Global Economy
According to the Office for National Statistics (ONS), consumer prices in the United Kingdom (UK) rose to a six-month high, rising by 60bps to 2.3% y/y in October (September: 1.7%) – above market expectation (2.2% y/y). The increase was primarily attributed to the uptick in housing and household service costs (5.5% y/y vs September: 3.8% y/y) even as energy costs (-10.1% y/y vs September: -16.2% y/y) declined at a slower pace following the government’s 10.0% increase in the energy price cap. Elsewhere, food prices (1.9% y/y vs September: 1.9% y/y) remained stable, while services inflation (5.0% y/y vs September: 4.9% y/y) increased marginally.
On a month-on-month basis, consumer prices increased by 0.6% (September: 0.0% m/m). Looking ahead, we expect inflation to remain above the 2.0% target over the short term on account of (1) rising energy bills, (2) direct impact of the expansionary 2024 Autumn Budget, and (3) global trade uncertainties. As a result, we anticipate the committee will adopt a cautious stance on easing monetary policy in the near term, with the higher-than-expected inflation print likely to temper expectations of a 25bps rate cut at the December monetary policy meeting.
According to S&P Global, the Eurozone’s private sector activity contracted to a 10-month low, as the Composite PMI settled at 48.1 points in November (October: 50.0 points). The downturn was influenced by broad-based deceleration across the services sector and factory activities. Specifically, the Services PMI (November: 49.2 Points vs October: 51.6 points), which had been offsetting the subdued factory activities, declined for the first time since January due to reduced new orders and low business confidence.
At the same time, factory activities, as measured by the Manufacturing PMI (November: 45.2 Points vs October: 46.0 points), dipped further as production dropped on the back of weaker output and external demand. Looking ahead, we anticipate the lingering headwinds arising from tepid demand, unfavourable business conditions and waning optimism to continue hindering private sector activity in the Eurozone. As a result, we expect the European Central Bank (ECB) to ease the key interest rates further at the December monetary policy meeting.
Global Equities
The global equities market displayed mixed sentiments this week, influenced by a combination of weak economic data in Europe and Asia, concerns over potential tariff hikes under the incoming Trump administration, and escalating tensions between Russia and Ukraine. Nonetheless, US equities (DJIA: +1.0%; S&P 500: +1.3%) remained on pace to post weekly gains, supported by positive reaction to strong manufacturing PMI data and better-than-expected jobless claims data.
Meanwhile, European equities (STOXX Europe: -0.1%, FTSE 100: +1.1%) faced pressure from disappointing economic indicators, including Eurozone flash PMI, UK inflation figures, and Germany’s GDP data, alongside geopolitical concerns. However, easing worries over recent government budget announcements provided some relief. Elsewhere, Asian markets (Nikkei 225: -0.9%; SSE: -1.9%) declined, as higher-than-anticipated inflation in Japan raised expectations of further rate hikes by the Bank of Japan, while China’s underwhelming fiscal measures and looming threats of increased US tariffs dampened sentiments. The Emerging Market (MSCI EM: 0.0%) closed flat as the losses in China (-1.9%) were offset by gains in India (+0.7%) and Taiwan (+0.7%), while the Frontier Market (MSCI FM: -0.5%) index closed lower, reflecting losses in Romania (-1.9%).
Nigeria: Domestic Economy
Private sector activities in Nigeria fell below the 50-point threshold in October after two consecutive months of expansion. According to the CBN, the composite PMI contracted to 49.6 points in October (September: 50.5 points), driven by a slowdown across the industry, agriculture, and service sectors. Specifically, the agriculture sector PMI (50.3 points vs September: 51.4 points) moderated due to weaker new orders and stock of raw materials, while the services PMI (50.0 points vs September: 51.0 points) slowed on the back of reduced output and employment amid stagnant business activities.
At the same time, the industry sector PMI (49.3 points vs September: 49.7 points) dipped further as the unabating inflationary pressures, naira depreciation and energy price fluctuations continued to dampen factory activities. Looking ahead, while we anticipate increased demand due to seasonality and the robust service sector activity to support near-term performance, we believe private sector activities will remain hampered by the persistent economic challenges, including high inflation, FX inadequacies, escalating energy costs, rising transportation expenses, and stringent financial conditions.
The amount disbursed by the Federation Account Allocation Committee (FAAC) to the three tiers of government in November (based on October revenue) increased by 8.7% m/m to NGN1.41 trillion (October: NGN1.30trillion). We estimate that the amount disbursed is 52.9% of the total gross revenue (NGN2.67 trillion) generated in the month, with the remaining balance allocated for transfer, intervention and refunds (NGN1.16 trillion) and the cost of collection (NGN97.52 billion).
In addition, we highlight that significant increases were recorded across inflows from Oil and Gas Royalty, Excise Duty, Value-added Tax (VAT), Import Duty, Petroleum Profit Tax (PPT), and Companies Income Tax (CIT), while receipts from Electronic Money Transfer Levy (EMTL) and CET levies declined. Based on the stipulated sharing revenue formula, the FGN received NGN433.02 billion (September: NGN424.87 billion), State Governments received NGN623.00 billion (September: NGN544.14 billion), while the Local Governments received NGN355.62 billion (September: NGN329.86 billion).
