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With Lower February Inflation, Analysts Urge Caution in Policy Decision

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inflation
  • With Lower February Inflation, Analysts Urge Caution in Policy Decision

After a 15-month rising streak, the consumer price index (CPI), which gauges inflation, reversed last month. The CPI stood at 17.78 per cent (year-on-year) in February, moving 0.94 per cent lower than the 18.72 per cent it recorded in January.

The National Bureau of Statistics, which released the February CPI, report last Tuesday that the decline represented the effects of slower rises in already high food and non-food prices and favourable base effects over 2016 prices. According to the agency, the price increases were recorded in all COICOP (Classification of Individual Consumption by Purpose) divisions that yield the Headline Index.

NBS pointed out that the major divisions responsible for accelerating the pace of the increase in the headline index were housing, water, electricity, gas and other fuel, education, food and alcoholic beverages, clothing and footwear, and transportation services.

On a month-on-month basis, the agency noted, the headline index increased by 1.49 per cent in February 2017, 0.48 per cent points higher from the rate of 1.01 per cent recorded in January. It stated, “The Food Index increased by 18.53 per cent (year-on-year) in February, up by 0.71 per cent points from rate recorded in January (17.82) per cent driven by increases in the prices of bread, cereals, meat, fish, potatoes, yams and other tubers and wine, while the slowest increase in food prices year on year were recorded by soft drinks, coffee, tea and cocoa.”

Analysts believe the decision of the Central Bank of Nigeria to adopt inflation targeting and not pursue growth with a view to addressing rising inflation, has paid off with the CPI achieving a lower inflation rate in February. While a school of thought believes the development signals the start of recovery from economic recession, others urge caution in taking policy decisions on the monetary tools, as the prolonged pressures are yet to abate. The general consensus, however, is that the authorities should watch the trend, with many believing inflation would continue on a downward streak.

The CBN had in July last year opted to target inflation rather than focus on growth, hence its decision to increase the monetary policy rate (MPR) to 14 per cent by 200 basis points, from 12 per cent, and later in the year the pace of inflation increase became slower than before. For instance, a month after the apex bank’s decision, inflation rose by 0.48 per cent to 17.61 per cent from 17.13 per cent in July. Before this, inflation had increased by 0.90 per cent to 16.48 per cent in June from 15.58 per cent in May. And ever since, the pace of increase has been reducing.

In welcoming the year-on-year decline in inflation rate, Director General, West African Institute for Financial and Economic Management, Professor Akpan Ekpo, pointed out that on closer examination, the month-on-month increase in the last one year had been on a slower pace.

Ekpo said, “This first time decline in 15 months points to the fact that the recession is easing. It appears that the decline in imports has reduced the impact of imported inflation on prices due to foreign exchange constraint. It follows that the pass through effect of speculation on domestic prices has been marginal.”

He advocated the need for caution because the food index increased year-on-year by 0.71 per cent, driven by increases in the prices of various food items. “It also increased on month-on-month as well. Inflation adversely affects the poor more than the rich, hence the rural CPI increase month-on-month is worrisome,” he said.

According to Ekpo, “Over all, the slight reduction in the rate of inflation is nothing to celebrate. The rate of inflation is an average measure; some prices go up while others decrease. Households and their families should not spend more than 20 per cent of their income on food and other very basic needs.”

Similarly, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, found it heart-warming that the rate of increase in general price level fell to 17.78 per cent in February 2017. According to him, “This could signal an inflexion point in inflation and also the commencement of recovery from economic recession. This could also support the argument in favour of monetary accommodation to ease the liquidity crunch and jumpstart economic activities.”

Ademola said, “The reasons for the lower inflation rate are many, with the high base rate in the corresponding period of 2016 a significant factor,” stressing, “The increase in liquidity from the implementation of capital projects and the Paris Club refund are important factors too.” In addition, he said, “The moderating exchange rate could also account for lower price increase from imported goods.”

Looking forward, the economist noted, “Due to the high inflation rate in 2016, the high base rates almost throughout the year indicate lower inflation rate expectations throughout 2017; hence the coming months would even record higher moderation in inflation rate.”

