Global Economy
According to final data from the Bureau of Economic Analysis (BEA), the United States (US) economy grew by 3.4% in Q4-23 (Q3-23: +4.9% q/q). This is an upward revision of the previous estimate of 3.2% which was initially released on 25 January 2024. The final data reflected upward revisions to consumer spending (+3.3% vs previous: +3.0%), non-residential fixed investment (+3.7% vs previous: +2.4%) and government spending (+4.6% vs previous: +4.2%), which was partly offset by a downward revision to private investment (+0.7% vs previous: +1.2%). Overall, the economy grew by an average of 2.5% y/y in 2023FY (2022FY: 1.9% y/y). Although we anticipate that robust consumer spending and a resilient labour market will sustain economic growth in the near term, we expect that the depletion of pandemic-era savings and elevated borrowing costs could present a downside risk to growth over the short to medium term.
Recent data from the United States Department of Labour showed that the initial jobless claims in the US fell by 2,000 to 210,000 in the week ending 22 March (vs the week ending 15 March: 212,000), signalling a resilient labour market amid tight monetary conditions. The outturn was lower than the market expectation of 215,000. We attribute the outturn to the improved economic activities and employers’ efforts to retain workers despite the uptick in job cuts recently, mainly across technology and media firms, primarily due to automation-related restructuring. Continuing claims for unemployment insurance rose by 24,000 to settle at 1.82 million claims (vs the previous week: 1.80 million claims). On a 4-week moving average, the initial jobless claims decreased by 750 to 211,000 (vs the week ending 15 March: 211,750). In the near term, we expect the labour market to remain resilient due to ongoing strong economic activity supported by resilient consumer spending and government expenditure. However, we believe prolonged high interest rates could eventually impact the labour market negatively, potentially leading to increased unemployment.
Global Equities
Global equities posted mixed performances this week as investors assessed the central bank’s policy administration path, while anticipating inflation data from the US (Personal consumption expenditures price index) and Eurozone. Accordingly, US equities (DJIA: +0.7%; S&P 500: +0.3%) rebounded from the losses recorded earlier in the week following optimism over the economy and interest rate cuts. European equities (STOXX Europe: +0.4%; FTSE 100: 0.0%) traded with mixed sentiments as optimism about potential interest rate reductions, were tempered by news of the UK entering a recession in H2-23, and disappointing German retail sales data. Asian equities (Nikkei 225: -1.8%; SSE: -1.1%) saw broad declines this week due to profit-taking in Japan, concerns over potential yen-buying intervention, and bearish sentiments in China fuelled by foreign outflows and yuan weakness. The negative sentiments in China (-1.1%) weighed on the Emerging Market (MSCI EM: -0.2%) index, while the Frontier Markets (MSCI FM: +0.4%) index closed higher, buoyed by bullish sentiment in Vietnam (+0.6%).
Nigeria
Domestic Economy
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) opted once again to increase the Monetary Policy Rate (MPR) by 200bps to 24.75% in its meeting on the 25th and 26th of March. This decision was primarily due to (1) existing inflationary pressures, (2) the imperative to anchor inflation expectations, and (3) the need to maintain exchange rate stability. Moreover, the MPC narrowed the asymmetric corridor surrounding the MPR to +100bps/-300bps (previously: +100bps/-700bps). The Committee also raised the Cash Reserve Requirement (CRR) for merchant banks to 14.0% from 10.0% while maintaining the CRR for Deposit Money Banks (DMBs) at 45.0%. Additionally, the liquidity ratio was retained at 30.0%. According to our model, we predict that inflation will reach its highest point in May, peaking at 33.24%. Whilst headline inflation is poised to remain elevated year-on-year, we expect a moderate month-on-month increase in domestic prices. We expect the MPC to consider the slower pace of increase in inflationary pressures and the stability of the naira during the next policy meeting, which may lead to a more moderate adjustment to the benchmark interest rate.
According to the Debt Management Office (DMO), Nigeria’s public debt stock rose by 10.73% q/q to NGN97.34 trillion in Q4-23 (Q3-23: NGN87.91 trillion). Analysing the breakdown, the total domestic debt stock increased by 5.7% q/q to NGN59.12 trillion, reflecting new borrowings to finance rising government expenditures against the persistent revenue underperformance. Similarly, the total external debt stock increased significantly by 19.51% q/q to NGN38.22 trillion primarily due to (1) additional borrowings from the World Bank Group (USD863.62 million) and bilateral organisations (USD369.77 million), and (2) the impact of the naira depreciation on foreign debt – the exchange rate value of NGN899.33/USD was used in converting the external debt compared to NGN768.76/USD in Q3-23. Total debt on a year-on-year basis grew by 110.46%, pushing the country’s debt-to-GDP ratio to 42.34%. Looking forward, we anticipate a significant increase in Nigeria’s total debt due to the trifecta impact of (1) high borrowing costs induced by CBN’s monetary policy tightening, (2) increased borrowing by the government to fund its 2024 budget deficit, and (3) the impact of the devaluation of the naira on foreign debt particularly in Q1-24. We project the total public debt to settle at NGN132.05 trillion (or 49.7% of GDP) in 2024E.
