Global Economy
According to the flash estimates from S&P Global, the US Manufacturing PMI signaled a third consecutive month of contraction, settling at 47.0 points in September (August: 47.9 points). We attribute the weak outturn to the sharp decline in new orders and employment, reflecting deterioration in business conditions and weaker producers’ optimism. Even as the Services PMI (55.4 points vs August: 55.7 points) moderated, it remained robust, supported by solid growth in work inflows and reduced job losses. Overall, the Composite PMI eased to 54.4 points (August: 54.6 points).
While we anticipate the resilient service sector will keep private sector activity above the 50-point psychological benchmark over the short to medium term, we expect further deceleration due to weak business sentiments primarily induced by election uncertainties. Nevertheless, despite the PMI data indicating slower business activities, we think the FOMC may need to proceed cautiously with further rate cuts given the increasing inflation risks, particularly in the services sector due to wage growth. Accordingly, the CME FedWatch tool now indicates a 51.0% probability of a 25bps cut (vs 49.3% likelihood of a 50bps cut) in the 7 November monetary policy meeting.
According to S&P Global, the Euro area’s Composite PMI dipped into the contraction territory, dropping to 48.9 points in September (August: 51.0 points) – the lowest print in 8 months. The downturn in overall private sector activity reflects a broad-based slowdown in the factory and services sector across the bloc, with Germany’s Composite PMI (September 47.2 Points vs August: 48.4 points) dipping further, while France’s Composite PMI (September 47.4 Points vs August: 53.1 points) slumped as demand eased after the Olympic games.
Analysing the breakdown, we highlight that the bloc’s Manufacturing PMI (September: 44.8 Points vs August: 45.8 points) crashed to a 9-month low as production dropped due to weaker new orders. On the other hand, the Service PMI (50.5 points vs September: 52.9 points) remained above the benchmark, though it dropped to a 7-month low due to weakened demand and a reduction in new businesses. We think the regional bloc is unlikely to return to meaningful growth over the short term, as the lingering fragile demand and unfavourable business conditions will continue to weigh on private sector activities. That said, we believe the European Central Bank (ECB) will implement another rate cut at the tail end of the year as inflation worries fade and growth in the zone falters.
Global Equities
Global stocks traded with positive momentum as anticipation grew for another significant US interest rate cut this year with investors closely watching the upcoming PCE (personal consumption expenditures) data for additional cues. Risk appetite was further boosted by news of additional fiscal stimulus from Chinese policymakers, complementing the monetary easing measures announced earlier in the week.
As of the time of writing, US equities (DJIA: +0.3%; S&P 500: +0.8%) are on track for a weekly gain, buoyed by strong US GDP data, Micron’s (MU) upbeat earnings, better-than-expected jobless claims data and China’s pledge for further stimulus. Equally, European equities (STOXX Europe: +2.3%; FTSE 100: +0.8%) are set to close higher, driven by optimism around China’s stimulus measures and expectations of further rate cuts in the US and Eurozone. Asian markets (Nikkei 225: +5.6%; SSE: +12.8%) rallied as investors responded positively to robust stimulus efforts by the Chinese policymakers and the prospect of monetary easing by the Bank of Japan. The Emerging Market (MSCI EM: +5.1%) index advanced spurred by the rally in China (+12.8%) while the Frontier Market (MSCI FM: +1.1%) index inched higher driven by positive sentiments in Vietnam (+1.6%).
Nigeria: Domestic Economy
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to increase the Monetary Policy Rate (MPR) by 50bps to 27.25% (Previous: 26.75%) – the fifth consecutive rate hike this year. The hike brings the total rate increase so far in 2024 to 850bps (2023FY: +225bps). We believe the Committee’s decision to tighten further was based on the need to (1) strengthen the recent disinflationary trend and manage inflation expectations given the upside risks to inflation, (2) stabilise the naira, and (3) narrow the negative real rate of return.
The Committee also voted to raise the Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks to 50.0% (previous: 45.0%) and 16.0% (previous: 14.0%), respectively, while holding other parameters constant – asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30.0%. Given the Committee’s commitment to stabilise prices and the anticipated uptick in headline inflation in the coming months following the increase in PMS prices, we expect the Committee to march on with its monetary policy tightening. Specifically, we expect the MPC to raise the policy rate by an additional 50bps at the next meeting scheduled for 25-26 November.
According to data from the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 31.2% y/y to NGN74.73 trillion in August (August 2023: NGN56.95 trillion). We attribute the sustained CPS growth to (1) CBN’s enforcement of the 50.0% loan-to-deposit ratio and (2) the effect of currency depreciation on naira-denominated assets. On a month-on-month basis, the CPS declined slightly by 1.0% in August (July: +3.2% m/m to NGN75.51 trillion), reflecting reduced private sector borrowing due to CBN’s tighter monetary policy measures to curb the rising inflation and stabilise the economy.
Overall, the currency in circulation increased by 55.8% y/y to NGN4.14 trillion (August 2023: NGN2.66 trillion) while the broad money supply grew by 61.9% y/y to NGN107.19 trillion, following increases across quasi-money (75.3% y/y) and narrow money (43.0% y/y) supply. We believe the re-enforcement of the CBN’s limit on DMB’s loan-to-deposit macro-prudential ratio will continue to drive the willingness of commercial banks to create risky assets over the short to medium term. Nonetheless, we believe that the apex bank’s intensified monetary policy tightening measures will tether the magnitude of growth.