We expect the naira depreciation to continue to boost total revenue collected from foreign sources, including oil receipts, import duty and foreign CIT payments. Additionally, we expect higher consumer prices to support increased VAT revenue collections. This is likely to support higher FAAC distributions to the three tiers of government in the near term. Nonetheless, the below-target oil production levels (Budget: 1.78 mb/d vs. Cordros forecast: 1.54 mb/d) are likely to constrain growth.
Capital Markets: Equities
The Nigerian equities market traded marginally higher this week as gains in WAPCO (+28.6%) and DANGSUGAR (+16.7%) outweighed losses in FBNH (-8.0%) and ACCESSCORP (-7.5%), nudging the All-Share Index up by 0.1% w/w to 97,725.64 points. As a result, the Month-to-Date and Year-to-Date returns settled at +0.2% and +30.8%, respectively. Market activity was mixed, as trading volume increased by 31.4% w/w, while trading value declined by 8.2% w/w. Across sectors, the Insurance (+4.5%), Consumer Goods (+1.9%), Industrial Goods (+1.8%), and Oil & Gas (+0.2%) indices posted gains, while the Banking (-2.6%) index ended the week in the red.
In the week ahead, we believe investors will focus on the outcome of the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the FI market. As a result, we envisage a cautious trading theme.
Money Market and Fixed Income
In line with our expectations, the overnight rate expanded by 593bps w/w to 32.8% as debits for the FGN bond PMA (NGN346.66 billion), FX sales (NGN120.00 billion), and Wednesday’s net NTB issuance (NGN82.25 billion) dwarfed inflows from FGN bond coupon payments (NGN27.10 billion) and OMO maturities (NGN6.38 billion). Thus, system liquidity remained subdued, with the average system liquidity for the week settling at a net short position of NGN121.25 billion (vs net short position of NGN57.77 billion in the prior week).
Next week, barring any mop-up activity by the apex body, we envisage that the inflows from FAAC disbursements (NGN977.98 billion) and OMO maturities (NGN5.00 billion) will boost system liquidity, causing the OVN rate to temper from current levels.
Treasury Bills
Trading in the Treasury bills secondary market was bearish this week as the average yield across all instruments expanded by 24bps to 25.3%. However, we note that bullish sentiments prevailed in the NTB segment as participants looked to fill unmet bids from the week’s NTB PMA at the secondary market. All told, the average yield contracted by 12bps to 24.0% at the NTB segment but expanded by 77bps to 27.2% at the OMO segment. At Wednesday’s NTB auction, the DMO offered bills worth NGN610.80 billion – NGN41.89 billion for the 91-day, NGN28.56 billion for the 182-day, and NGN540.45 billion for the 364-day bills.
Subscription level settled higher at NGN1.18 trillion (previous auction: NGN669.93 billion), with a bid-to-offer ratio of 1.9x (previous auction: 1.3x). The auction closed with the DMO allotting instruments worth NGN693.05 billion – NGN35.41 billion for the 91-day, NGN16.92 billion for the 182-day, and NGN640.71 billion for the 364-day papers – at respective stop rates of 18.00% (unchanged), 18.50% (unchanged) and 23.50% (previous: 23.00%).
We expect investors to reprice bills in line with the outcome of the MPC meeting scheduled for next week (25 and 26 November). Nonetheless, we highlight the likelihood of renewed demand in the secondary market bolstered by the surplus inflows expected into the financial system next week.
Bonds
Proceedings in the FGN bond secondary market were mixed this week, underpinned by investors who sought to take advantage of the attractive yield on the MAR-2025 bond amid sell-offs due to expectations of higher yields after next week’s MPC meeting. Subsequently, the average yield pared by 3bps to 19.4%. Across the benchmark curve, the average yield declined at the short (-43bps) end, following demand for the MAR-2025 (-210bps) bond, while it expanded at the mid (+22bps) segment, driven by sell-offs of the FEB-2031 (+64bps) bond.
The average yield was unchanged at the long end. At Monday’s PMA, the DMO offered instruments worth NGN120.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 1.3x; Stop rate: 21.00%) and 18.50% FGN FEB 2031 (Bid-to-offer: 4.9x; Stop rate: 22.00%). The total subscription level settled at NGN369.59 billion (previous: NGN389.24 billion), with a bid-to-offer ratio of 3.1x (previous: 2.2x). Eventually, the DMO allotted instruments worth NGN346.16 billion across the two tenors, resulting in a bid-to-cover ratio of 1.0x.
Similarly, we expect market participants to take cues from the decision of the monetary policy authority next week. Meanwhile, we maintain our short-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
The naira depreciated this week by 2bps w/w to NGN1,652.62/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) despite the CBN’s intervention, selling c.USD 42.00 million to authorised dealers. Elsewhere, the country’s FX reserves maintained its growth trajectory, as the gross reserve level grew marginally by USD2.24 million w/w to USD40.28 billion (20 November), relative to the 6-week average weekly addition of USD257.91 million. Total turnover at the NAFEM as of 20 November decreased by 68.1% WTD to USD518.32 million, with trades consummated within the NGN1,601.50/USD – NGN1,705.00/USD band. In the forwards market, the naira rates decreased across the 1-month (-0.2% to NGN1,741.12/USD), 3-month (-0.3% to NGN1,817.47/USD), 6-month (-0.2% to NGN1,927.93/USD), and 1-year (-3.7% to NGN2,158.28/USD) contracts.
We expect the exchange rate to face upward pressure as overall market supply continues to fall short of total demand. In the near term, the CBN is likely to sustain sub-optimal FX interventions, limited by the weak net FX reserves.
Cordros
