Global Economy
According to the recently released data from Eurostat, Euro Area’s consumer prices eased by 40bps to 2.2% y/y in August (July: +2.6% y/y) – the lowest print since July 2021 (+2.2% y/y). Parsing through the breakdown provided, we note that energy prices (-3.0% y/y vs July: +1.2% y/y) fell, while the cost of non-energy industrial goods (+0.4% y/y vs July: +0.7% y/y) moderated. Elsewhere, prices of Food, alcohol & tobacco (+2.4% y/y vs July: 2.3% y/y) and services (+4.2% y/y vs July: +4.0% y/y) increased in the review period.
On a month-on-month basis, consumer prices rose by 0.2% (July: +0.0% m/m). We expect consumer prices to hover around current levels in September as we envisage pressures arising from elevated services costs and wage growth especially Germany to offset the weaker energy prices. However, we believe the recent inflation data will bolster the European Central Bank’s (ECB) chances of easing the interest rate at the next monetary policy meeting, synchronising neatly with market expectations that the apex bank will lower the key interest rate by 25bps on 12 September.
As reported by the United States Department of Labor, the initial jobless claims in the US declined modestly by 2,000 to 231,000 in the week ending 24 August (vs the week ending 17 August: 233,000), coming in below market expectation of 231,000. Despite the decline, the outturn remains above the H1-24 average (226,000 claims), signaling a softer labour market as re-employment opportunities for laid-off workers become increasingly scarce. On a non-seasonally adjusted basis, notable declines were recorded across Florida (-1,496), Texas (-1,394), and California (-635), while significant increases were recorded across New York (+2,695), Michigan (+1,333) and North Dakota (+1,007 at the same time, the initial jobless claims declined by 4,750 to 231,500 vs week ending 17 August: 236,250) on a 4-week moving average.
We believe that the soft labour market conditions mirror the influence of the Fed’s stringent financial conditions on the broader economy. However, the elevated unemployment and wage stagnation raise concerns about the economic outlook, presenting potential downside risks to growth prospects. Consequently, the FOMC may implement a rate cut in the near term to balance the economy. Indeed, the CME FedWatch Tool indicates a 67.5% probability that the Fed will cut the key interest rate by 25bps at the monetary policy meeting in September.
Global Equities
Optimism over potential interest rate cuts kept major global stock indices higher early in the week. However, sentiment wavered later in the week as the focus shifted to the upcoming Personal Consumption Expenditure (PCE) price index data today (Friday), for further clues on the future path of rate hikes. At the time of writing, mixed sentiments dominated US equities (DJIA: +0.4%; S&P 500: -0.8%) as reactions to the revised GDP data helped offset Nvidia’s sharp post-earnings dip.
Meanwhile, European equities (STOXX Europe: +1.6%; FTSE 100: +1.0%) are set to close higher as cooling Eurozone inflation cemented expectations of a September rate cut by the European central bank. In Asia, Japanese stocks (Nikkei 225: +0.6%) posted gains as the yen’s weakness benefited export-oriented companies, while Chinese stocks (SSE: -0.4%) fell due to steep losses in tech stocks. The Emerging Markets (MSCI EM: -0.5%) and Frontier Markets (MSCI FM: -0.4%) indices also declined, weighed down by losses in China (-0.4%) and Vietnam (-0.1%), respectively.
Nigeria: Domestic Economy
According to the recently released GDP report by the NBS, the domestic economy maintained its growth trajectory as the real GDP grew by 3.19% y/y in Q2-24 (Q1-24: 2.31% y/y). Analysing the breakdown provided, we highlight that the oil sector remained positive for the third consecutive quarter, rising by 10.15% y/y (Q1-24: +5.70% y/y) primarily due to a lower base in the corresponding quarter in the previous year, following the shut-ins and force majeure on Exxon Mobil’s operation that weighed on crude oil output in the period. Specifically, average crude oil production output settled at 1.41 mb/d in Q2-24 compared to 1.22 mb/d in Q2-23.
At the same time, the non-oil sector maintained its resilience, holding steady at 2.8% y/y (Q1-24: 2.8% y/y) as the improvement in agriculture subsector was enough to balance the moderations noticed across the manufacturing (+1.28% y/y vs Q1-24: +1.49% y/y) and services (+3.79% y/y vs Q1-24: +4.32%) subsectors. While we expect the broader economy to maintain a positive growth trajectory over the short to medium term, we envisage a deceleration in growth due to moderate oil and non-oil sectors’ activity. Precisely, we anticipate the growth in the oil sector to slow, given a high statistical base from the same period last year (Q3-24E: 1.52 mb/d vs. Q3-23: 1.45 mb/d). Similarly, we expect the non-oil sector growth to moderate on account of (1) persistent currency pressures, (2) elevated interest rates, and (3) higher energy prices. Consequently, we project the real GDP to settle at 2.84% y/y in Q3-24, with full-year growth of 3.00% y/y (2023FY: +2.74% y/y).
