Global
At the June monetary policy meeting, the Governing Council of the European Central Bank (ECB) voted to cut its key policy rates in line with market expectations. Accordingly, the council reduced the main refinancing operations, marginal lending facility and deposit lending facility rates by 25bps apiece to 4.25%, 4.50% and 3.75%, respectively (previously: 4.50%, 4.75%, and 4.00%), citing that the underlying inflation dynamics and the effectiveness of monetary policy transmission influenced their decision after nine months of holding rates steady.
In addition, the ECB acknowledged that its tight monetary policy has kept financing conditions restrictive by dampening demand and maintaining well-anchored inflation expectations. However, it was further noted that domestic price pressures remain, primarily due to elevated wage growth.
Furthermore, the council emphasised that it would keep policy rates sufficiently restrictive for as long as necessary to tame the elevated inflationary pressures while adopting a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restrictions.
The Council’s determination to bring inflation to its 2.0% medium-term target suggests that key interest rates may remain at restrictive levels for an extended period, especially in light of the recent stronger-than-expected economic data, including robust wage growth and services inflation (accounts for 57.0% of CPI).
As a result, we expect the Committee to “HOLD” the key interest rate at the July monetary policy meeting, with a potential rate cut in September, synchronising neatly with market expectations of one more reduction this year.
According to the United States Bureau of Labor Statistics, total non-farm payroll employment in the US increased by 272,000 jobs in May (April: 165,000 jobs), above market expectations (185,000). The data print suggests the labour market remains robust and supporting the view that the Fed may keep interest rates higher-for-longer.
At the same time, we highlight that significant employment gains were noted across healthcare (68,000 jobs), government employment (43,000 jobs), and leisure and hospitality (42,000 jobs). However, the labour force participation rate settled lower at 62.5% m/m (April: 62.7% m/m), while the unemployment rate increased marginally to 4.0% m/m (April: 3.9% m/m).
Additionally, the employment-population ratio stood at 60.1% m/m (April: 60.2% m/m). While we expect the labour market to remain solid in the near term, we think 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 U.S. Fed will likely maintain interest rates at restrictive levels in the near term. Accordingly, the CME FedWatch Tool indicates a 99.4% probability that the Fed will keep the key policy rate unchanged in the June meeting.
Global Equities
Global stocks traded higher for most of the week on rate cuts optimism, however, unexpectedly strong US monthly jobs data released later in the week dampened hopes the Federal Reserve would soon follow Eurozone and Canadian interest rate cuts.
As of the time of writing, US equities (DJIA: +0.7%; S&P 500: +1.7%) remained on track for weekly gains as investors assessed conflicting employment (ADP private payrolls and non-farm payrolls) data and look ahead to the Federal Reserve’s meeting next week for clues on the monetary policy outlook. Elsewhere, the European equities markets (STOXX Europe: +1.0; FTSE 100: -0.4%) traded with mixed sentiments as investors digested fresh US jobs data and the European Central Bank’s latest interest rate commentary.
In Asia, the Japanese equities (Nikkei 225: +0.5%) mirrored the positive sentiments on Wall Street, meanwhile, Chinese equities (SSE: -1.2%) declined as investors assessed the lukewarm domestic demand amid the higher-than-expected trade balance in May. The Emerging (MSCI EM: +2.3%) and Frontier (MSCI FM: +1.0%) market indices mirrored the bullish sentiments across global stocks consequent upon gains in India (+3.2%) and Vietnam (+2.1%), respectively.
Nigeria: Domestic Economy
Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose by 60.5% m/m to USD3.12 billion in May (April: USD1.95 billion). We attribute the outturn to a broad-based increase in inflows from both local (68.5% of total transactions) and foreign sources (31.5% of gross transactions) in the period.
Analysing the breakdown, inflows from local sources increased by 45.7% m/m to USD2.14 billion in May (April: USD1.47 billion) driven by increased interventions by the CBN (+432.6% m/m) as well as larger inflows from Exporters (+27.2% m/m), and Non-Bank Corporates (+16.0% m/m). At the same time, collections from foreign sources increased significantly by 105.9% m/m to USD984.40 million (April: USD478.10 million), supported by improved foreign investor confidence given the CBN’s sustained FX market reforms and higher yields on naira-denominated assets. Going forward, we expect CBN’s intervention in the FX market, as well as the sustenance of FX market reforms, to continue to bolster confidence and support liquidity conditions in the NAFEM window.
As revealed in Stanbic IBTC Bank’s Purchasing Managers’ Index (PMI) report for May 2024, private sector activities in the country remained resilient for the sixth consecutive month, with the composite PMI increasing by 1.0 point to 52.1 in May (April: 51.1) – its highest level since touching 54.5 points in January. We highlight that the improvement was fueled by increased new orders and output as consumer demand continues to rise amid signs of easing inflationary pressures. However, the depreciation of the naira remains a significant factor, posing an upward risk to both purchasing and selling costs. Looking ahead, we anticipate improved private sector activities in the near term to be driven by resilient domestic demand, albeit still weaker relative to historical levels due to lingering inflationary pressures. That said, we anticipate the broad economy to maintain its positive growth trend over the short to medium term.
