Global Economy
According to recently released data by the National Bureau of Statistics, China’s consumer prices rose by 30bps to 0.5% y/y in July (June: +0.2% y/y) – market expectation: 0.3% y/y. We highlight that price pressures were likely due to increased domestic demand as the government continues to implement measures to stimulate economic activities and reduce deflation risks. Analyzing the breakdown provided, food inflation reversed twelve consecutive months of contraction to settle at 0.0% y/y in July (June: -2.1% y/y).
Meanwhile, non-food inflation (+0.7% y/y vs June: + 0.8% y/y) eased marginally on the back of lower price pressures across the housing and health sub-baskets. On a month-on-month basis, headline inflation increased by 0.5% (June: -0.2% m/m). While we anticipate further increases in consumer prices driven by improving demand, reflective of the government’s consumption-boosting policies, we expect inflationary pressures to remain below historical levels. This is due to subdued consumer spending stemming from low income and high youth unemployment in China. Consequently, we expect the PBoC to “HOLD” the key policy rates at the August monetary policy meeting and possibly implement a rate cut in September.
According to S&P Global, United States (US) composite PMI remained above the 50.0 points psychological threshold for the 18th consecutive month, slowing to 54.3 points in July (June: 54.8 points) as elevated cost pressures and weak consumer confidence weighed on private sector activity. On one hand, while the services sector remained resilient due to growth of new businesses and robust health and financial services activities, the Service PMI (55.0 points vs June: 55.3 points) came in lower in July as higher costs dampened consumer demand. On the other hand, factory activity as measured by the manufacturing PMI (49.6 points vs June: 51.6 points), deteriorated due to a slowdown in operating conditions and employment as new orders weakened. We anticipate that overall private sector activities in the US will remain in the expansionary territory over the short term. Our view is premised on improved optimism following the anticipation of a rate cut by the US Fed and increased spending due to pre-election activities.
Global Equities
Equities markets across the globe sank this week, driven by fears of a recession in the US following a weaker-than-expected jobs report last week, and concerns that the Federal Reserve is lagging in cutting interest rates to combat an economic slowdown. The downturn was further intensified by the unwinding of the yen “carry trade” after the Bank of Japan raised interest rates last week, narrowing the interest rate gap between Japan and the US. In line with this, US equities (DJIA: -0.7%; S&P 500: -0.5%) were set to close lower, as of the time of writing. Likewise, European equities (STOXX Europe: -0.1%; FTSE 100: -0.3%) were headed for a weekly loss prompted by fears of economic slowdown in the United States. Asian equities (Nikkei 225: -2.5%; SSE: -1.5%) posted losses driven by (1) negative sentiment from Wall Street and (2) a surge in the yen to a seven-month high against the dollar. Finally, the Emerging Markets index (MSCI EM: -1.3%) reflected the negative global market sentiments, following the loss in China (-1.5%) while the Frontier Markets index (MSCI FM: -1.1%) declined driven by bearish sentiments in Vietnam (-1.3%) and Romania (-3.0%).
Nigerian Economy
Based on data released by the CBN, international payments by the apex bank increased by 30.8% y/y to USD3.31 billion in 5M-24 (5M-23: USD2.53 billion). Breaking it down, foreign debt service and payments increased by +96.3% y/y to USD2.19 billion and accounted for 66.1% of total international payments. Similarly, we note an increase in direct remittances (+28.5% y/y to USD841.37 million) underpinned by increased payments for international services by Nigerian residents.
Meanwhile, payments for letters of credit fell by 63.3% q/q to USD279.99 million (5M-23: USD762.03 million), partly attributable to reduced consumer demand underpinned by high inflationary pressures as well as the depreciation of the naira. Looking forward, we expect international payments to remain elevated, supported by the FG’s repayment of maturing debts primarily from Multilateral and Bilateral sources as well as interest payments. Elsewhere, we anticipate trade imports to improve in the short term due to reduced naira depreciation and the FG’s 150-day import duty removal on certain agricultural produce, potentially increasing international payments.
On Wednesday, the Central Bank of Nigeria (CBN) re-initiated the Retail Dutch Auction System (RDAS), marking the first foreign exchange retail (FX) auction under the current CBN administration. We highlight that the strategic move by the apex bank was aimed at achieving several objectives, including (1) satisfying the growing FX demand, which has been partly fueled by seasonal factors such as summer tourism and businesses seeking the greenback for trade, (2) stabilizing the naira, and (3) facilitating transparent price discovery.
Notably, the CBN received bids from end users amounting to USD1.18 billion submitted through 32 authorized dealer banks; however, bids valued at c. USD313.69 million from six banks were disqualified due to late submissions or failure to adhere to the required bidding format. Consequently, the CBN successfully auctioned USD876.26 million at a cut-off rate of NGN1,495.00/ USD, with settlement for the successful bids scheduled for Thursday (August 8). Although the CBN has not specified the frequency of retail auctions, we expect the naira to stabilize in the short term due to reduced demand pressure and tight naira liquidity after a significant portion of bids were met at the auction. However, we note that the expected currency respite may be short-lived if the CBN does not sustain interventions in the FX market.