Speaking along the same line, Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, described the drop in February CPI as good news for the Nigerian economy.

He added, “We expect inflation to drop further in March because the base-year effect is waning and would wane further. It was in February last year that this ‘madness’ started.

“But in February this year, we started seeing improved foreign exchange supply and if that continues, we expect inflation to continue to decline. So, good things are happening and confidence is gradually returning to the economy.”

Ecobank Nigeria’s analyst, Kunle Ezun, who said the drop in inflation was expected, predicted that the CPI might fall to 14 per cent at the end of the year. Ezun stated, “The issue now is, how does that translate to improvement in the living conditions of Nigerians? For me, government must ensure that the power sector is fixed so that the high cost of power by firms and households is reduced.

“There is also the need to bring down the cost of transportation.”

In his own contribution, Director, Union Capital Markets Ltd, Egie Akpata, observed, “The base effect is kicking in so we could see a steady decline in year-on-year CPI going forward.”

Akpata was, however, quick to point out that the month-on-month inflation accelerated CPI and all its major indices. “So the inflation related pressures are not yet about to be a thing of the past.”

He cautioned that before reducing interest rates, the CBN, which is the monetary authority, needs to observe a few months of CPI reductions. “It is unlikely they will make a move to reduce rates at the next MPC.”

Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, attributed the moderation in the CPI largely to the base effect. To him, “The base effect would be more pronounced in May 2017 inflation because it was in May 2016 that the uptick was higher. So, if nothing significant occurs in the economy, we are going to see a drastic reduction, to maybe single digit in May 2017 inflation.”

For the Managing Director and Chief Economist, Global Research Africa, Standard Chartered Bank, Razia Khan, “We were expecting an improvement in February based on an even more pronounced base effect. Our food price indicator suggested that y/y inflation had started to decelerate.”

Going forward, Khan predicted, “Improved FX sales by the CBN and a reduced parallel market premium will help lessen price pressures. But all of this must be assessed against the growth in money supply. If the federal government remains dependent on CBN financing of its budget, that is a clear risk, still, to inflation. Even if the base effect dominates in the near term.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Markets

Global Markets Near Record Peaks and Will Get Stronger: deVere CEO

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Stocks

As the FTSE 100 hits 7,000 points for the first time since the Covid pandemic, global stock markets are poised to “get even stronger”, says the CEO of one of the world’s largest independent financial advisory and fintech organisations.

The observation from Nigel Green, the chief executive and founder of deVere Group, comes as London’s index jumped over the important threshold in early trading in London, gaining over 0.5% to 7024 points.

Mr Green notes: “London’s blue-chip index is up 40% since the worst lows of the pandemic.

“This landmark moment represents the wider optimistic sentiment gripping global markets which are near record peaks.

“We can expect global stock markets to get even stronger as investors look to seize the opportunities from economies reopening.

“They are looking towards economies rebounding in a post-pandemic era due to the monetary and fiscal stimulus, pent-up cash and demand, and strong corporate earnings.

“The current ultra-low interest rate environment and the under-performance of bonds will also act as a catalyst for stock markets.”

However, the CEO’s bullish comments also come with a warning.

“I would urge investors to proceed with caution as there are some headwinds on the horizon, including relations between the U.S. and China, the world’s two largest economies, which could be coming to a tipping point in coming weeks.

“As such, in order to capitalise on the opportunities and mitigate risks, investors must ensure proper portfolio diversification.”

Mr Green concludes: “A variety of factors are going to drive global stock markets. Investors will not want to miss out and should work with a good fund manager to judiciously top-up their portfolios.”

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Markets

Refinitiv Expands Economic Data Coverage Across Africa

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Building on its commitment to drive positive change through its data and insights, Refinitiv today announced the expansion of its economic data coverage of Africa. The new data set allows investment managers, central bankers, economists, and research teams to use Refinitiv Datasteam analytical data for detailed exploration of economic relationships and investment opportunities among data series covering the African continent.