According to data from the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 33.7% y/y to NGN75.48 trillion in July (July 2023: NGN56.46 trillion). We attribute the sustained CPS growth to the dual impact of the (1) CBN’s enforcement of the 50.0% loan-to-deposit ratio and (2) effect of currency depreciation on naira-denominated assets. On a month-on-month basis, the CPS increased by 3.1% in July (June: -1.5% m/m to NGN73.19 trillion). Overall, the broad money supply grew by 62.7% y/y to NGN106.27 trillion, in line with the increase recorded across quasi-money (73.3% y/y) and narrow money (44.8% y/y) supply. We believe the re-enforcement of the CBN’s limit on DMB’s loans-to-deposits macro-prudential ratio will continue to drive the willingness of commercial banks to create risky assets over the short to medium term. However, we believe that the apex bank’s intensified monetary policy tightening measures will tether the magnitude of growth.
Capital Markets: Equities
Positive sentiments returned to the local bourse this week after two consecutive weeks of losses. Specifically, the All-Share index advanced by 0.6% w/w to 96,580.01 points, driven by strong investors’ interest in OANDO (+60.7%) following the completion of the acquisition of the Nigerian Agip Oil Company (NAOC) as well as bargain hunting activities in BUAFOODS (+5.7%). As a result, the Month-to-Date and Year-to-Date returns improved to -1.2% and +29.2%, respectively. Meanwhile, market activity levels remained mixed, as total trading volume declined by 50.1% w/w while total trading value increased by 60.9% w/w. Sectoral performance was broadly positive, as the Oil and Gas (+8.5%), Insurance (+5.8%), Consumer Goods (+3.5%), Banking (+2.0%) and Industrial Goods (+0.1%) indices recorded gains.
In the near term, we believe the absence of a near-term catalyst will likely tilt overall market sentiment toward the negative, and likely drive negative performances consequently. 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 contracted by 611bps to 20.1% despite debits for the OMO auctions (NGN1.61 trillion), as liquidity was boosted by residual FAAC disbursements. Notwithstanding, deposit money banks’ activities at the SDF window (NGN3.43 trillion) surged thus causing average system liquidity to settle at a net short position of NGN622.65 billion (vs a net short position of NGN171.94 billion in the previous week).
We expect the OVN rate to trend higher in the absence of any notable inflows to support the financial system amid a possible net issuance at Wednesday’s NTB auction.
Treasury Bills
Trading in the Treasury bills secondary market maintained its bullish trend from prior weeks, as investors repriced long-dated papers after the CBN’s recent circular on the operationalisation of the SDF and SLF funding rates led to an effective reduction in SDF rates. Thus, the average yield across all instruments contracted by 148bps to 21.8%. Across the market segments, the average yield declined by 111bps to 21.2% in the NTB segment and dipped by 223bps to 22.9% in the OMO segment. The CBN conducted two OMO auctions during the week, which was met with significant interest.
The total subscription level at the first auction was NGN891.46 billion (July: NGN86.50 billion) as the apex body offered instruments worth NGN500.00 billion (July: NGN150.00 billion). Eventually, the CBN allotted NGN869.46 billion – NGN5.00 billion for the 92-day, NGN10.00 billion for the 176-day, and NGN854.46 billion for the 358-day at respective stop rates of 18.5%, 19.3%, 21.9%. At the second auction, participants were mostly interested in the 1-year bill offered, with zero interest recorded for the 91-day bill. The total subscription level printed NGN765.00 billion amid NGN1.85 trillion worth of bills on offer. Accordingly, the CBN allotted NGN758.00 billion for the 364-day at a stop rate of 21.9%, while no sales were made on the 91-day and 175-day bills.
We expect next week’s NTB PMA (NGN233.31 billion worth of maturities on offer) to determine proceedings in the NTB market, with most participants anticipating a reduction in stop rates which should trigger a downward repricing of yields in the secondary market.
Bonds
Bullish sentiments persisted in the FGN bonds secondary market amid pockets of offers on the short – and mid – dated bonds. Consequently, the average yield declined by 67bps to 19.0%. Across the benchmark curve, the average yield contracted at the short (-89bps), mid (-90bps), and long (-49bps) ends, following demand for the MAR-2025 (-203bps), JUN-2033 (-115bps), and MAR-2050 (-163bps) bonds, respectively.
We anticipate further moderation in yields, as investors believe we have reached the peak of yields amid a reduced government borrowing profile over H2-24. Nonetheless, we maintain our medium-term expectation of yields remaining elevated 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 declined for the fourth consecutive week as the gross reserves level weakened by USD122.95 million w/w to USD36.32 billion (29 August). Accordingly, the naira depreciated by 1.8% to NGN1,598.56/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) as the total turnover at the NAFEM (as of 29 August) declined by 28.3% WTD to USD608.43 billion, with trades consummated within the NGN1,499.00/USD – NGN1,615.00/USD band. In the forwards market, the naira rates depreciated on the 1-month (-0.1% to NGN1,624.90/USD) contract but appreciated across the 3-month (+0.7% to NGN1,670.42/USD), 6-month (+1.8% to NGN1,750.35/USD), and 1-year (+3.6% to NGN1,904.16/USD) contracts.
We expect currency pressures to persist due to limited FX supply, stemming from minimal CBN intervention and weak FPI participation. Notwithstanding, we cite that successful completion of the domestic US Dollar Bond (USD500.00 million) scheduled to close today could bolster the CBN’s efforts in stabilizing the naira in the short term.
Cordros
