Global Economy
According to the National Bureau of Statistics (NBS) of China, economic growth in the second-largest global economy slowed to +4.7% y/y in Q2-24 (Q1-24: +5.3% y/y | Q2-23: +6.3% y/y), underperforming market expectations of +5.1% y/y. We highlight that the downturn was driven by a plethora of factors, including (1) weak household spending, (2) persistent real estate woes, (3) ineffective transmission of cautious policy easing efforts, (4) weak consumer confidence, (5) high local government debt, and (6) unfavourable weather conditions. Similarly, on a quarter-on-quarter basis, growth in the Chinese economy settled at +0.7% (Q2-24: +1.5% q/q). While we anticipate the government will implement more robust stimulus measures to bolster economic activities, we expect that the economy will remain pressured by the lingering impacts of (1) an elongated downturn in its property sector, (2) currency fluctuations, (3) lackluster consumer demand, and (4) escalating trade tensions. Indeed, the IMF expects China’s growth to slow to +4.6% y/y in 2024FY relative to 5.2% y/y in 2023FY.
Consumer prices in the United Kingdom (UK) held steady in June. Specifically, the Office for National Statistics (ONS) reported that headline inflation came in at 2.0% y/y in June (May: +2.0% y/y); above market expectations (+1.9% y/y). We highlight that the deceleration in costs of food (+1.5% y/y vs May: +1.7% y/y), alcohol and tobacco (+7.3% y/y vs May: +7.8% y/y), and clothing and footwear (+1.6% y/y vs May: +3.0% y/y) were enough to offset the upward price pressures stemming from the health (+6.3% y/y vs May: +6.2% y/y), and Restaurants and hotels (+6.2% y/y vs May: +5.8% y/y) sub-baskets. On a month-on-month basis, consumer prices settled at 0.1% (May: 0.3% m/m). While we expect that consumer prices will stay within the Bank of England’s (BoE) target in July, we think wage growth in the UK will pose an upside risk to inflationary pressures over the short term. Thus, we believe the BoE will await further data releases, particularly additional confirmation of a deceleration in wage growth, before contemplating policy easing. All told, we anticipate that the BoE will maintain a “HOLD” stance at the August Policy meeting and implement a rate cut in September, if convinced that inflationary pressures are under control.
Global Equities
Global stocks were broadly negative this week as economic and geopolitical concerns overshadowed optimism about potential interest rate cuts. As of the time of writing, US equities (DJIA: +1.7%; S&P 500: -1.3%) traded with mixed sentiments as expectations of an upcoming Federal Reserve rate cut, driven by signs of a cooling labor market, were offset by selloffs in technology stocks following reports that the US might renew export restrictions on semiconductor equipment to China. Elsewhere, European equities (STOXX Europe: -1.9%; FTSE 100: -0.6%) were set to close lower as investors digested the latest ECB interest rate decision amid a higher-than-expected UK inflation data. In Asia, Japanese equities (Nikkei 225: -2.7%) declined as the Japanese yen strengthened significantly against the US dollar on bets that the Bank of Japan would intervene in the FX market. Conversely, the Chinese market (SSE: +0.1%) recorded a marginal gain as optimism for more stimulus measures by the government dampened persistent concerns over a renewed trade war between Beijing and Washington. The Emerging Markets index (MSCI EM: -1.6%) closed lower, driven by losses in Taiwan (-4.4%), while the Frontier Markets index (MSCI FM: +0.7%) advanced, supported by gains in Romania (+1.3%).
Nigeria
According to the National Bureau of Statistics (NBS), headline inflation maintained its uptrend, rising by 24bps to 34.19% y/y in June (May: 33.95% y/y). The increase in prices primarily reflects the impact of the (1) depreciation of the naira, (2) increased food demand associated with the Eid-al-Kabir festivities, and (3) depletion of the off-season harvest. Accordingly, food prices rose by 40.87% y/y (May: 40.66% y/y) while core inflation (+36bps to 27.40% y/y) advanced to its highest level since March 2004 (32.60% y/y). On a month-on-month basis, the headline CPI reversed the downtrend seen in the past three months, increasing by 17bps to 2.31%. Looking ahead, we believe that inflationary pressures may have peaked in June and should begin to moderate in July, mainly due to a high statistical base from the prior year and a slower increase in energy prices. All told, we forecast the headline inflation to settle at 2.16% m/m in July, translating to a y/y print of 33.24% y/y.
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in July (from the total revenue generated in June) increased by 18.5% m/m to NGN1.35 trillion (June: NGN1.14 trillion). We attribute the increased disbursement to higher receipts from Companies Income Tax (CIT), Value Added Tax (VAT), Import and Excise Duties, and Electronic Money Transfer Levy (EMTL), while collections from Royalty Crude, Petroleum Profit Tax (PPT), Rentals and CET Levies declined. From the breakdown provided, we understand the amount disbursed represents 54.4% of the total gross revenue (NGN2.48 trillion) generated in the month, with the remaining balance spread across (1) NGN1.04 trillion for transfer intervention and refunds, and (2) NGN92.11 billion for the cost of collection. Consequently, the FGN received 33.9% or NGN459.78 billion (June: NGN365.81 billion), State Governments received NGN557.58 billion (June: NGN494.92 billion), while the Local Governments received NGN337.02 billion (June: NGN282.48 billion). Whilst gains from the exchange rate differential (Budget: N800.00/USD vs Actual: NGN1,581.65/USD) will continue to support government revenue from foreign sources in naira terms, we expect below-target oil production levels (Budget: 1.78 mb/d vs Cordros forecast: 1.52 mb/d), reinstated PMS subsidy, and the FG’s 150-day import duty-free window for food commodities will tether growth in revenue distributed to the three tiers of government.