Securing reliable, detailed, timely, locally sourced content has not been easy for economists who have in the past had to use international sources which often can take many months to update and opportunities to monitor the market can be missed. Because Africa is a diverse continent, economists and strategists need more timely access to country-specific data via national sources to create tailored business, policy, trading and investment strategies to meet specific goals.

Africa continues to develop critical infrastructure, telecommunications, digital technology and access to financial services for its 1.3bn people. The World Bank estimates that over 50% of African inhabitants will be under 25 by 2050. This presents substantial opportunities for investors who can spot important trends and make informed decisions based on robust and timely economic data.

Stuart Brown, Group Head of Enterprise Data Solutions, Refinitiv, said: “Africa’s growing, dynamic and fast evolving economies makes it a focal point for financial markets today and in the coming decades.  As part of LSEG’s commitment to empowering the global markets with accurate and timely data, we are excited about making these unique datasets available via the Refinitiv Data Platform. Our economic data coverage of Africa will provide our customers with deeper and broader inputs for macroeconomic analyses and enable more effective investment strategies and economic research.”

Refinitiv Africa economic data coverage:

  • Africa economics content comprises around 500,000 nationally sourced time series data covering 54 African nations
  • Content is sourced from national statistical offices, central banks and other key national institutions
  • The full breadth of economics categories in Datastream including national accounts, money and finance, prices, surveys, labor market, consumer, industry, government and external sectors
  • International sources including OECD, World Bank, IMF, African Development Bank, Oxford Economics & more provide comparable data & forecasts across the continent

Refinitiv® Datastream® has global macroeconomics coverage to analyze virtually any macro environment, and better understand economic cycles to uncover trends and forecast market conditions. With over 14.2 million economic times series map trends, customers can validate ideas and identify opportunities using Refinitiv Datastream. Access its powerful charting tools, 9,000 pre-built chart templates and chart studies for commonly used valuation, performance, and technical and fundamental analysis.

 Refinitiv continually grows available data – the China expansion in 2019 covered a unique combination of economic and financial indicators. Refinitiv plans to expand Southeast Asia covering Thailand, Vietnam, Philippines and Malaysia with delivery expected in 2021. This ensures that Refinitiv will have much needed emerging market economic content.

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Crude Oil

Oil Rises on Drawdown in U.S. Oil Stocks, OPEC Demand Outlook

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Oil prices rose in early trade on Wednesday, adding to overnight gains, after industry data showed U.S. oil inventories declined more than expected and OPEC raised its outlook for oil demand.

Brent crude futures rose 28 cents, or 0.4%, to $63.95 a barrel at 0057 GMT, after climbing 39 cents on Tuesday.

U.S. West Texas Intermediate (WTI) crude futures similarly climbed 28 cents, or 0.5%, to $60.46 a barrel, adding to Tuesday’s rise of 48 cents.

Oil price gains over the past week have been underpinned by signs of a strong economic recovery in China and the United States, but have been capped by concerns over stalled vaccine rollouts worldwide and soaring COVID-19 infections in India and Brazil.

Nevertheless, the Organization of the Petroleum Exporting Countries (OPEC) tweaked up its forecast on Tuesday for world oil demand growth this year, now expecting demand to rise by 5.95 million barrels per day (bpd) in 2021, up by 70,000 bpd from its forecast last month. It is banking on the pandemic to subside and travel curbs to be eased.

“It was a welcome prognosis by the market, which had been fretting about the impact the ongoing pandemic was having on demand,” ANZ Research analysts said in a note.

Further supporting the market on Wednesday, sources said data from the American Petroleum Institute showed crude stocks fell by 3.6 million barrels in the week ended April 9, compared with estimates for a decline of about 2.9 million barrels from analysts polled by Reuters.

Traders are waiting to see if official inventory data from the U.S. Energy Information Administration (EIA) on Wednesday matches that view.

Market gains are being capped on concerns about increased oil production in the United States and rising supply from Iran at a time when OPEC and its allies, together called OPEC+, are set to bring on more supply from May.

“They may have to contend with rising U.S. supply,” ANZ analysts said.

EIA said this week oil output from seven major shale formations is expected to rise by 13,000 bpd in May to 7.61 million bpd.

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