and in addition, stronger demand from the implementation of the wage increase to take its toll, with a consequent resumption in the uptrend in Non–Food inflation.
· The Next MPC meeting should be interesting: Whilst the lower headline inflation suggests a sigh of relief in monetary tightening, the outlook for non-food inflation (as explained above) points to an uptrend which is likely to make monetary policy decisions challenging. The next MPC which is expected to hold on the 19th and 20th of September, will give huge consideration to the situation of prices (inflation, exchange rate and interest rates). Currently, inflation seems to have abated (though with clouds of uncertainty around its outlook), exchange rates are stable but with large volumes on demand at the bi–weekly WDAS auctions, and interest rates (on deposit) are yet to be positive in real returns. The foregoing sets the stage for an intriguing MPC meeting come September. We will detail our expectations in our MPC preview to be released prior to the meeting.
· Overall remark; positive for the market: Whilst we see an obvious buy-market, following the drop in inflation figures, we believe market focus may skew towards the mid-end of the yield curve. Our belief is based on the current narrow yield of less than 100bps between the benchmark 5-Year and 20-Year, given current trading levels of 11.15% and 11.30% for the 5- and 7-Years respectively as against 11.95% for the 20-Year. We expect the current Standing Deposit Facility (SDF) rate, which stands at 6.75% to be the “floor” for 91-Day T-Bills and also OMO auctions by the CBN, and anticipate this will keep money market rates relatively firm despite looming demand.
· Nigeria’s Inflation rate currently at 9.4% is lower than Kenya (15.5% - Jul’11), but still higher than Ghana (8.4% - Jul’11).
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Source: ADEDAYO IDOWU, Research Division, Vetiva Capital Management Limited, Plot 266B, Kofo Abayomi Street, P. O. Box 73530 Victoria Island, Lagos, NIGERIA, Tel: +234-1-4617521-3, 2700657-8.