Global Economy
According to Eurostat, headline inflation in the Euro Area moderated by 40bps to 1.8% y/y in September (August: +2.2% y/y) – the lowest level since April 2021 (+1.6% y/y). We attribute the downturn in inflationary pressure primarily to the contraction in energy prices. Precisely, energy prices (-6.0% y/y vs August: -3.0% y/y) dipped further into the negative territory, while food prices (+2.4% y/y vs August: +2.3% y/y) expanded for the first time in five months. On a month-on-month basis, consumer prices declined by 0.1% (August: +0.1% m/m), signaling the first contraction since January.
Eurozone inflation is expected to hover near the European Central Bank’s (ECB) 2.0% target in the short term, partly due to the easing wage drift. However, recent oil price spikes induced by the escalating Middle East tension could drive energy costs higher, potentially reigniting inflationary pressures. Nonetheless, we believe the moderating wage dynamics and below-target inflation will bolster the ECB’s likelihood of cutting the key interest rate further at the next meeting, synchronizing neatly with the financial market’s pricing of a 25bps cut at the 17 October monetary policy meeting.
According to the United States Bureau of Labor Statistics, total non-farm payroll employment in the US increased by 254,000 jobs in September (August: +159,000 jobs) – above market expectations (+140,000). Analyzing the breakdown, significant employment gains were noted across the healthcare sector (+45,000 jobs) induced by increased job offers in healthcare services, hospitals as well as nursing & residential care facilities. At the same time, government employment (+31,000 jobs) rose further, supported by job gains in local and state government offices. In addition, employment in social assistance (+27,000 jobs) increased primarily due to higher job demand by individual and family services.
As a result, the unemployment rate eased to 4.1% m/m (August: 4.2% m/m), signaling the second consecutive month of moderation, while the labour force participation rate remained steady at 62.7% m/m (August: 62.7% m/m) for the third consecutive month. Overall, the data print brings the 9M-24 average to 194,000 jobs, remaining below the 12-month and 9M-23 averages of 198,580 and 264,000 jobs, respectively. This reflects softer labour market conditions as hiring slows in response to cooling economic activity. Although we acknowledge that the US job market remains soft, we think that the continued growth in non-farm payrolls for the fourth consecutive month, as well as the reduced layoffs by companies, could result in tighter labour market conditions. Consequently, we anticipate that the Federal Open Market Committee (FOMC) will adopt a cautious approach to rate cuts at the next meeting, aligning with market expectations of a 90.9% probability of 25bps ease (vs 9.1% likelihood of 50bps cut).
Global Equities
Risk-off sentiment dominated global stocks due to escalating tensions in the Middle East and consternation regarding US rate cuts following the September non-farm payrolls report. However, the Chinese market stood out positively, buoyed by expectations of further stimulus measures. Accordingly, US equities (DJIA: -0.7%; S&P 500: -0.7%) are set for a weekly decline, as investors weighed escalating geopolitical tensions and port strikes across the US against strong labour market data, (ADP private payrolls, jobless claims, and September non-farm payrolls report) and their implications for potential interest rate cuts.
Similarly, European stocks (STOXX Europe: -2.1%; FTSE 100: -0.5%) are on track for a weekly loss as investors weighed the risk of a broader Middle Eastern conflict against encouraging Eurozone inflation figures. In Asia, Japanese equities (Nikkei 225: -3.0%) dropped following the global risk-off sentiments. However, Chinese stocks (SSE: +8.1%) recorded a third consecutive weekly gain, with Alibaba Group and Tencent Holdings fueling a tech rally, bolstered by expectations of further stimulus measures, despite the Golden Week holiday. Meanwhile, the Emerging Market (MSCI EM: 0.1%) index edged lower, impacted by a sharp decline in Indian stocks (-4.0%), and the Frontier Market (MSCI FM: -1.4%) index also fell, driven by selloffs in Vietnam (-1.0%) and Romania (-1.4%).
Nigeria: Domestic Economy
According to the CBN’s Purchasing Manager’s Index (PMI) report for September, private sector activities remained resilient as the composite PMI expanded to 50.5 points (August: 50.2 points). We highlight that the improved reading indicates a sustained upturn in the services and agriculture sectors while the industry sector remains subdued. Analyzing the breakdown, services PMI (51.0 points vs. August: 50.7 points) notched to a 16-month high on account of the solid upturn in business activities, increased stock of raw materials and continued rise in incoming business opportunities. In the same vein, the agriculture sector PMI (51.4 points vs. August: 50.5 points) expanded for the second straight month due to improved crop production, while livestock, forestry and agricultural support services also witnessed expansions in the period.
Elsewhere, while the industry sector PMI (49.7 points vs August: 49.2 points) remains below the benchmark, September print represents the highest level in eight months, indicating increased activities across the mining, quarrying, electricity, gas & water supply and construction subsectors; the manufacturing subsector declined. We expect that resilient services and potential improvement in agricultural activities following the harvest period will support private sector performance in the near term. However, ongoing challenges from the highly inflationary environment and tight financial conditions are expected to constrain economic activities, particularly in the industrial sector.
