Global Economy
At the recently concluded December policy meeting, the United States Federal Open Market Committee (FOMC) voted to cut the key interest rate for the third consecutive time this year. Specifically, the US Fed unanimously voted to reduce the target range for the federal funds rate by 25bps to 4.25% – 4.50% (previously: 4.50% – 4.75%). Notably, the committee revised its projections, planning for only two additional rate cuts in 2025 (totaling 50bps), down from the four cuts (or a 100bps reduction) projected during the September meeting.
For us, this reflects a more cautious view of the economic trajectory in line with the potential impact of President-elect Donald Trump’s proposed policies, including higher tariffs, tax cuts, and stricter immigration measures, on the economic outlook. Looking ahead, we believe the FOMC is likely to adopt a cautious “wait-and-see” approach, pausing further rate cuts in light of recent data indicating a persistent increase in inflation.
Consequently, we expect the Fed to keep rates unchanged in the near term in order to assess the economy’s performance and trajectory more thoroughly, particularly the potential impacts of economic policy shifts under the incoming Trump administration. Indeed, the CME FedWatch tool now reflects an 89.3% probability of a “HOLD” decision on the 29 January meeting.
Elsewhere, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 6 – 3 to maintain the bank rate at 4.75%. In terms of voting pattern, three members voted for a 25bps cut, while six members voted to maintain the rate at 4.75%. We believe the decision to “HOLD” was due to recently released data on inflation and wage growth, which indicate persistent price pressures and a robust labour market, outweighing concerns about fragile UK economic growth.
Additionally, the Committee downgraded its economic forecast for Q4-24, revising growth expectations from a 0.3% expansion projected in November to 0.0%, citing declines in most economic activities. The MPC further highlighted that it is closely monitoring the effects of measures announced in the Autumn Budget, as well as geopolitical tensions and uncertainties in trade policy, on growth and inflationary pressures.
The BOE’s tone suggests a cautious approach, signalling increased vigilance regarding inflation risks, which remain skewed to the upside. This outlook is shaped by the anticipated impact of upcoming tariffs and the uncertainty surrounding the effects of recent UK Budget changes on consumer prices. Thus, given the persistence of sticky inflation and the growing upside risks, we believe the BoE’s ability to implement rate cuts in the near term will remain constrained.
Global Market
Global equities markets faced downward pressures this week as investors scrutinised interest rate policy decisions and outlooks from major central banks, including the U.S. Federal Reserve, the Bank of England (BoE), the Bank of Japan (BoJ), and the People’s Bank of China (PBoC). Accordingly, US equities (DJIA: -3.4%; S&P 500: -3.0%) were set to close the week lower as the Federal Reserve’s economic projections and indications of fewer-than-expected interest rate cuts in 2025 weighed on market sentiment. Similarly, European equities (STOXX Europe: -1.9%, FTSE 100: -2.3%) were on course for a decline, driven by risk-off sentiment as investors reacted negatively to the U.S. Federal Reserve’s policy outlook and the Bank of England’s decision to maintain policy rates.
Asian Equities (Nikkei 225: -1.9%, SSE: -0.7%) mirrored the broader market trend, further influenced by (1) the Bank of Japan’s hawkish policy outlook amid a stronger-than-expected inflation data and (2) the People’s Bank of China’s (PBoC) decision to hold rates steady despite rising optimism for increased policy support in 2025. Meanwhile, the Emerging Market (MSCI EM: -2.3%) and Frontier Market (MSCI FM: -2.1%) indices settled lower, driven by losses in China (-0.7%) and Vietnam (-0.4%), respectively.
Nigeria: Domestic Economy
Based on the recently released data by the National Bureau of Statistics (NBS), headline inflation rose for the third consecutive month, increasing by 72bps to 34.60% y/y in November (October: 33.88% y/y). Breaking it down further, food prices (+77bps to 39.93% y/y) rose for the third month in a row primarily due to below-average harvests caused by persistent insecurity, flooding in food-producing regions, and high input costs.
At the same time, core inflation (+38bps to 28.75% y/y) increased for the second consecutive month, reflecting the effects of (1) the depreciation of the naira, (2) elevated energy costs, and (3) increased business operating expenses. On a month-on-month basis, headline inflation steadied at 2.64%, as higher food prices (+4bps to 2.98% m/m) offset a decline in core item prices (-30bps to 1.83% m/m). While the naira appreciation may ease import costs, other factors such as festive demand, poor harvests, and high energy and transport costs could partially counteract this effect. Consequently, we expect headline inflation to rise by 2.53% m/m in December, translating to a y/y rate of 34.91%.
