Global Economy
The Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 5 – 4 to reduce the bank rate by 25bps to 5.0% (Previous: 5.25%) – the first interest rate cut since March 2020 (-25bps to 0.1%). We believe the BoE’s decision was influenced by the diminished impact of past external shocks and the progress in moderating persistent inflation risks. Meanwhile, the Committee anticipate a gradual uptick in inflation in H2-24 as the effects of a sharp drop in household energy prices fade before returning to the set 2.0% target next year.
Although no explicit forward guidance was provided at the meeting, the BoE clarified that they are not committing to a series of rapid rate reductions. They remain cautious about cutting rates too quickly or too significantly while ensuring inflation stays within target. Further out, the Committee stated they would closely monitor inflation persistence and adjust monetary policy restrictiveness as needed. We expect the key policy rate will remain restrictive until medium-term inflation risks are further mitigated. Consequently, we anticipate that the BoE will “HOLD” the bank rate at the September policy meeting, with the possibility of another 25bps cut in November.
According to the recently released data from Eurostat, the Euro Area’s consumer prices rose by 10bps to 2.6% y/y in July (June: +2.5% y/y), coming in above market expectation of +2.4% y/y. We attribute the upturn in inflationary pressure to an increase in energy prices. Precisely, energy prices (+1.3% y/y vs June: +0.2% y/y) rose to a 15-month high, while food prices (+2.3% y/y vs June: +2.4% y/y) slowed for the third consecutive month. On a month-on-month basis, consumer prices settled at 0.0% (June: +0.2% m/m). Whilst higher energy prices and sticky services costs continue to keep inflation elevated, we expect favourable base effects and slower food prices to support disinflation in the near term. That said, we believe the European Central Bank (ECB) will embark on policy easing in the near term, given strong dovish signals. Accordingly, rates in the money market reflect and expectation that the ECB will ease the key policy rate at the September policy meeting.
Global Equities
Global stocks traded with mixed sentiments as investors assessed rate decisions by the Bank of England (BoE) and Bank of Japan (BoJ) along with weak corporate earnings and economic data releases. As of the time of writing, US equities (DJIA: -0.6%; S&P 500: -0.2%) were set to close in the red, extending the losing streak to a second straight week, on negative sentiments from weaker-than-expected economic data (Initial jobless claims and Manufacturing data) and sharp selloffs in heavyweight tech stocks – Nvidia, Moderna and Intel. In the same vein, European markets (STOXX Europe: -1.6%; FTSE 100: -0.3%) were on track to close lower as the losses on tech stocks and weak US economic data weighed on sentiments amidst the rate cut announcement from the BoE.
In Asia, the Nikkei 225 (-4.7%) declined as investors assessed BoJ decision to raise benchmark interest rates to 0.25% amid negative sentiments from Wall Street. Meanwhile, the Chinese market (SSE: +0.5%) advanced following optimism that the Chinese government will ramp up stimulus measures to bolster growth after a string of gloomy economic reports. Elsewhere, the Emerging (MSCI EM: +1.4%) index closed positively following gains in China (+0.5%) while the Frontier (MSCI FM: -0.6%) market index dipped consequent upon bearish sentiments in Vietnam (-0.4%).
Nigeria: Domestic Economy
According to the Central Bank of Nigeria (CBN), credit to the private sector (CPS) increased by 38.5% y/y to NGN73.12 trillion in June (June 2023: NGN52.81 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 Ratio (LDR) limit, and (2) the impact of the naira depreciation on foreign denominated assets. However, on a month-on-month basis, CPS declined by 1.6% in June (May: +1.9% m/m to NGN74.31 trillion), highlighting the impact of CBN’s hawkish stance in this year to curb the rising inflation.
Elsewhere, the broad money supply grew by 56.1% y/y to NGN101.35 trillion, in line with increases recorded across quasi-money (+61.9% y/y) and narrow money supply (+50.2% y/y). Looking ahead, we think the re-enforcement of the CBN’s limit on DMB’s loans-to-deposits macro-prudential ratio could continue to drive the willingness of commercial banks to create risky assets. However, we believe that the apex bank’s intensified monetary policy tightening measures will tether the magnitude of growth.
Based on data from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) dropped to a five-month low in July, decreasing by 4.4% m/m to USD1.92 billion (June: USD2.01 billion). The decline was mainly due to a contraction in foreign inflows (12.6% of total transaction value) as the collections from foreign sources declined by 51.4% m/m to USD243.30 million (USD500.20 million) on the back of weaker collections from foreign portfolio investments (-58.8% m/m) and other corporates (-32.1% m/m) despite the rebound in foreign direct investment (+1,705.9% m/m).
