The Week That Was (September 12-16)
Headline inflation clears 20%, but slowdown in m/m suggests peak in sight: The National Bureau of Statistics (NBS) published CPI data for August which showed that prices facing the average Nigerian climbed 20.52% on a y/y basis with renewed pressures in Food (+23.1% y/y) – a multi-decade high. Adjusted for food and fuel prices, underlying inflation (as proxied by the core inflation measure) accelerated to 17.1% y/y. However, the m/m trends showed that the pace of price increases appear to be slowing with the August print of 1.79% below the 1.82% in the prior two months. This likely reflects the onset of early harvests which forced a marked downturn in rural headline CPI (1.75% vs. 1.82% previously) relative to urban CPI (1.79% vs 1.82%). Indeed, with flattish trends across energy prices during the month, the signs are starting to appear the current inflation spiral may be nearing a peak.
Figure 1: Headline Inflation
Looking ahead, despite the gravitational effect from improved food supplies as the main harvest gets under in September, the presence of adverse statistical base effects from 2021 suggests inflation likely runs towards 22% over the next two months before flat-lining in November-December.
Improved liquidity + Fear of CRR debit drives heavy demand at the primary NTB auction: At the NTB auction during the week, improved banking system liquidity on account of recently paid bond coupons set the stage for a bullish auction. Demand came in heavy with bids at 2.2x (last 1x) the NGN160billion on offer which allowed the DMO room to trim the stop-rate on the widely watched 1-yr tenor to 9.75% (last 10%). In the secondary market, bills declined across all three T-bill securities: NTB (down 11bps w/w), OMO (down 21bps w/w) and SPEBs. Banks likely front-loaded NTB buying to insulate their balance sheets from CRR debits which were carried out on Friday.
Bond yields flat ahead of September 2022 bond auction, MTN opens: FGN bond yields were flattish ahead of the monthly bond auction with the key tenors inching higher on Friday as CBN CRR debits got underway. Elsewhere, MTN opened its NGN100billion bond sale across two maturities (4-year and 10-year) after closing out a NGN23billion commercial paper sale during the week.
Figure 2: Naira Yield Curve
The Week Ahead (September 19-23)
In the coming week, the DMO will look to sell NGN225billion worth of bonds across the FGN MAR 2025, FGN 2032 and FGN 2037. System liquidity has been bolstered by the inflow of bond coupons which cumulate to NGN360billion over the month. However soaring inflation suggests the CBN will likely maintain the pattern of rate hikes with an extra 100-200bps next week which might keep investors second-guessing. Though the street expects strong demand at the auction, I’m more skeptical as I think long-money investors continue to feel bond heavy and will only display a weak hand. My sense is the 2025 will likely price around the 13% handle, while the 2032 will hug the 13.5% level seen in August and the 2037 in the 13.9-14% region. Markets continue to view the DMO as behind target given the outsized fiscal deficit and reduced likelihood of offshore financing. Essentially, the DMO will have to chase the money.