Capital Markets: Equities
The sentiments in the domestic equities market were bullish for most of the week as Q2-24 corporate earnings announcements trickled in. Notably, buying interest in AIRTELAFRI (+4.8%) propelled the All-Share Index to a 0.9% w/w gain, to reach 100,539.40 points — its highest level since 15 April (101,777.12 points). Consequently, the Month-to-Date and Year-to-Date returns rose to +0.5% and +34.5%, respectively. However, activity levels were subdued, with total trading volume increasing slightly by 2.2% w/w while total trading value declined by 50.3% w/w. Sectoral performances were mixed as the Insurance (-4.9%), Consumer Goods (-0.2%) and Oil and Gas (-0.1%) indices recorded losses, while the Industrial Goods (+0.1%) index advanced. Also, the Banking index closed flat.
In the interim, we anticipate that the full commencement of the H1-24 earnings season will shape market sentiments. Additionally, we believe that investors will be closely monitoring the outcome of the MPC meeting scheduled for next week to gain further insight into the direction of yields in the fixed-income market and the attendant impact on the equities market.
Money market and fixed income
The overnight (OVN) rate contracted to 32.0% (-43bps w/w), driven by the liquidity surfeit from last week coupled with inflows from Remita payments (c.NGN200.00 billion), FGN bond coupon payments (NGN65.36 billion) and OMO maturities (NGN16.00 billion). Subsequently, the week’s average liquidity remained at a net long position, settling at NGN870.92 billion (previous: net long position of NGN1.44 trillion).
For next week, we envisage further moderation in the OVN rate as we believe the financial system will remain awash with liquidity. For context, we expect the combined inflows from FAAC disbursements (NGN894.60 billion), FGN bond coupon payments (NGN216.59 billion) and OMO maturities (NGN44.00 billion) will offset the debits for FGN bond PMA (NGN300.00 billion) and a possible net issuance at the Wednesday NTB auction.
Treasury Bills
Trading in the Treasury bills secondary market maintained the bearish trend from the prior weeks, as FPIs exited their positions. Thus, the average yield across all instruments rose by 100bps to 24.7%. Across the market segments, the average yield advanced by 156bps to 24.9% in the T-bills segment and increased by 6bps to 24.3% in the OMO segment. We note that the CBN conducted an OMO auction midweek which was met with paltry interest following a subscription of NGN36.00 billion (range of bid: 23.22% – 24.17%), compared to the NGN150.00 billion on offer. As a result, the apex bank ended the auction with no sales.
We expect the outcome of the MPC meeting scheduled for 22 and 23 July to influence sentiments in the T-bills secondary market. Nonetheless, we do not rule out a likely return of demand in the secondary market supported by the significant amount of liquidity influx expected into the financial system next week. In addition, the DMO is scheduled to conduct an NTB PMA next Wednesday (24 July), where it is expected to roll over NGN277.96 billion worth of maturities.
Bonds
Proceedings in the FGN bonds secondary market remained bearish this week, driven by the disappointing June CPI data (+24bps to 34.19% y/y). Consequently, the average yield expanded by 15bps to 19.4%. Across the benchmark curve, the average yield advanced at the short (+22bps), mid (+21bps) and long (+7bps) segments following sell pressures on the MAR-2025 (+82bps), JUN-2033 (+80bps) and MAR-2050 (+68bps) bonds, respectively.
Next week, we believe the direction of yields in the secondary market will be shaped by the outcome of this month’s FGN bond auction holding on Monday (22 July). At the auction, the DMO is set to offer instruments worth NGN300.00 billion through re-openings of the 19.30% FGN APR 2029, 18.50% FGN FEB 2031 and 19.89% FGN MAY 2033 bonds. Notwithstanding, 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
This week, Nigeria’s FX reserves hit its highest level in 16 months, as the gross reserve level increased by USD557.70 million w/w to USD35.93 billion (18 July), attributable to the disbursement of first tranche (USD750.00 million) of the Development Policy Financing from the World bank. Meanwhile, the naira depreciated further by 2.1% w/w to NGN1,596.92/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM ) amid the CBN’s insufficient supply to the official (USD63.00 million) and parallel (USD20,000 for each eligible BDC) markets on Thursday. Total turnover at the NAFEM as of 19 July decreased by 2.7% WTD to USD1.09 billion, with trades consummated within the NGN1,470.00/USD – NGN1,650.00/USD band. In the forwards market, the naira rates on the 1-month (-0.9% to NGN1,603.29/USD), 3-month (-0.7% to NGN1,652.24/USD), 6-month (-0.5% to NGN1,734.73/USD) and 1-year (-0.3% to NGN1,901.25/USD) contracts declined.
The naira remained under pressure as FX demand continued to exceed overall supply. FX Inflows from FPIs remain muted amid sparse supply from the CBN. In the short term, we expect the naira to remain volatile, barring any significant FX supply from the CBN.
Cordros