Capital Markets: Equities
Despite the recent hike in the monetary policy rate (MPR), the domestic stock market maintained its upward momentum this week, as bullish sentiments dominated three of the five trading sessions. Specifically, the All-Share Index climbed by 0.2% w/w to 98,458.68 points, driven by strong buying activity in SEPLAT (+10.0%), UBA (+6.2%) and FLOURMILL (+22.9%). As a result, the MTD and YTD returns increased to +1.9% and +31.7%, respectively. Activity level was also positive as the trading volume and value rose by 46.0% w/w and 2.2% w/w, respectively. Sectoral performance was mixed, with gains recorded in the Oil & Gas (+3.3%), Banking (+2.5%) and Insurance (+1.4%) indices, while the Consumer Goods (-0.1%) index settled lower. The Industrial Goods index closed flat.
In the coming week, we anticipate that investors will be cautious about leaving gains in the market, leading to intermittent profit-taking. However, this is likely to be balanced by bargain-hunting activities as investors prepare for the upcoming Q3-24 earnings season. In the medium term, we expect investors’ sentiment to be shaped by macroeconomic developments and movements in yields within the fixed income market.
Money market and Fixed Income
Having stayed depressed at c. 20.0% levels for most of the week, the overnight (OVN) rate eventually closed the week higher at 30.0% (+5bps w/w), as liquidity pressures at the end of the week alongside debits for the FGN bond PMA (NGN264.53 billion) and OMO (NGN252.90 billion) auctions outweighed the sizeable inflows from FAAC disbursements (NGN828.08 billion) and FGN bond coupon payments (NGN273.43billion).
In the absence of any significant inflow expected in the coming week, we expect liquidity pressures to persist. As such, we expect the OVN rate to remain elevated.
Treasury Bills
The Treasury bills secondary market turned bearish this week, as the market reacted to the hike in the benchmark interest rate. As a result, the average yield across all instruments expanded by 45bps to 25.1%. Across the market segments, the average yield increased by 34bps to 25.2% in the T-bills segment and rose by 64bps to 25.0% in the OMO segment. At this week’s NTB auction, the DMO offered NGN227.54 billion – NGN28.15 billion for the 91-day, NGN25.58 billion for the 182-day, and NGN173.81 billion for the 364-day bills – worth of instruments to investors.
Aggregate subscription settled lower at NGN304.27 billion (previous: NGN563.17 billion), with a bid-to-offer of 1.3x. The auction closed with the DMO allotting exactly what was offered at respective stop rates of 17.00% (previous: 16.63%), 17.50% (previous: 17.00%) and 20.00% (previous: 18.59%). Meanwhile, the CBN also conducted an OMO auction on Thursday, offering instruments worth NGN500.00 billion – NGN75.00 billion for the 96-day, NGN75.00 billion for the 194-day and NGN350.00 billion for the 362-day – to investors. Total subscription settled at NGN252.90 billion for the 362-day, while no demand was seen for the 96-day and 194-day tenors. Eventually, the CBN allotted exactly the demanded amount at a stop rate of 24.36% (previous: 21.80%).
Based on our expectation of a possible liquidity deficit in the coming week, we expect yields in the Treasury bills secondary market to trend higher.
Bonds
The Treasury bonds secondary market equally traded with bearish sentiments as players exited their positions, anticipating higher yields due to the increased policy rate. Subsequently, the average yield inched higher by 8bps to 18.7%. Across the benchmark curve, the average yield expanded at the short (+22bps), mid (+12bps) and long (+5bps) segments, specifically as investors sold off the MAR-2025 (+102bps), FEB-2031 (+38bps) and MAR-2050 (+45bps) bonds, respectively.
At Monday’s PMA, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 0.3x; Stop rate: 19.00%), 18.50% FGN FEB 2031 (Bid-to-offer: 1.1x; Stop rate: 19.99%), and 19.89% FGN MAY 2033 (Bid-to-offer: 11.3x; Stop rate: 20.05%) bonds. Total subscription level settled at NGN414.89 billion (previous: 460.18 billion), with a bid-to-offer ratio of 2.8x (previous: 2.4x). Eventually, the DMO allotted instruments worth NGN264.55 billion across the three tenors, resulting in a bid-to-cover ratio of 1.6x.
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. In the medium term, we maintain our 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 increased for the fourth consecutive time this week, as the gross reserve level grew by USD310.75 million w/w to USD37.78 billion (24 September). The CBN’s consistent effort to support the naira – intervening with USD89.00 million this week – caused the naira to trend slightly slower, settling at NGN1,540.78/USD (+5bps w/w) at the Nigerian Autonomous Foreign Exchange Market (NAFEM).
Total turnover at the NAFEM as of 26 September increased by 3.7% WTD to USD787.54 billion, with trades consummated within the NGN1,540.00/USD – NGN1,699.00/USD band. In the forwards market, the naira rates decreased across the 1-month (-2.7% to NGN1,684.53/USD), 3-month (-2.6% to NGN1,721.12/USD), 6-month (-2.0% to NGN1,849.07/USD) and 1-year (-1.5% to NGN2,051.10/USD) contracts.
Despite the CBN’s market interventions, we anticipate persistent FX demand pressure in the near term, partly due to seasonal factors. This is likely to underpin the volatility in the naira in the short term.
Cordros