Capital Markets: Equities
The bears took a back seat as positive sentiments resurfaced in the Nigerian equities market following investors’ interest in MTNN (+5.2%), OANDO (+60.5%), UBA (+14.7%), and ZENITHBANK (+7.9%), which drove the All-Share Index higher by 0.9% to 98,605.79 points. Thus, the Month-to-Date and Year-to-Date returns increased to +0.9% and +31.9%, respectively. However, activity levels remained weak, as the total trading volume and value declined by 21.0% and 6.3% w/w, respectively. Sectoral performance was largely positive, with gains recorded in the Banking (+5.1%), Consumer Goods (+2.3%), Insurance (+1.8%) and Oil and Gas (+1.0%) indices. The Industrial Goods (-3.7%) was the sole loser for the week.
We believe earnings from the Tier-1 banks in the coming week(s) will support positive sentiments in the near term, especially given the anticipation of interim dividends. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed-income market.
Money Market and Fixed Income
The overnight (OVN) rate expanded significantly by 792bps w/w to 34.0%, following the debits for the CBN’s FX Retail Dutch Auction (c. NGN1.31 trillion) on Thursday. Notwithstanding, average system liquidity settled at a net long position of NGN10.61 billion (previous week: net short position of NGN132.33 billion) reflecting DMBs’ activities at the CBN SLF window (NGN419.87 billion).
We anticipate sustained dearth in system liquidity next week, as we believe that the sole inflow from OMO maturities (NGN20.50 billion) would be insufficient to support financial system liquidity. Thus, we expect the OVN rate will likely maintain its uptrend.
Treasury Bills
Bearish sentiments persisted in the Treasury bills secondary market, as the average yield across all instruments expanded by 51bps to 25.9%. Across the market segments, the average yield advanced by 32bps to 25.8% in the NTB segment and increased by 87bps to 26.1% in the OMO segment. At this week’s NTB auction, the DMO offered NGN216.09 billion – NGN16.59 billion for the 91-day, NGN51.35 billion for the 182-day and NGN148.15 billion for the 364-day bills – worth of instruments to investors. Demand at the auction settled at NGN486.87 billion (previous: NGN373.95 billion), with a bid-to-offer of 2.3x. The auction closed with the DMO allotting exactly what was offered at respective stop rates of 18.50% (unchanged), 19.50% (unchanged) and 21.89% (previous: 22.10%).
We believe the lackluster demand for instruments in the T-bills secondary market will likely remain sticky next week, further supported by the continuous dearth in system liquidity. As a result, we expect yields to rise further from current levels.
Bonds
Similarly, activities in the Treasury bonds secondary market remained bearish, driven by sell pressures on short- and mid-dated papers. Thus, the average yield across instruments advanced by 28bps to 20.1%. Across the benchmark curve, the average yield expanded at the short (+64bps) and mid (+21bps) segments, as investors sold off the MAR-2025 (+158bps) and JUL-2030 (+39bps) bonds, respectively. Meanwhile, the average yield contracted at the long (-6bps) end following demand for the JUL-2034 (-41bps) bond.
Following the reschedule of the August 2024 FGN bond auction to 19 August by the DMO on Thursday, we expect players in the secondary market to likely reshuffle their portfolio next week ahead of the new auction date. Elsewhere, we maintain our medium-term expectation of yields remaining elevated consequent to (1) domestic monetary policy administration and (2) sustained imbalance in the demand and supply dynamics due to significant fiscal deficit.
Foreign Exchange
This week, the Nigeria’s FX reserves improved further, albeit at a slower pace, as the gross reserves level grew by USD12.06 million w/w to USD36.85 billion (08 August). Meanwhile, we highlight that the Retail Dutch Auction by the apex bank on Tuesday eased pressure on the currency, with the naira appreciating by +2.7% w/w to NGN1,574.20/USD at the NAFEM. Total turnover at the window (as of 08 August) decreased by 58.7% WTD to USD472.67 million, with trades consummated within the NGN1,520.00/USD – NGN1,628.00/USD band. In the forwards market, the rate recorded on the 1-month (+0.2% to NGN1,622.10/USD) contract increased, but was unchanged on the 3-month (NGN1,684.56/USD) contract. Elsewhere, the rates declined on the 6-month (-0.9% to NGN1,773.76/USD) and 1-year (-1.9% to NGN1,959.58/USD) contracts.
The naira appreciated in the week on reduced demand pressure following the successful completion of the CBN’s Retail Dutch Auction (RDAS) on 7 August, where USD 876.26 million in bids were met out of USD 1.18 billion. Additionally, FPI participation in the FX market improved as the CBN’s move to stabilize the naira increased investor confidence. While we anticipate FX liquidity will remain frail over the short-term, we expect the naira to trade with less volatility due to the moderation in demand pressure.
Cordros