According to the CBN, private sector activities contracted for the second consecutive month, settling at 48.9 points (below the 50-point threshold) in November (October: 49.6 points), driven by weaker business activities in the industry and service sectors, despite improved activities in the agricultural sector. Specifically, the services sector (47.4 points vs 50.0 points) contracted for the first time since May 2024, primarily reflecting weaker activities in the professional, scientific & technical services, and transportation & warehousing services subsectors. Furthermore, the Industrial sector (49.3 points vs October: 49.3 points) remained in contraction as unabating inflationary pressures and high borrowing costs continued to weigh on production activities.
On the other hand, agricultural sector PMI (51.0 points vs October: 50.3 points) printed above the 50-point threshold for the second month in a row, supported by the ongoing main harvest season, which bolstered farming 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 persistent economic challenges, including high inflation, high energy and transportation expenses, and tight financial conditions.
Capital Markets: Equities
The Nigerian equities market closed higher for the third consecutive week, as bargain-hunting in ARADEL (+20.7%) following ministerial consent for the acquisition of Shell Petroleum Development Company (SPDC) by Renaissance Africa Energy Limited, as well as strong performances by GTCO (+7.7%), and TRANSCOHOT (+9.4%) caused the All-Share Index (ASI) to advance by 1.8% w/w to 101,129.09 points. Consequently, the Month-to-Date and Year-to-Date returns settled higher at +3.7% and +35.2%, respectively. Also, trading activities were mixed, as trading volume declined by 6.3% w/w, while trading value increased by 84.9% w/w. Analysing by sectors, the Insurance (+8.8%), Banking (+3.2%), Consumer Goods (+2.9%), and Oil & Gas (+1.0%) indices advanced, while the Industrial Goods (-0.9%) index declined.
We expect bullish sentiments to persist in the coming week, driven by positive market momentum and sustained investor interest in fundamentally strong stocks.
Money Market and Fixed Income
The overnight (OVN) rate declined by 58bps w/w to 32.3% as inflows from contractor payments (NGN450.00 billion), FAAC disbursements (NGN400.00 billion), and FGN bond coupons (NGN9.52 billion) outweighed debits for the FGN bond PMA (NGN263.21 billion), supporting system liquidity. Accordingly, the average liquidity for the week improved, settling at a net short position of NGN867.73 billion (vs net short position of NGN1.14 trillion in the prior week).
Barring any liquidity management measures by the CBN next week, we expect the inflows from FAAC disbursements (NGN700.00 billion), FGN bond coupons (216.76 billion), and OMO maturities (NGN10.00 billion) will further boost system liquidity, causing the OVN rate to temper from current levels.
Treasury Bills
The Treasury bills secondary market traded with mixed sentiments this week as the average yield across all instruments declined by 3bps to 26.5%. Across the market segments, the average yield remained unchanged at 25.7% in the NTB segment but expanded by 6bps to 27.3% in the OMO segment.
We anticipate that the liquidity influx into the system next week will likely drive demand for instruments, causing a decline in yields in the secondary market.
Bonds
The FGN bond secondary market was bearish following November’s CPI print (+72bps y/y to 34.60%). Thus, the average yield expanded by 21bps to 19.7%. Across the benchmark curve, the average yield expanded at the short (+55bps) and mid (+6bps) segments, specifically as investors sold off the APR-2029 (+145bps) and JUL-2030 (+51bps) bonds, respectively. The average yield closed flat 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: 1.1x; Stop rate: 21.14%) and 18.50% FGN FEB 2031 (Bid-to-offer: 3.5x; Stop rate: 22.00%) bonds. The total subscription level settled at NGN278.82 billion (previous: NGN369.59 billion), with a bid-to-offer ratio of 2.3x (previous: 3.1x). Eventually, the DMO allotted instruments worth NGN211.15 billion across the two tenors, resulting in a bid-to-cover ratio of 1.3x.
We reiterate our forecast for a sustained rise in yields in the short term driven by the (1) hawkish stance by the monetary policy authorities and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
The naira appreciated this week by 4bps w/w to NGN1,547.64/USD at the Nigerian Foreign Exchange Market (NFEM) following the CBN intervention at the official window, selling c. USD197.70 million to authorized dealers. Notably, the country’s FX reserves recorded accretion this week, as the gross reserves level grew by USD226.47 million w/w to USD40.79 billion (19 December). In the forwards market, the naira rates decreased on the 1-month (-0.1% to NGN1,581.39/USD) contract but increased across the 3-month (+0.0% to NGN1,638.84/USD), 6-month (+0.4% to NGN1,720.67/USD) and 1-year (+0.3% to NGN1,895.16/USD) contracts.
FX liquidity is expected to remain suboptimal despite CBN FX intervention as inflows from autonomous sources remain weak. Barring any significant intervention from the CBN, the naira is likely to remain under pressure and could depreciate from its current level in the medium term.
Cordros