Capital Markets
Equities
The local stock market witnessed another subdued performance despite closing marginally higher on two of the four trading sessions this week. The downward slide was primarily due to sell pressures on FBNH (-8.0%) and DANGSUGAR (-11.9%) amid intense bargain hunting on ZENITHBANK (+11.4%) and GTCO (+7.7%). Accordingly, the All-Share index shed 0.1% w/w to close at 104,562.06 points. As a result, the MTD and YTD returns moderated slightly to +4.7% and +40.0%, respectively. Activity level remained weak as trading volume and value decreased by 31.9% w/w and 7.8% w/w, respectively. Sectoral performance was mixed as the Insurance (+3.2%), Banking (+1.9%), Industrial Goods (+0.2%) indices advanced while the Consumer Goods (-1.0%) index declined. The Oil and Gas index closed flat.
Given the outcome of the MPC meeting, we believe the hawkish stance of the MPC will continue to intensify risk-off sentiments in the local bourse, particularly among domestic investors. However, we believe earnings releases from the banks and accompanying dividend declarations could trigger another wave of positive sentiments, supporting buying activities on the bourse.
Money market and fixed income
Money market
This week, the overnight (OVN) rate expanded by 92bps to 28.2%, as debits for the net NTB issuances (NGN1.03 trillion) mopped up liquidity influx from the FAAC allocation (NGN800.03 billion) and FGN bond coupon payments (NGN202.34 billion). Consequently, the average system liquidity settled at a net long position of NGN770.32 billion (vs a net long position of NGN760.53 billion in the previous week).
Barring significant inflows to support the financial system next week, we anticipate the OVN rate will likely remain elevated at current levels.
Treasury bills
Bullish sentiments persisted in the Nigerian Treasury bills secondary market, as the average yield across all instruments contracted by 6bps to 17.9%. We attribute this performance to higher demand as investors looked to cover for lost bids at the NTB PMA on Wednesday. Across the market segments, the average yield dipped by 4bps and 6bps to 17.7% and 18.5% in the NTB and OMO secondary markets, respectively. At the primary auction, the CBN offered instruments worth NGN161.33 billion – NGN17.61 billion of the 91-day, NGN1.56 billion of the 182-day, and NGN142.16 billion of the 364-day bills. Demand was at the highest level on record at a total subscription of NGN2.62 trillion (bid-to-offer: 16.2x) with more interest on the longer-dated bill (NGN2.48 trillion | 94.8% of the total subscription). Eventually, the CBN over-allotted bills worth NGN1.19 trillion – NGN29.83 billion of the 91-day, NGN25.56 billion of the 182-day, and NGN1.13 trillion of the 364-day – at respective stop rates of 16.24% (unchanged), 17.00% (unchanged), and 21.12% (unchanged).
Following our expectation of a possible lower liquidity in the system next week, we envisage likely moderation in demand for instruments in the T-bills secondary market and, thus, increased yields.
Bonds
Activities in the Treasury bonds secondary market were subdued for most of the week, as investors evaluated the MPC’s hawkish stance and 200bps hike in the MPR on Tuesday. Consequently, the average yield expanded by 15bps to 19.4%. Across the benchmark curve, the average yield advanced at the short (+13bps) and mid (+73bps) segments following sell pressures on the JAN-2026 (+54bps) and JUN-2033 (+290bps) bonds, respectively, but closed flat at the long end.
In the interim, we expect cautious trading in the FGN bonds secondary market as players reprice yields higher in tandem with the rising interest rates. Over the short term, we maintain that (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics will keep yields elevated in the market.
Foreign Exchange
Nigeria’s FX reserves weakened further this week, as the gross reserves level fell by USD311.91 million to USD33.95 billion (26 March). Meanwhile, the naira further appreciated by 9.3% to NGN1,309.39/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover (as of 27 March 2024) declining by 47.8% WTD to USD984.84 million, as trades were consummated within the NGN1,200.00 – NGN1,486.00/USD band. Notably, the CBN sold another round of USD10,000.00 to each of the eligible BDCs at NGN1,251.00/USD, with an allowable spread capped at 1.5%. In the Forwards market, the naira rates recorded for the 1-month (+9.5% to NGN1,334.58/USD), 3-month (+9.1% to NGN1,375.00/USD), 6-month (+8.7% to NGN1,438.11/USD) and 1-year (+10.7% to NGN1,541.08/USD) contracts increased.
We acknowledge the CBN’s continuous efforts in the FX market to stabilise the naira, reflected in the (1) sustained sale of US dollars to eligible BDCs and (2) maintenance of high yields on naira-denominated assets to support FPI inflows. Whilst CBN’s intervention in the FX market is poised to remain frail in the near term given its low FX reserves, we expect the naira to remain stable in the short term, supported by tighter monetary policy conditions and improved FX liquidity.
Cordros