Capital Markets: Equities
Negative sentiments resurfaced in the domestic bourse due to profit-taking activities on most trading days of the week. Specifically, sell pressures on TRANSCORP (-11.2%) and UBA (-5.4%) drove a 0.1% w/w decline in the All-Share Index, as it closed at 99,222.33 points. Consequently, the Month-to-date and Year-to-date returns settled at -0.1% and +32.7%, respectively. Analysing activity levels, trading volume, and value declined by 22.2% w/w and 2.6% w/w, respectively. Finally, sector performances were mixed, as the Banking (-0.6%) and Oil & Gas (-0.2%) indices declined, while the Insurance (+0.8%) and Consumer Goods (+0.3%) indices advanced. Meanwhile, the Industrial Goods index closed flat.
In the coming week, we expect the overall market sentiment to remain bearish, especially given the lack of significant drivers to buoy investors’ interest over the near-term, before the earnings season. One potential factor that could change the direction of activities may be upcoming share issuances by banks, however, the timelines for these issuances remain unclear. Notwithstanding, we advise investors to trade cautiously over the near term in fundamentally justified names.
Money market and fixed income
The overnight (OVN) rate expanded by 71bps w/w to 30.7% as the week’s sole inflow from OMO maturities (NGN37.05 billion) was insufficient to outstrip OMO auction settlements (NGN513.95 billion) and net NTB issuances (NGN57.30 billion). As a result, the average system liquidity settled lower at a net long position of NGN377.38 billion (vs NGN617.50 billion in the previous week).
In the absence of any significant inflows to boost the financial system liquidity in the coming week, we anticipate that system liquidity will likely remain under pressure. We expect this will lead to the OVN rate trending higher.
Treasury bills
In line with our expectations, the Treasury bills secondary market traded on a bearish note as the average yield in the market rose by 35bps to 22.0%. Across the market segments, the average yield advanced by 28bps to 22.0% at the T-bills segment and expanded by 50bps to 21.9% at the OMO segment.
At this week’s NTB auction, the DMO offered participants, instruments worth NGN221.13 billion – NGN14.42 billion for the 91-day, NGN26.82 billion for the 182-day and NGN179.89 billion for the 365-day bills. Notably, aggregate subscriptions at the auction settled at NGN713.89 billion (bid-to-offer: 3.2x), lower than the NGN1.59 trillion recorded at the previous auction.
Eventually, the CBN allotted bills worth NGN278.43 billion – NGN19.61 billion for the 91-day, NGN12.27 billion for the 182-day, and NGN246.55 billion for the 365-day papers – at respective stop rates of 16.50% (unchanged), 17.50% (previous: 17.45%) and 20.67% (previous: 20.69%). Meanwhile, the CBN also conducted an OMO auction on Tuesday, offering instruments worth NGN250.00 billion – NGN25.00 billion for the 105-day, NGN75.00 billion for the 189-day and NGN150.00 billion for the 357-day – to investors. Total subscription settled at NGN518.95 billion (bid-to-offer: 2.1x), with the CBN allotting NGN513.95 billion across the three tenors – NGN10.00 billion for the 105-day, NGN16.00 billion for the 189-day and NGN487.95 billion for the 357-day – at respective stop rates of 18.74% (previous: 19.00%), 19.59% (previous: 19.64%), 22.33% (previous: 22.34%).
Based on our expectation of a possible liquidity deficit in the coming week, we expect yields in the Treasury bills secondary market to trend higher, as participants (specifically banks) in the market look to fulfil their funding needs. In addition, the CBN is scheduled to hold an NTB PMA next Thursday (13 June), where it is expected to rollover NGN44.23 billion worth of maturities.
Bonds
Bearish sentiments prevailed in the Treasury bonds secondary market this week, as the average yield expanded by 4bps to 18.7%. Across the benchmark curve, the average yield advanced at the short (+5bps) and mid (+14bps) segments as investors took profits on the MAR-2025 (+13bps) and FEB-2031 (+34bps) bonds, respectively. Meanwhile, the average yield closed flat at the long end.
Next week, we still anticipate quiet proceedings in the FGN bonds secondary market as investors’ appetite for instruments remains low. Our expectation is driven by the trifecta impact of the (1) depressed liquidity in the system, (2) unattractive yields, especially on mid- to long-dated bonds, and (3) weak macroeconomic landscape. Meanwhile, we maintain our medium-term expectation of elevated yields consequent on (1) anticipated monetary policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics.
Foreign exchange
Nigeria’s FX reserves increased by USD109.89 million w/w to USD32.80 billion (06 June). Similarly, the naira appreciated by 0.1% w/w to NGN1,483.99/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the total turnover (as of 06 June) at the market declined by 56.3% WTD to USD827.49 million, with trades consummated within the NGN1,250.00/USD – NGN1,520.00/USD range. In the forwards market, the naira rates recorded on the 1-month (+1.0% to NGN1,500.26/USD), 3-month (+0.9% to NGN1,546.11/USD), 6-month (+0.8% to NGN1,613.06/USD) and 1-year (+2.6% to NGN1,749.57/USD) contracts increased.
We note the renewed pressure in the FX market stemming from limited intervention by CBN and weak offshore participation. Given CBN’s sporadic FX supply and weak net FX reserves, we anticipate continued pressure on the naira. However, we expect the forthcoming World Bank meeting this month, where a USD2.20 billion loan facility for Nigeria is expected to be approved, with an initial partial disbursement (USD750.00 million, subject to request), to offer short-term support for the naira.
Cordros
