Weekly Economic and Financial Commentary – WE 13th July 2018

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Saturday, July 14, 2018   09.39AM  /   ARM Research      

 

Summary 

Global Economy

In the US, rising input costs drove producer prices for final demand 0.3% MoM in June (3.4% YoY), with the core PCI rising 2.7% YoY (vs. 2.6% YoY in May). Pass-through of the rising input prices translated to higher consumer price, as inflation for June came in at 2.9% YoY – the strongest pace in more than six years, while MoM inflation rose 0.1%. In a surprise move, the Bank of Korea held its bank rate steady at 1.50% at its July monetary policy meeting, citing uncertainty surrounding the impact of the ongoing trade tensions be-tween the U.S. and China. Elsewhere, the Bank of Canada raised the overnight lending rate 25 bps to 1.50 percent, marking its fourth hike in the past 12 months. A development like-ly to further escalate the trade tension, the China’s custom office revealed that trade surplus with the US expanded to $28.97 billion in June ($24.58 billion in May) as the growth in exports to US (+5.7% MoM) outpaced growth in imports from the U.S of 4% MoM .
 

Domestic Economy

This week, the apex bank released trade balance for the month of May 2018 which showed that trade surplus moderated for the period. Specifically, the surplus picture declined by 26% MoM to $1.84 billion as export tracked slower (-16.2% MoM to $4.7 billion) than import (-8.4% MoM to $2.6 billion). We link the sharp decline in export to weak crude oil pro-duction which – according to OPEC – shed 7.4% MoM to 1.63 mbpd in May. On the positives, trade surplus continued its fine growth trajectory in the first five-month of 2018. Pointedly, relative to last five months, trade balance surged 35% to $9.4 billion as export (+15.7% to $24.7 billion) continued to outperform import (+7.0% to $14.1 billion) thereby leaving the bourgeoning trade surplus unsullied
 

Equities

Despite closing 0.45% higher today, Nigeria’s equity market continued its losing streak, ending the week 0.62% lower at 37,392.77 pts, making it the second consecutive week of de-cline. The decline was largely due to negative performances in Guaranty Bank (-3.73%), Dangote Flour Mills Plc (-3.0%), Dangote Sugar (-5.41%), UBA (-3.38%), Total (-4.76%) and Flour Mills (-5.54%). Dissecting the performance on a sectorial basis, the Construction, Banking and Brewers sectors were the worst performer for the week
 

Fixed Income

Yields in the fixed income market closed relatively flat this week as average yields rose 1bp to 13.22%. For context, yields dipped 11bps today, following strong buy sentiment at both ends of the curve which offset higher yields earlier in the week due to tight market liquidity, particularly after the CBN on Thursday sold N315.5 billion for the 70day and 210day pa-pers at stop rates 11.05% and 12.15%. Overall, average fixed income yields rose 1bp apiece at the T-bills market and bond market to 12.59% and 13.85% respectively.

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The Week In Review 

Global

In the US, rising input costs drove producer prices for final demand 0.3% MoM in June (3.4% YoY), with the core PCI rising 2.7% YoY (vs. 2.6% YoY in May). Pass-through of the rising input prices translated to higher consumer price, as inflation for June came in at 2.9% YoY – the strongest pace in more than six years, while MoM inflation rose 0.1%. In a surprise move, the Bank of Korea held its bank rate steady at 1.50% at its July monetary policy meet-ing, citing uncertainty surrounding the impact of the ongoing trade tensions between the U.S. and China. 

Elsewhere, the Bank of Canada raised the overnight lending rate 25 bps to 1.50 percent, marking its fourth hike in the past 12 months. A development likely to further escalate the trade tension, the China’s custom office revealed that trade surplus with the US expanded to $28.97 billion in June ($24.58 billion in May) as the growth in exports to US (+5.7% MoM) outpaced growth in imports from the U.S of 4% MoM.
 

Domestic

This week, the apex bank released trade balance for the month of May 2018 which showed that trade surplus moderated for the period. Specifically, the surplus picture de-clined by 26% MoM to $1.84 billion as export tracked slower (-16.2% MoM to $4.7 bil-lion) than import (-8.4% MoM to $2.6 billion). We link the sharp decline in export to weak crude oil production which – according to OPEC – shed 7.4% MoM to 1.63 mbpd in May. 

On the positives, trade surplus continued its fine growth trajectory in the first five-month of 2018. Pointedly, relative to last five months, trade balance surged 35% to $9.4 billion as export (+15.7% to $24.7 billion) continued to outperform import (+7.0% to $14.1 billion) thereby leaving the bourgeoning trade surplus unsullied.
 

Equities

Despite closing 0.45% higher today, Nigeria’s equity market continued its losing streak, ending the week 0.62% lower at 37,392.77 pts, making it the second consecutive week of decline. The decline was largely due to negative performances in Guaranty Bank (-3.73%), Dangote Flour Mills Plc (-3.0%), Dangote Sugar (-5.41%), UBA (-3.38%), To-tal (-4.76%) and Flour Mills (-5.54%). 

Elsewhere, Tantalizers Plc (-25.0%) and Mutual Benefits Assurance (-24.4%) were the largest decliners for the week while Custodian & Allied Assurance (+17.5%) and Forte Oil (+9.7%) turned out to be the highest gainers for the week. Dissecting the perfor-mance on a sectorial basis, the Construction, Banking and Brewers sectors were the worst performer for the week.
 

Fixed Income

Yields in the fixed income market closed relatively flat this week as average yields rose 1bp to 13.22%. For context, yields dipped 11bps today, following strong buy sentiment at both ends of the curve which offset higher yields earlier in the week due to tight market liquidity, particularly after the CBN on Thursday sold N315.5 billion for the 70day and 210day papers at stop rates 11.05% and 12.15%. 

Overall, average fixed income yields rose 1bp apiece at the T-bills market and bond market respectively to 12.59% and 13.85%.
 

Forex

·   Capital importation witnessed weighty decline in the month of May, shedding 34% MoM to $1.4 billion – deepest level since December 2017 – driven by FPI which is the heftiest contributor ~81% of total capital flows.

·    According to breakdown, FPI moderated markedly (-33% MoM to $1.2 billion) driven by decline across flows to equities (-27% MoM to $195 million), bonds (-57% MoM to $104 million) and money market instruments (-29% MoM to $864 million).

·      On a quarterly basis, we highlight that capital importation moderated in Q2 18 (14.3% QoQ to $5.4 billion) as U.S rate normalization triggered flight to quality by foreign investors with knock-on effect keeping flows into the economy at bay.

·     In a swift response by the apex bank to limit the impact of drying FPI flows, its intervention at the IEW (+89.8% QoQ to $1.28 billion) and BDC (+15% QoQ to $1.56 billion) was reignited with overall intervention reaching a high of $8.50 billion (+49.8% QoQ) in Q2 18.

 

Figure 1: Monthly capital importation and IEW FPI ($’Billion)

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Figure 2: CBN intervention across FX markets ($’Million)


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