Global Economy
According to the United States Department of Labor, the initial jobless claims in the US increased by 3,000 to 219,000 in the week ending 25th May (vs. the week ending 18th May: 216,000). We highlight that the slight increase suggests a gradual loss of momentum in the US labor market as job vacancies deteriorate amid recent layoffs in COVID-19 test firms and technology and media companies.
On a non-seasonally adjusted basis, notable increases were recorded across Tennessee (+1,890), Michigan (+1,603) and Minnesota (+828), while the most significant declines were recorded in Pennsylvania (-845 claims) and California (-760). On a 4-week moving average, we highlight that the initial jobless claims rose by 2,500 to 222,500 (vs week ending 18th May: 220,000).
While we expect the labour market to remain solid in the near term relative to 2020FY (average: 1,450,000 claims) and 2021FY (average: 460,000 claims) levels, we believe the effect of tight financial conditions will continue to pose key downside risks to the labour market over the short term. Nonetheless, the resilient economy and still tight labour market reinforce the view that the US Fed will likely maintain interest rates at restrictive levels in the near term. Accordingly, the CME FedWatch Tool indicates a 98.9% probability that the Fed will keep the key policy rate unchanged in the June meeting.
According to the recently released data from Eurostat, the Euro Area’s consumer prices rose for the first time in 5 months to 2.6% y/y in May (April: +2.4% y/y) – above market expectation (+2.5% y/y). We attribute the upturn in inflationary pressure to the rebound in energy prices despite the slowdown in the cost of food. Analyzing the breakdown, energy prices (+0.3% y/y vs April: -0.6% y/y) rose for the first time in 13 months, while food, alcohol & tobacco (+2.6% y/y vs April: +2.8% y/y) prices slowed. On a month-on-month basis, consumer prices moderated to 0.2% (April: +0.6% m/m).
Whilst the surge in energy prices and the unwind of fiscal policy support programs across the bloc could continue to pose an upside risk to inflationary pressures, we expect favourable base effect and frail consumer demand to support disinflation in the near term. That said, we believe the European Central Bank (ECB) will embark on a policy easing in the near term, given its strong dovish signals. Accordingly, the money market maintains that the apex bank may implement a 25bps cut at the June 12 meeting, followed by an additional cut before the end of the year.
Global Markets
Sentiments remained bearish across global equities as a batch of disappointing economic data across US, Europe and Asia weighed on sentiments, diminishing hopes of interest rate cuts by major central banks. Furthermore, investors’ attention shifted to the US personal consumption expenditures index (PCE) report due later today (31 May), for clues on interest rate outlook.
In line with this, US equities (DJIA: -2.5%; S&P 500: -1.3%) were headed for a second consecutive week of losses as rising Treasury yields and a weaker-than-expected revised Q1-24 GDP data (+1.3% | previously: +1.6%) weighed on sentiments. Likewise, European equities (STOXX Europe: -0.7%; FTSE 100: -0.7%) were on track to close lower as higher-than-expected inflation data in the Eurozone fueled concerns about prolonged high interest rates.
Asian markets remained bearish (Nikkei 225: -0.4%; SSE: -0.1%) following (1) negative sentiments on Wall Street, (2) worries over the recent rise in long-term interest rates in Japan, and (3) weak Chinese manufacturing PMI data indicating a patchy economic recovery. The Emerging Markets index (MSCI EM: -2.3%) closed lower led by losses in China (-0.1%) and India (-1.9%). Similarly, the Frontier (MSCI FM: -0.5%) market index reversed last week’s gain due to bearish sentiments in Romania (-0.6%).
Nigeria: Domestic Economy
Based on the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market declined by 35.7% m/m to NGN346.23 billion in April (March: NGN538.54 billion). We highlight that domestic investors primarily drove the decline in the review period, with domestic inflows (65.1% of market transactions) dropping by 49.3% m/m to NGN225.40 billion (March: NGN444.28 billion) driven by m/m contraction across retail (-54.9% m/m) and institutional (-43.6% m/m) transactions.
We understand that the weak domestic participation was due to investors’ preference for fixed-income instruments due to the higher yields, particularly on the short-term papers. Meanwhile, foreign transactions (34.9% of gross transactions) increased by 28.2% m/m to NGN120.83 billion (March: NGN94.26 billion), representing the fourth consecutive month of increase and the highest level since May 2018 (NGN192.95 billion).
We attribute the sustained improvement in foreign participation to investors’ positive reactions to CBN efforts to stabilize the FX. While we expect domestic investors to continue to dominate market performance, we think buying activities will be constrained by expectations of elevated yields in the FI market following the Monetary Policy Committee’s contractionary stance.
On the other hand, we believe the CBN’s policies around fixing FX inadequacies will continue to bolster investor confidence and encourage the continued return of foreign investors. Consequently, we expect sustained improvements in foreign participation in the short term.
According to data from the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 67.0% y/y to NGN72.92 trillion in April (April 2023: NGN43.66 trillion). We attribute the sustained CPS growth to the dual impact of (1) CBN’s enforcement of the 50.0% loan-to-deposit ratio and (2) the depreciation of the local currency. On a month-on-month basis, the CPS increased by 2.4% in April (March: -11.9% m/m to NGN71.21 trillion). That said, the broad money supply grew by 73.0% y/y to NGN96.97 trillion, in line with the increase recorded across quasi-money (90.7% y/y) and narrow money supply (50.0% y/y). Looking ahead, we believe the re-enforcement of the CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) will drive the willingness of commercial banks to create risky assets in the short term. However, we understand that the apex bank’s intensified monetary policy tightening measures could tether the growth of the CPS in the near term.
