Global Economy
According to the Bureau of Economic Analysis (BEA), the United States (US) real GDP fell below market expectation (+3.0% q/q) in Q3-24, settling at 2.8% q/q (Q2-24: +3.0% q/q). The deceleration primarily reflects the sharp slowdown in private domestic investment (+0.3% q/q vs Q2-24: +8.3% q/q) driven by the weaker residential (-5.1% q/q vs Q2-24: -2.8% q/q) and non-residential (+3.3% q/q vs Q2-24: +3.9% q/q) investments. Meanwhile, consumer spending (+3.7% q/q vs Q2-24: +2.8% q/q) accelerated as expenditures on goods (+6.0% q/q vs Q2-24: +3.0% q/q) and services (+2.6% q/q vs Q2-24: +2.7% q/q) remained robust.
Concurrently, government expenditures (+5.0% q/q vs Q2-24: +3.1% q/q) rose to a four-quarter high in line with the government’s increased spending on defence. On a year-on-year basis, the economy grew by 2.7% y/y in Q3-24 (Q2-24: +3.0% y/y | Q3-23: +3.2% y/y). We believe economic activities in the world’s largest economy will stay resilient over the short to medium term, particularly with anticipation of additional rate cuts by the US Fed, which are expected to bolster consumer confidence and enhance non-residential investments. We also expect consumer expenditure to remain strong, supported by substantial gains in real wages (especially among lower-income households) and positive wealth effect. Accordingly, the IMF now projects the US economy to grow by 2.8% in 2024FY – 20bps higher than the July estimate (+2.6% y/y).
Elsewhere, growth in the Euro Area exceeded market expectations (+0.2% q/q) in Q3-24. According to Eurostat, real GDP in the region grew by 0.4% q/q in Q3-24 (Q2-24: +0.2% q/q) – the highest point since Q2-22 (+0.8% y/y). This improvement was partly driven by the unexpected rebound in Germany (+0.2% q/q vs Q2-24: -0.3% q/q) due to increased government and consumer spending. Similarly, growth in France (+0.4% q/q vs Q2-24: +0.2% q/q) was supported by stronger domestic demand during the Paris Olympics. Meanwhile, economic activity was steady in Spain (+0.8% q/q vs Q2-24: +0.8% q/q) as improved government and consumer spending offset the contraction in private investment. In contrast, Italy (+0.0% q/q vs Q2-24: +0.2% q/q) reported stagnant growth for the first time in five quarters, as reduced net foreign demand offset inventory gains.
On a year-on-year basis, the zone grew by 0.9% y/y in Q3-24 (Q2-24: +0.6% y/y). We expect real GDP growth in the Eurozone will remain resilient, underpinned by gradual improvement in business activity and consumer confidence due to relatively lower interest rates and easing inflationary pressures. Nonetheless, we expect growth to remain below the zone’s natural rate of expansion (1.0%) as economic activity in the region is likely to be constrained by sluggish manufacturing, particularly in Germany and Italy, amid escalating trade tensions. Thus, the IMF projects the region to grow by 0.8% y/y in 2024E (2023FY: 0.4% y/y).
Global Equities
Global stocks extended their losses for another week as uncertainty around the upcoming US presidential election, mixed economic and earnings data, and caution ahead of the October non-farm payrolls report dampened risk appetite. As of the time of writing, US equities (DJIA: -0.8%; S&P 500: -1.8%) are poised to close lower as disappointing earnings guidance from Microsoft and Meta and uncertainty surrounding the US presidential election weighed on sentiments. Similarly, European equities (STOXX Europe: -2.6%; FTSE 100: -1.7%) were on course for a weekly decline as investors adopted a risk-off stance, driven by mixed corporate earnings, unexpectedly high Eurozone inflation data, and inflation concerns tied to UK government spending, which tempered expectations for the Bank of England (BOE) rate cuts.
In Asia, Chinese equities (SSE: -0.8%) settled lower as investors overlooked positive Manufacturing PMI to focus on potential fiscal stimulus from an upcoming legislative meeting and the results of next week’s US presidential election. Meanwhile, Japanese equities (Nikkei 225: +0.4%) edged higher, snapping a two-week losing streak as investors responded positively to the government’s commitment to economic stability and pro-growth policies. The Emerging Market (MSCI EM: -1.4%) index declined following bearish sentiments in China (-0.8%) and Taiwan (-2.4%), while the Frontier Market (MSCI FM: +0.4%) index inched higher, driven by gains in Vietnam (+0.5%).
Nigeria: Domestic Economy
According to data from the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 27.5% y/y to NGN75.85 trillion in September (September 2023: NGN59.51 trillion). We believe the continuous increase in CPS reflects the impact of (1) CBN’s enforcement of the 50.0% loan-to-deposit ratio and (2) the spillover effects of the naira depreciation on foreign-denominated assets of the banks. On a month-on-month basis, the CPS rose by 1.7% in September (August: -1.0% m/m to NGN74.73 trillion). Similarly, Credit to the Government surged to a record high of NGN42.02 trillion in September, representing an 89.8% y/y increase relative to the NGN22.14 trillion in September 2023, indicating increased reliance on domestic banks for deficit financing.
Additionally, broad money supply (M3) expanded by 62.8% y/y to NGN108.95 trillion, amid increases across quasi-money (+79.6% y/y) and narrow money supply (+40.4% y/y), while the currency in circulation rose by 56.1% y/y to NGN4.31 trillion (September 2023: NGN2.76 trillion). We project the CPS will maintain a double-digit expansion in 2024FY as we believe the re-enforcement of the CBN’s limit on the loans-to-deposits macro-prudential ratio for deposit money banks (DMBs) will continue to drive the willingness of commercial banks to create risky assets. Nonetheless, we acknowledge that the increased monetary policy tightening measures may tether CPS growth.
Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose to a five-month high in October, increasing by 40.2% m/m to USD3.04 billion in October (September: USD2.17 billion). The improvement was primarily due to a substantial increase in inflows from foreign sources (44.6% of total inflows). In comparison, collections from local sources (55.4% of total inflows) dropped for the second consecutive month. Specifically, inflows from foreign sources increased by 292.7% m/m to USD1.37 billion (September: USD345.50 million), reflecting the highest level in seven months in line with improved carry trade opportunities in the capital market over the review period.
As a result, higher accretions were recorded across the FPI (+510.9% m/m) and FDI (+44.6% m/m) segments, while inflows from other corporate segment (-15.1% m/m) dropped. Elsewhere, inflows from local sources declined by 7.5% m/m to USD1.69 billion in October (September: USD1.82 billion) driven by declines across collections from the individuals (-30.6% m/m), CBN (-14.3% m/m), and non-bank corporates (-8.6% m/m) segments, amid a marginal improvement in the exporters/importers (+0.6% m/m) segment. While we acknowledge the recent liquidity influx from foreign investors, we believe this is unlikely to be sustained given the (1) unfavourable macroeconomic conditions, (2) still weak structure of the Nigerian FX market, and (3) sustained volatility in the naira. Additionally, we anticipate that the limited inflows from the CBN may pose downside risks to overall liquidity conditions in the near term, potentially dampening market confidence and heightening pressure on the naira.
Capital Markets: Equities
Activities in the domestic bourse took a negative turn this week, following pressure from profit-taking activities during the week. Consequently, the All-Share Index declined by 2.0% w/w to 97,432.02 points, following sell pressures on BUACEMENT (-11.1%), MTNN (-4.9%), FBNH (-6.1%), and ARADEL (-25.7%). Accordingly, the Month-to-Date and Year-to-Date returns printed -0.2% and +30.3%, respectively. Market activity was mixed, as the total trading volume increased by 17.2% w/w, while value declined by 40.4% w/w respectively. Across sectors, the Industrial Goods (-3.7%), Insurance (-0.4%), and Consumer Goods (-0.2%) indices posted losses, while the Oil & Gas (+1.2%) and Banking (+0.2%) indices advanced.
Next week, we expect choppy trading activities as investors rebalance their portfolios based on the assessment of the Q3 corporate earnings reports released thus far.
Money Market and Fixed Income
As we anticipated, the overnight (OVN) rate contracted significantly by 10.46ppts w/w to 19.7%, underpinned by inflows from FGN bond coupon payments (NGN260.67 billion) and OMO maturities (NGN254.25 billion). We note that this is the lowest print since February, which is also the last time the rate trended below the 20.0% mark, indicating strong liquidity in the financial system. Accordingly, the average liquidity for the week settled at a net long position of NGN390.67 billion (previous: net short position of NGN437.00 billion).
Next week, barring any significant mop-up activity by CBN, we still expect system liquidity to remain robust, leading to a likely contraction in the OVN rate.
Treasury Bills
In the Treasury bills secondary market, demand pressures eased on the last trading day, undermining the four consecutive days of bullish sentiments posted during the week. As a result, the Treasury bills secondary market closed bearish week-on-week, as the average yield across all instruments increased by 9bps to 25.9%. Across the market segments, the average yield advanced by 4bps to 24.2% in the NTB segment and increased by 11bps to 26.2% in the OMO segment.
Based on our outlook for a liquidity surfeit in the coming week, we expect yields in the Treasury bills secondary market to trend lower. Additionally, the CBN is scheduled to hold an NTB PMA next Wednesday (6 November), with NGN513.43 billion worth of maturing bills on offer.
Bonds
Trading in the Treasury bonds secondary market remained bearish this week following sell pressures on short-dated bonds, specifically the MAR-2027 and APR-2029 bonds. Accordingly, the average yield expanded by 18bps to 19.5%. Across the benchmark curve, the average yield expanded at the short (+47bps) end due to selloffs of the MAR-2027 (+109bps) bond but contracted at the mid (-7bps) and long (-8bps) segments due to interest in the FEB-2031 (-25bps) and JUN-2038 (-57bps) bonds, respectively.
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 depreciated this week by 4.0% w/w to NGN1,666.72/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) despite the CBN intervening at the official window, selling c. USD77.00 million to authorized dealers. Elsewhere, the country’s FX reserves grew for the ninth consecutive week by USD326.64 million w/w to USD39.77 billion (30 October). Total turnover at the NAFEM as of 31 October decreased by 50.0% WTD to USD771.23 million, with trades consummated within the NGN1,575.00/USD – NGN1,690.00/USD band. In the forwards market, the naira rates decreased on the 1-month (-1.2% to NGN1,699.95/USD) contract but increased across the 3-month (+1.3% to NGN1,732.09/USD), 6-month (+1.0% to NGN1,848.62/USD) and 1-year (+3.0% to NGN2,024.79/USD) contracts.
We expect the naira to remain under pressure in the near term, given the (1) sustained demand pressure in the FX market, (2) CBN’s limited capacity to sufficiently intervene across the market segments and (3) suboptimal inflows from Foreign Portfolio Investors (FPIs).
Cordros
