Global Economy
According to the Bureau of Labor Statistics (BLS), the United States headline inflation maintained its downtrend for the third consecutive month, coming in below market expectations (+3.1% y/y) as it eased by 30bps to 3.0% y/y in June (May: +3.3% y/y). We highlight that the deceleration in consumer prices was mainly driven by the slowdown in energy prices (+1.0% y/y vs May: +3.7% y/y) and moderation in transportation (+9.4% y/y vs May: +10.5% y/y) and shelter (+5.2% y/y vs May: +5.4% y/y) costs. Meanwhile, the cost of food (+2.2% y/y vs May: +2.1% y/y) rose marginally due to a slight uptick in prices of food away from home (+4.1% y/y vs May +4.0% y/y) and food at home (+1.1% y/y vs May: +1.0% y/y).
On a month-on-month basis, the headline inflation declined by 0.1% m/m (May: 0.0% m/m). Looking ahead, we expect consumer prices to trend downwards in the near term in line with the tight monetary policy conditions. However, we envisage the inflation rate to remain above the Fed’s 2.0% target due to higher service costs amid rising oil prices and wage growth. That said, we believe the FOMC will maintain the key interest rate at current levels in its July meeting while awaiting future economic data to firm up its decision to proceed with a rate cut. Indeed, the CME FedWatch tool now indicates a probability of 91.2% that the Fed will keep rates unchanged at its July policy meeting and a 94.5% chance of a rate cut in September.
According to the Chinese National Bureau of Statistics, China’s consumer prices eased by 10bps to 0.2% y/y in June (May: +0.3% y/y) – market expectation (+0.4% y/y). Analyzing the breakdown, food prices (-2.1% vs May: -2.0% y/y) dipped further as the tight household budgets tethered demand despite the recent food supply disruptions induced by unfavourable weather conditions. However, the non-food inflation basket was stable at 0.8% y/y (May: +0.8% y/y) as prices closed flat across the housing (+0.2% vs May: +0.2% y/y), health (+1.5% vs May: +1.5% y/y) and education (+1.7% vs May: +1.7% y/y) sub-baskets; clothing prices (+1.5% vs May: +1.6% y/y) slowed marginally. On a month-on-month basis, headline inflation declined by 0.1% (May -0.2% m/m).
We expect the lacklustre domestic demand in China stemming from low consumer income and increased preference for savings for precautionary motives to continue driving lower consumer prices in the short term. However, we expect the People’s Bank of China (PBoC) to remain cautious about further easing monetary policy to avoid additional pressure on the weak currency. Nevertheless, we anticipate at least one more interest rate cut towards the tail end of the year.
Global Equities
Sentiments in the global equities market remained upbeat, as cooling US inflation bolstered expectations for an interest rate cut by the Federal Reserve at its September meeting. Accordingly, US equities (DJIA: +1.0%; S&P 500: +0.3%) were on track for a weekly gain as expectations for upcoming interest rate cuts gained momentum. This was fueled by remarks from the Federal Reserve Chairman, who indicated that the central bank would consider cutting rates before inflation reached the 2.0% target.
Likewise, European equities (STOXX Europe: +0.6%; FTSE 100: +0.2%) remained in the positive territory, supported by (1) a stronger pound, (2) optimistic corporate earnings forecasts, and (3) growing bets for a September rate cut by the US Federal Reserve. Asian markets (Nikkei 225: +0.7%; SSE: +0.8%) were broadly positive, benefiting from the upbeat sentiment on Wall Street, expectations of strong corporate earnings, and better-than-expected export data from China. Lastly, gains in China (+0.8%) and India (+0.6%) drove the Emerging Markets index (MSCI EM: +1.8%) higher, while the Frontier Markets index (MSCI FM: +0.5%) was driven by positive performances in Vietnam (+0.1%) and Romania (+0.4%).
Nigeria: Domestic Economy
Based on data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) maintained its uptrend for the third consecutive month, rising by 2.2% m/m to 1.50 mb/d in June (May: 1.47 mb/d). Notably, significant improvement was recorded at the Bonny terminal (+20.2% y/y) as the restart of the Awoba field boosted supply to a 5-month high production level despite the shut-in recorded at the Nembe Creek oil field in mid-June. At the same time, increased production was recorded across the Agbami (+4.7% m/m) and Forcados (+2.6% m/m) production terminals.
In comparison, declines were witnessed across the Qua Iboe (-17.3% m/m), Bonga (-10.45 m/m) and Escravos (-2.9% m/m) terminals. Overall, crude oil production averaged 1.51 mb/d in H1-24 (H1-23: 1.46 mb/d | 2023FY: 1.47 mb/d). While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that (1) frequent leaks from pipelines, (2) intermittent oil terminal shutdowns for repairs, and (3) International Oil Companies (IOC) divestment still pose downside risks to crude oil production in the near term. Thus, we maintain our average crude oil production estimate (including condensate) of 1.52 mb/d for 2024E (FG estimate: 1.78 mb/d).
According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 65.9% y/y to NGN74.31 trillion in May (May 2023: NGN44.79 trillion). We attribute the increase in CPS in the review period to the (1) Deposit Money Banks’ (DMBs) efforts to boost risk asset creation in line with the CBN’s 50.0% Loan-to-Deposit (LDR) and (2) the impact of the naira depreciation on foreign denominated assets. On a month-on-month basis, the CPS increased by 1.9% in May (April: +2.4% m/m to NGN72.92 trillion).