We attribute the weaker foreign inflow to the frail foreign investor participation in the Nigerian Capital Market following the renewed concerns on increased currency conversion and market risk associated with the tight FX liquidity and the volatility in the naira. However, inflows from local sources (87.4% of total transaction value) increased by 11.1% m/m to USD1.68 billion (June: USD1.51 billion) supported by larger inflows from the CBN (+348.1% m/m) and individuals (+12.3% m/m) segments, while inflows from non-bank corporates (-6.9% m/m) and exporters (-4.5% m/m) declined. Over the short term, we expect FX liquidity conditions to remain frail, mainly due to weak CBN intervention. In addition, we think FX liquidity concerns, the elevated global interest rates and geopolitical uncertainties may keep foreign inflows subdued in the near term.
Capital Markets: Equities
The Nigerian equities market continued with bearish sentiments, as profit-taking activities on MTNN (-5.0%) and NESTLE (-9.8%) stocks drove the All-Share Index lower by 0.5% w/w to 97,745.75 points. Consequently, the Month-to-Date and Year-to-Date returns settled at 0.0% and +30.7%, respectively. In terms of activity level, the total traded volume declined by 4.3% w/w while the total traded value increased by 11.3% w/w. Across our sectoral coverage, the Consumer Goods (-3.3%) and Banking (-0.5%) indices posted losses, while the Oil & Gas (+4.3%) and Insurance (+1.6%) indices recorded gains. The Industrial Goods index closed flat.
While we expect the ongoing H1-24 earnings season to ultimately guide the market’s direction over the short term, we still expect bearish sentiments to remain the key theme as investors remain cautious and continue to exhibit weak appetite for Nigerian tickers.
Money Market and Fixed Income
In line with our expectations, the overnight (OVN) rate contracted by 60bps w/w to 26.1%, driven by the still saturated system liquidity. Consequently, DMBs sterilised excess cash at the CBN’s Standing Deposit Facility (total: NGN1.92 trillion), causing the average liquidity for the week to settle at a net short position of NGN132.33 billion (previous week: net long position of NGN292.31 billion).
We expect the system to remain awash with liquidity next week, further supported by inflows from OMO maturities (NGN80.00 billion). However, we highlight that a significant net issuance at the Wednesday NTB auction could diminish liquidity levels, leading to a likely expansion in the OVN rate.
Treasury Bills
Sentiments in the Treasury bills secondary market remained bearish, as the average yield across all instruments expanded by 28bps to 25.4%. Across the market segments, the average yield inched higher by 25bps to 25.5% in the NTB segment and advanced by 32bps to 25.3% in the OMO segment. Midweek, the CBN offered NGN150.00 billion worth of OMO bills to auction participants, which received a subscription of NGN86.50 billion (bid-to-offer: 0.6x | range: 23.00% – 26.89%). Owing to the soft demand, the auction closed with no allotments made, just as witnessed at the previous OMO auction.
Next week, we expect yields in the Treasury bills secondary market will maintain its northward movement as we envisage that foreign players will continue to exit their holdings in lieu of the unstable naira. In addition, the DMO is scheduled to hold an NTB PMA next Wednesday (07 August) where it set to rollover NGN216.09 billion worth of maturities.
Bonds
Proceedings in the FGN bonds secondary market were bearish, as the average yield across instruments expanded by 32bps to 19.8%. Across the benchmark curve, the average yield increased at the short (+33bps), mid (+11bps) and long (+22bps) segments, due to sell pressures on the APR-2029 (+121bps), JUL-2030 (+39bps) and JUN-2038 (+97bps) bonds, respectively.
In the near term, we anticipate local participants in the Treasury bonds secondary market will continue to reprice yields higher to reflect the elevated benchmark interest rate and significant supply profile due to expected issuances.
Foreign Exchange
Nigeria’s FX reserves reached its highest point since February 2023, as the gross reserve level increased by USD290.77 million w/w to USD36.80 billion (31 July). Meanwhile, the naira depreciated by 0.5% w/w to NGN1,617.08/USD at the NAFEM, amid the CBN selling c.USD42.00 million to Authorized Dealers on Thursday. Total turnover at the window (as of 01 August) decreased by 34.7% WTD to USD871.78 million, with trades consummated within the NGN1,500.00/USD – NGN1,645.00/USD band. In the forwards market, the naira rates on the 1-month (NGN1,625.39/USD) and 1-year (NGN1,922.32/USD) contracts were unchanged, while it declined on the 3-month (-0.3% to NGN1,684.47/USD) contract. Elsewhere, the rate on the 6-month (+0.2% to NGN1,758.16/USD) contract increased.
FX liquidity remained tight this week following a muted intervention from the CBN, which underpinned the increased pressure on the naira. Looking forward, given the CBN’s intention to resume a Retail Sale Dutch Auction on 7 August due to the increased FX demand pressure, we anticipate an improvement in FX liquidity, potentially reducing the volatility in the naira in the short term.
Cordros
