Global Economy
According to the Bureau of Labor Statistics (BLS), the United States Personal Consumption Expenditures (PCE) price index eased by 10bps to 2.6% y/y in May (April: +2.6% y/y). We attribute the slowdown to the lingering impact of falling gas prices and cheaper food costs.
Analyzing the breakdown, goods prices (-0.1% y/y vs April: +0.1% y/y) contracted amid a slowdown in the cost of services (+3.9% y/y vs April: 4.0% y/y). Excluding food and energy prices, the PCE price index settled at 2.6% y/y (April: 2.8% y/y). That said, the PCE price index was flat on a month-on-month basis (April: 0.3% m/m). Although the data print signals a relief on price pressures, we highlight that consumer prices remain sticky, reinforcing the view that the US Fed will wait for further signs of a slowdown in consumer prices and a softening labour market before considering a rate cut.
As a result, we expect the FOMC to “HOLD” the key policy rate at the July meeting and opt for a rate cut in September. Indeed, the CME FedWatch tool now indicates 89.7% probability that the Fed will keep rates unchanged at its July policy meeting.
According to the Japanese Ministry of Internal Affairs & Communications, consumer prices in Japan increased by 30bps to 2.8% y/y in May (April: 2.5% y/y). We highlight that the uptick in inflationary pressures reflects the impact of increased energy prices, as the government ended its electricity and gas subsidies. As a result, the core inflation accelerated to 2.5% y/y (April: 2.2% y/y), while food inflation settled at 4.1% y/y (April: 4.3% y/y).
On a month-on-month basis, headline inflation rose by 0.5% (April: 0.2% m/m). We believe inflationary pressures are on course to increase further in the near term on account of higher energy prices and increased import costs due to a weaker yen. Accordingly, we expect the Bank of Japan (BoJ) to maintain its tightening cycle in the near term, with a rate hike expected at the July policy meeting.
Global Equities
Inflation was the focal point this week across global equities as signs of a cooldown following the latest personal consumption expenditures (PCE) price index data reinforced bets that the US Federal Reserve could start cutting interest rates this year. Accordingly, US equities (DJIA: +0.1%; S&P 500: +0.2%) were poised for a weekly gain buoyed by hopes of interest rate cuts following the signs of a cooling economy as revealed in the latest PCE data, jobless claims, and May’s durable goods data. Meanwhile, European equities (STOXX Europe: -0.9%; FTSE 100: -0.7%) were on track for a weekly loss as investors digested a lower-than-expected consumer-confidence reading from Germany.
Asian markets were mixed, as Japanese equities (Nikkei 225: +2.6%) recorded gains due to bargain hunting in technology stocks on expectations of improved earnings from a weaker yen, while Chinese equities (SSE: -1.0%) fell amid concerns over rising geopolitical tensions and doubts about China’s economic recovery. Elsewhere, the Emerging (MSCI EM: -1.3%) and Frontier (MSCI FM: -0.6%) markets posted losses on bearish sentiments in China (-1.0%) and Vietnam (-2.0%), respectively.
Nigeria: Domestic Economy
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market increased by 2.6% m/m to NGN355.38 billion in May (April: NGN346.23 billion). The performance was due to a broad-based increase in participation from both domestic (65.0% of gross transaction) and foreign (35.0% of gross transaction) investors. Analysing the breakdown, inflows from domestic investors increased by 2.5% m/m to NGN231.10 billion (April: NGN225.40 billion), supported by a 12.7% m/m surge in inflows from retail investors, amid a 5.7% m/m decline in inflows from institutional investors.
At the same time, inflows from foreign investors increased by 2.9% m/m to NGN124.28 billion in May (April: NGN120.83 billion). While we expect domestic investors to continue to contribute the most to total transaction value, we think buying activities will be constrained by elevated yields in the fixed income market following the Monetary Policy Committee’s tight monetary policy stance. On the other hand, we expect the improved FX market liquidity and reduced naira volatility to support foreign investor participation in the equities market.
According to the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) declined by 12.9% q/q to NGN984.61 billion in Q1-24 (Q4-23: NGN1.13 trillion). We believe the decline was primarily driven by the reduction in business activities given the weak macroeconomic environment due to the lingering impact of naira depreciation, tight financial conditions, and elevated inflationary pressures. Analysing the breakdown, local collections (-27.6% q/q to NGN386.49 billion | 39.3% of total collections) declined while foreign CIT payments rose marginally (+0.3% q/q to NGN598.13 billion | 60.7% of aggregate collections).
However, on a year-on-year basis, total CIT collection increased by 255.6% (Q1-23: NGN469.01 billion) as the currency depreciation supported a substantial increase in foreign collections (+255.6% y/y). Looking ahead, we expect CIT collections to remain pressured by existing challenges in the short term, potentially lowering growth in the government’s total non-oil revenue estimated at NGN4.16 trillion in 2024E (2023FY: NGN3.31 trillion).
