In line with our expectation, economic growth strengthened in the third quarter of 2019, with the recently released GDP reading showing that economic activities expanded by 2.28% y/y (vs. an upwardly revised 2.12% y/y in Q2-19). The outturn is 17 bps shy of our estimate of 2.11%, with the variance stemming from sharper than expected growth in Oil GDP.
Sifting through the breakdown provided, we highlight that the improved reading emanated from faster growth in the non-oil sector (+1.85% y/y vs. +1.64% in Q2-19), driven by improved reading in service sector (+3.45% y/y), Agriculture sector (+2.23% y/y) and manufacturing sector (+1.23% y/y), while the oil sector printed a slower growth of +6.49% y/y (vs. 7.17% y/y in Q2-19).
For Q4-19, we expect sustained growth in the Oil sector (+6.28%), driven by low base in the corresponding quarter in the prior year, and an improved crude production (2.03 mb/d), while we expect faster growth in the Service and Agriculture sectors to support non-oil GDP growth of 2.06% y/y. Overall, we expect growth to settle at 2.36% y/y and 2.21% in Q4-19 and 2019FY, respectively.
On the heels of the sustained pressure from the food basket, consumer prices in October printed 11.61% y/y, — the highest since May 2018 — representing 28bps and 36bps higher than our estimate and prior month respectively. To start with, despite the full-blown harvest season in October, food inflation surged by 58bps to 14.09% — the highest since April 2018, as the impact of all land borders closure continued to take a toll on food prices.
Elsewhere, against the surprising uptick recorded in the prior month, core inflation tapered by 7bps to 8.88% y/y, on account of the subdued energy prices. Given the recent decision to extend border closure till early next year, together with the festive induced demand, we expect food inflation to widened in November.
That said, despite CBN’s hard stance on the currency and muted energy pressure, we expect core inflation to increase marginally, given the low base from the corresponding period in the prior year. Overall, we now expect headline inflation to sustain its upward trajectory, expanding to 11.87% y/y (1.04% m/m).
The rally in the domestic equities market was sustained for a third consecutive week – first time since May 2019, as investors’ hunt for positive real return continued amidst depressed fixed income (FI) yields. The All-Share index ended 0.5% higher w/w following four consecutive days of gains. Consequently, the MTD gain grew to 2.4% while the YTD loss shrank to 14.1%.
On sectors, investors piled into heavyweight Consumer Goods (+6.0%) and Oil & Gas (+2.2%) stocks, as the sectors outperformed. The Insurance (+0.5%) index also closed in the green. On the flip side, profit taking across Banking (-0.9%) and Industrial Goods (-2.2%) sectors, whose stocks and respective indices were the top gainers last week, led to underperformances in the indices.
In our view, the still compelling valuations and attractive dividends yields have driven market performance over the past few weeks, a reaction to a limited outlet for investments given recent policy directives limiting domestic participation in the FI market. In the short term, we expect that stock market will continue to benefit, especially as FI yields remain on the downtrend.
The overnight (OVN) rate declined by 964bps w/w to 4.43% as system liquidity was boosted by inflows from OMO maturities (NGN389.89 billion), FAAC disbursements to states and local governments (NGN386.70 billion) and bond coupon payments (NGN17.87 billion). The CBN, for the first time in 14 weeks, did not conduct an OMO auction.
In the coming week, OMO maturities (NGN352.70 billion) will bolster system liquidity. Barring any liquidity mop-up by the CBN, we expect a contraction in the overnight lending rate.
Trading in the Treasury bills market remained bullish this week as the average yield across instruments pared by 66 bps to 11.8%. As with the prior week, most of the activities were localized to the NTB market, where local corporates and individuals trade.
The average yield on NTBs in the secondary market declined by 225bps to 8.6% as demand remained strong in the face of a shallow market for securities in the face of persistent OMO maturities. However, the yields on OMO bills increased by 9bps to 13.4% reflecting the weak demand for those instruments in the newly segmented market.
There will be an PMA Treasury bills auction on the 27th of November, where instruments worth NGN150.60 billion will be issued across the 91DAY (NGN24.37 billion), 182DAY (NGN23.16 billion), and 364DAY (NGN103.07 billion) Instruments, while an equal amount will mature on the following day.
We expect trading volumes to start to temper in the NTB market, as the average yield trends towards the single-digit level. However, the average OMO yield is expected to remain around the same level, moderately paring in the coming week. Overall, we expect overall volumes in the market to pare and market participants to take positions in Treasury bonds as has been witnessed over the past few weeks.
Trading in the Treasury bonds secondary market was tepid, as market players reacted to the higher October inflation figure. Consequently, average yield pared marginally by 4bps to settle at 12.2%. The JUL-2021 bond (-24 bps) recorded the largest decline in yield, while the APR-2023 bond (+62bps) recorded the largest increase.
Also, the DMO held a PMA Treasury bonds auction during the week when three instruments were offered through re-openings – 12.75% FGN APR 2023 (Bid-to-offer: 0.86x; Stop rate: 12.0000%), 14.55% FGN APR 2029 (Bid-to-offer: 1.88x; Stop rate: 12.9300%), and 14.80% FGN APR 2049 (Bid-to-offer: 2.30x; Stop rate: 13.3900%).
The recent restrictions to trading in the Treasury bills market have continued to drive volumes in the Treasury bonds market, as investors have continued to seek out higher-yielding instruments. We expect this pattern to continue over the coming week, and so expect the average Treasury bonds yield to pare.
Amidst continued sell-offs by offshore investors, Nigeria’s FX reserves dipped below the UDS40.00 billion ‘psychological’ level this week – the first time this year– after declining by USD68.28 million WTD (20 Nov 2019) to USD39.97 billion.
Meanwhile, the CBN sustained its weekly FX intervention, selling USD210.00 million across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Nonetheless, the naira depreciated by 0.02% WTD to NGN362.64/USD at the I&E window but closed flat at NGN360.00/USD at the parallel market.
Elsewhere, total turnover at the I&E window decreased by 37.39% WTD to USD978.34 million, with trades consummated within the NGN340.50 – 363.50/USD band. In the Forwards market, the naira weakened across all contracts, with the exception of 1-year (+0.8% to NGN397.94/USD), as the 1-month (-0.% to NGN366.35/USD), 3-month (-0.3% to NGN372.34/USD) and 6-month (-0.7% to NGN382.75/USD) contracts declined.
Despite the rate of decline in FX reserves orchestrating fears of possible currency devaluation, our model suggests that the CBN’s has enough ammunition to sustain its naira defense over 2019.
Visit www.proshareng.com for more details
You want to share a story with us? You want to advertise? You need publicity for a product, service, or event? Contact us on WhatsApp – +234 803 3018 881