Capital Market: Equities
The Nigerian equities market rebounded after three consecutive weeks of bearish sentiments, as bargain hunting activities across tickers with attractive entry points pushed the All-Share Index higher by 1.7% to 99,300.38 points. Precisely, investors’ interests in SEPLAT (+13.7%), FBNH (+14.7%), UBA (+15.6%), DANGSUGAR (+20.5%), ZENITHBANK (+10.0%) and GTCO (+7.2%) spurred the weekly gain. As a result, the Month-to-Date and Year-to-Date returns for the index increased to +1.1% and +32.8%, respectively. However, activity levels were mixed, as the trading volume increased by 10.2% w/w, while trading value decreased by 23.1% w/w. Sectoral performance was mostly positive as the Oil and Gas (+9.1%), Banking (+8.7%), Insurance (+3.9%), and Consumer Goods (+2.0%) indices advanced, while the Industrial Goods (-0.1%) index was the sole loser for the week.
While we still expect overall market sentiment to border on the bearish side, we believe investors will continue to cherry pick attractive stocks particularly at current market valuations. Overall, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse in the near term.
Money market and fixed income
The overnight (OVN) rate contracted by 306bps w/w to 29.9%, as inflows from FX swap maturities (c. NGN500.00 billion), Remita electronic payments (c.NGN200.00 billion) and FGN bond coupon payments (NGN5.63 billion) supported the financial system amid debits for this week’s OMO auction (NGN500.00 billion). Accordingly, the average system liquidity remained at a net long position but closed lower at NGN617.50 billion (vs NGN905.64 billion in the previous week).
Next week, we envisage the OVN rate will likely remain elevated given that we do not expect any notable inflows to support the system amid a possible net issuance at the NTB auction scheduled for next Wednesday.
Treasury bills
Proceedings in the Treasury bills secondary market closed on a mixed note amid profit-taking activities specifically on the CBN’s OMO bills. As a result, the average yield across all segments increased slightly by 1bp to 21.6%. Across the market segments, the average yield declined by 25bps to 21.7% at the NTB segment but advanced by 64bps to 21.4% at the OMO segment. Midweek, the apex bank floated its eighth OMO auction of the year, offering instruments worth NGN500.00 billion – NGN75.00 billion for the 90-day, NGN75.00 billion for the 174-day and NGN350.00 billion for the 363-day – to participants. Notably, investors’ focus was largely on the 1-year bill amid zero interest in the 90-day bill. Eventually, the CBN allotted NGN73.00 million for the 174-day bill and NGN499.27 billion for the 363-day bill at respective stop rates of 19.64% (previous: 19.74%) and 22.34% (previous: 22.49%).
Following the likelihood of no significant inflows into the financial system next week, we think demand for instruments in the Treasury bills secondary market will likely wane, causing yields in the space to rise further. In addition, the CBN is scheduled to hold an NTB PMA on Wednesday (05 June) with NGN221.13 billion worth of maturities on offer.
Bonds
Trading in FGN bonds secondary market remained relatively calm amid pockets of offers on few short- and long-dated bonds. Consequently, the average yield inched higher by 2bps to 18.7%. Across the benchmark curve, the average yield expanded at the short (+4bps) and long (+1bp) ends, following sell pressures on the MAR-2025 (+12bps) and APR-2049 (+3bps) bonds, respectively. Conversely, the average yield closed flat at the mid segment.
We envisage the trading pattern in the Treasury bonds secondary market to remain quiet following players staying on the sidelines as the month comes to an end. Meanwhile, our medium-term expectation is that yields in the market will remain elevated, driven by the (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics.
Foreign exchange
This week, Nigeria’s FX reserves paused its five-week growth trend as the gross reserve level weakened by USD44.00 million w/w to USD32.69 billion (29 May). Elsewhere, the naira appreciated to a month high of NGN1,173/USD on 28 May before closing the week at NGN1,485.99/USD (-0.2% w/w) at the Nigerian Autonomous Foreign Exchange Market (NAFEM). Markedly, the CBN intervened in the market five times over the week, with total sales of USD338.00 million within the range of NGN1,030.00/USD and NGN1,400.00/USD. Total turnover at the NAFEM (as of 30 May) advanced by 3.1% WTD to USD1.55 billion, with trades consummated within the NGN1,010.00/USD – NGN1,520.00/USD band. In the forwards market, the naira rates depreciated across the 1-month (-0.8% to NGN1,515.63/USD), 3-month (-0.8% to NGN1,559.64/USD), 6-month (-0.3% to NGN1,626.00/USD) and 1-year (-1.4% to NGN1,795.08/USD) contracts.
We point out the aforementioned intervention by the CBN amid improved inflows from FPIs, which together supported the appreciation witnessed during the week. Additionally, the CBN’s OMO issuances after the USD1.30 billion non-deliverable forwards (NDF) matured on 29 May forestalled demand pressure that could have resulted in the weakening of the naira. In the short term, we still expect the naira to remain under pressure barring any significant intervention from the CBN.
Cordros