Capital Markets: Equities
This week, the local bourse closed in the green as bullish sentiments dominated trading activities in three out of the five trading sessions. Particularly, renewed interest in SEPLAT (+10.0%) and TRANSCOHOT (+9.3%) drove the All-Share Index higher by 0.3% w/w to 100,057.49 points. Consequently, the Month-to-Date and Year-to-Date returns increased to +0.8% and 33.8%, respectively. Trading activity remained weak, as the total traded volume and value declined by 19.8% w/w and 6.1% w/w, respectively. From a sectoral standpoint, the Oil and Gas (+5.7%), Insurance (+3.3%) and Banking (+1.1%) indices posted gains, while the Consumer Goods (-0.6%) and Industrial Goods (-0.3%) indices declined.
We expect investors to continue to cherry-pick fundamentally sound stocks, given the absence of any significant positive catalysts. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and corporate actions.
Money market and fixed income
This week, the overnight (OVN) rate contracted by 104bps w/w to 25.0%, as the settlements for the FGN bond auction (NGN297.01 billion) and net NTB issuances (NGN55.55 billion) had minimal impact on the healthy liquidity overlay. However, DMBs’ sustained usage of the apex bank’s Standing Deposit Facility ensured the week’s average liquidity remained at a net short position (NGN253.60 billion | prior week: NGN563.87 billion).
In the absence of an OMO auction by the CBN to absorb the surplus liquidity in the financial system, we expect the OVN rate to maintain its downtrend next week.
Treasury bills
Activities in the Treasury bills secondary market were bearish this week, with notable sell pressures on the CBN-issued OMO bills. As a result, the average yield across all instruments expanded by 63bps to 22.5%. Across the market segments, the average yield inched higher by 10bps to 22.1% at the NTB segment and advanced by 175bps to 23.5% at the OMO segment. This week’s NTB auction saw the DMO offering instruments worth NGN284.26 billion – NGN29.83 billion for the 91-day, NGN30.67 billion for the 182-day and NGN168.21 billion for the 364-day papers – to investors.
The auction was massively contested as total subscriptions level settled at NGN773.98 billion (bid-to-offer: 3.4x | previous auction: NGN538.02 billion). The auction closed with the DMO allotting instruments worth NGN284.26 billion – NGN28.15 billion for the 91-day, NGN36.44 billion for the 182-day, and NGN219.67 billion for the 365-day bills – at respective stop rates of 16.30% (unchanged), 17.44% (unchanged) and 20.68% (previous: 20.50%).
Next week, we expect the liquidity surfeit in the system to support buying interest in the Treasury bills secondary market, thus causing yields to temper from current levels.
Bonds
This week, the Treasury bonds secondary market closed on a bullish note, underpinned by buying activities on the APR-2032 (-155bps) and JUN-2033 (-155bps) papers. Consequently, the average yield contracted by 3bps to 18.7%. Across the benchmark curve, the average yield increased at the short (+6bps) and long (+1bp) ends as players sold off the MAR-2025 (+13bps) and JUN-2053 (+10bps) bonds, respectively.
However, the average yield dipped at the mid (-70bps) segment due to demand for the JUN-2033 (-155bps) bond. At Monday’s primary market auction, the DMO offered instruments worth NGN450.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 0.2x; Stop rate: 19.64%), 18.50% FGN FEB 2031 (Bid-to-offer: 0.4x; Stop rate: 20.19%) and 19.89% FGN MAY 2033 (Bid-to-offer: 1.5x; Stop rate: 21.50%) bonds. Notably, the auction recorded weak demand as total subscription level settled at NGN305.26 billion (previous: NGN551.32 billion), with a bid-to-offer ratio of 0.7x. Eventually, the DMO allotted instruments worth NGN297.01 billion across the three tenors, resulting in a bid-to-cover ratio of 1.0x.
Taking a cue from the muted interest shown by players at the month’s FGN bond PMA and post-auction sell-offs, especially on the MAY-2033 (+108bps) bond, we think the risk-off approach of investors in the FGN bond secondary market would likely persist. Meanwhile, we maintain our medium-term expectation of elevated yields consequent to (1) anticipated monetary policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
Nigeria’s FX reserves grew for the fourth consecutive week, as the gross reserves level increased further by USD442.47 million w/w to USD34.14 billion (27 June), attributable to increased oil earnings and a possible receipt of a part of the IMF’s Development Policy Financing (DPF) loan. Conversely, the naira depreciated by 1.3% w/w to NGN1,505.30/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the total turnover (as of 27 June) at the market advanced by 29.1% WTD to USD845.03 million, with trades consummated within the NGN1,4110.00/USD – NGN1,577.00/USD band.
In the forwards market, the naira depreciated across the 1-month (-1.0% to NGN1,521.26/USD), 3-month (-1.8% to NGN1,577.88/USD), 6-month (-1.9% to NGN1,652.47/USD) and 1-year (-2.4% to NGN1,811.77/USD) contracts.
We point out that the frail liquidity in the FX market underpinned the increased volatility on the naira this week as interventions by the CBN remain muted, together with weak offshore participation. In the short term, we anticipate the naira remaining under pressure, barring any significant FX interventions from the CBN.
Cordros