In addition, the currency in circulation increased by 56.9% y/y to NGN3.97 trillion (May 2023: NGN2.53 trillion) while the broad money supply (M3) grew by 78.2% y/y to NGN99.24 trillion, mirroring the increases observed in M2 (+78.2% y/y) and narrow money (+48.5% y/y). Over the short to medium term, we think the re-enforcement of the CBN’s limit on the loans-to-deposits macro-prudential ratio for deposit money banks will continue to drive the willingness of commercial banks to create risky assets. Nonetheless, we believe that the apex bank’s intensified monetary policy tightening measures could tether the growth of the CPS in the near term.
Capital Markets: Equities
The local bourse opened the week on a negative footing and maintained the same momentum throughout the week, except for the last trading session, due to a lack of positive triggers to spur strong buying interest. Mainly, sell pressures on GTCO (-3.9%), TRANSCORP (-1.0%), SEPLAT (-1.7%) and UBA (-4.0%) drove the All-Share Index lower by 0.4% w/w resulting in Month-to-Date and Year-to-Date returns of -0.3% and +33.3%, respectively. Despite this, activity levels were stronger than the previous week, with total trading volume and value increasing by 22.4% w/w and 173.5% w/w, respectively. From a sectoral perspective, the Banking (-2.1%), Insurance (-0.4%), and Consumer Goods (-0.1%) indices declined while the Oil and Gas (+1.4%) index advanced. The Industrial Goods index closed flat.
As the half-year earnings season approaches, we believe investors will look for signs of improvement following the broadly lacklustre Q1-24 corporate earnings. Consequently, we expect mixed market performance in the coming week, with bargain-hunting balanced by intermittent profit-taking activities.
Money Market and Fixed Income
The overnight (OVN) rate declined by 7bps w/w to 32.5%, as the inflows from OMO maturities (NGN32.20 billion) and banks’ activity at the CBN SLF window cushioned the debits for net NTB issuance (NGN44.16 billion). Thus, the week’s average liquidity closed at a net long position of NGN1.44 trillion (vs net long position of NGN1.13 trillion in the prior week).
Barring any significant outflows next week, we anticipate the inflows from OMO maturities (NGN16.00 billion) and FGN bond coupon payments (NGN65.36 billion) will likely support system liquidity, leading to a decline in the OVN rate.
Treasury Bills
Bearish sentiments persisted in the NTB secondary market this week, following notable sell pressures on mid-dated papers amid pockets of post-auction demand from participants who lost out at the Wednesday NTB PMA. Consequently, the average yield across all instruments expanded by 32bps to 23.7%. Across the market segments, the average yield advanced by 57bps to 23.3% in the NTB segment but contracted by 11bps to 24.2% in the OMO segment. At this week’s T-bills auction, the DMO offered NGN166.11 billion – NGN27.11 billion for the 91D, NGN1.49 billion for the 182D and NGN137.50 billion for the 364D bills – worth of instruments to investors.
Aggregate subscription settled lower at NGN308.66 billion (bid-to-offer: 1.9x), compared to the previous auction (bid-to-offer: 3.4x | NGN773.98 billion). Eventually, the DMO allotted bills worth NGN207.27 billion – NGN28.47 billion for the 91D, NGN9.16 billion for the 182D and NGN169.64 billion for the 364D papers – with respective stop rates of 16.33% (unchanged), 17.44% (unchanged) and 21.24% (previous: 20.68%).
Next week, we expect mixed activities in the Treasury bills secondary market, as the modest liquidity in the financial system might be insufficient to drive strong demand for bills and cause yields to fall significantly.
Bonds
The Treasury bonds secondary market closed on a bearish note this week as most traders opened short positions ahead of this month’s bond auction. As a result, the average yield increased by 49bps to 19.3%. Across the benchmark curve, the average yield expanded at the short (+123bps), mid (+69bps) and long (+5bps) segments due to profit-taking activities on the MAR-2025 (+329bps), JUN-2033 (+139bps) and JUN-2053 (+51bps) bonds, respectively.
We highlight that the DMO postponed the July 2024 FGN bond auction in a circular released today, citing unforeseen circumstances as the reason for the action. However, we do not envisage participants in the market to react negatively to this development, especially as the offer size and instruments remain the same. Nonetheless, 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 expanded further this week, as the gross reserves grew by USD507.09 million w/w to USD35.28 billion (11 July). Conversely, the naira depreciated by 3.5% w/w to NGN1,563.80/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the CBN sold c.USD94.00 million at an average of NGN1,504.00/USD to banks during the week. At the NAFEM, total turnover (as of 11 July) increased by 14.3% WTD to USD943.29 million, with trades consummated within the NGN1,465.00/USD – NGN1,590.00/USD band. In the forwards market, the naira rates decreased across the 1-month (-3.3% to NGN1,588.23/USD), 3-month (-2.8% to NGN1,640.70/USD), 6-month (-2.8% to NGN1,725.39/USD) and 1-year (-2.5% to NGN1,894.92/USD) contracts.
Although market liquidity improved on mild intervention from the CBN, it remained insufficient to drive a significant appreciation in the naira, as demand for FX continued to outweigh supply. Looking ahead, we expect the naira to remain under pressure due to the muted FX supply from the CBN and weak inflows from FPIs.
Cordros