Based on data from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined by 7.1% m/m to USD2.17 billion in September (August: USD2.34 billion). The decline was driven by a broad-based shortfall across local (84.1% of total transaction value) and foreign (15.9% of total transaction value) inflows. Analysing the breakdown provided, inflows from local sources dipped by 6.0% m/m to USD1.83 billion (August: USD1.94 billion) due to declines across the Individuals (-53.1% m/m), non-bank corporates (-27.5% m/m) and exporters (-4.7% m/m) segments despite the more robust inflow from the CBN segment (+184.2% m/m). Similarly, inflows from foreign sources declined by 12.4% m/m to USD345.50 million (August: USD394.50 million), partly due to weak investor confidence. Over the short term, we expect FX liquidity conditions to remain weak, primarily due to limited intervention by the CBN. This is likely to erode market confidence and intensify pressure on the naira.
Capital Markets: Equities
Despite starting the week on a positive note, the Nigerian equities market turned sour upon reopening on Wednesday following Tuesday’s Independence Day celebration. Thus, the All-Share Index fell by 1.0% w/w to 97,520.54 points, with the MTD and YTD returns settling at -1.1% and +30.4%, respectively. The downturn was driven by profit-taking on industrial and banking sector stocks despite strong interest in oil & gas stocks. Notably, selloffs in DANGCEM (-10.0%), BUACEMENT (-3.4%), and FBNH (-11.2%) drove the weekly loss. Activity levels were mixed, as trading volume dropped by 13.6% w/w, while total trading value surged by 188.9% w/w. From a sectoral viewpoint, the Oil & Gas (+7.3%), Insurance (+3.8%) and Consumer Goods (+0.3%) indices ended in positive territory, while the Industrial Goods (-6.8%) and Banking (-0.7%) indices declined.
In the near term, we expect investors to maintain a cautious trading approach, with sentiments likely skewed towards the bearish side. As such, we expect intermittent profit-taking to persist. However, this could be balanced by bargain-hunting activities as investors prepare for the upcoming Q3-24 earnings season.
Money Market and Fixed Income
The overnight (OVN) rate expanded by 275bps w/w to 32.8% as OMO auction (NGN731.14 billion), CRR (NGN110.00 billion), and FX sales (NGN98.00 billion) debits pressured financial system liquidity in the absence of any significant inflows. As a result, the average system liquidity settled at a net short position of NGN174.26 billion (vs a net long position of NGN462.09 billion in the previous week).
We expect the OVN to remain elevated in the absence of any notable inflows to support the financial system amid a possible net issuance at the Wednesday NTB auction.
Treasury Bills
In line with our expectations, the Treasury bills secondary market traded on a bearish note due to the tight system liquidity. Thus, the average yield in the market rose by 51bps to 23.1%. Across the market segments, the average yield advanced by 76bps to 22.7% at the T-bills segment and expanded by 13bps to 23.8% at the OMO segment. Notably, the CBN conducted an OMO auction on Thursday, offering instruments worth NGN500.00 billion – NGN25.00 billion for the 89-day, NGN25.00 billion for the 187-day and NGN450.00 billion for the 362-day – to investors. Total subscription settled at NGN737.14 billion (bid-to-offer: 1.5x), with demand seen only for the 362-Day bill. Eventually, the CBN allotted NGN731.14 billion for the 362-Day bill at a stop rate of 24.3% (previous: 24.4%), while no sale was made for the 89-Day and 187-Day bills.
Based on our expectation of a liquidity dearth in the coming week, we expect yields in the Treasury bills secondary market to trend higher. Also, the CBN is scheduled to hold an NTB PMA next Wednesday (09 October), with NGN81.90 billion worth of maturities on offer.
Bonds
Similarly, bearish sentiments prevailed in the Treasury bonds secondary market this week following profit-taking activities on short- and long-dated bonds. Hence, the average yield expanded by 33bps to 19.1%. Across the benchmark curve, the average yield advanced at the short (+59bps), mid (+31bps), and long (+14bps) segments following selloffs of the MAR-2025 (+151bps), JUL-2030 (+86bps), and JUN-2038 (+85bps) bonds, respectively.
Next week, we still expect yields to trend upwards, driven by the impact of (1) depressed liquidity in the system and (2) the expectation of higher yields on new issuances. Meanwhile, we maintain our medium-term expectation of elevated yields consequent on (1) anticipated monetary policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
The naira depreciated by depreciated by 3.4% w/w to NGN1,631.21/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) as the CBN made no interventions during the week. Total turnover (as of 03 October) at the market declined by 30.7% WTD to USD906.11 million, with trades consummated within the NGN1,540.00/USD – NGN1,699.00/USD range.
Notably, Nigeria’s FX reserves recorded accretion for the fifth consecutive week, increasing by USD517.01 million w/w to USD38.58 billion (03 October). In the forwards market, the naira rates declined on the 1-month (-0.3% to NGN1,689.10/USD), 3-month (-0.7% to NGN1,770.68/USD), 6-month (-1.1% to NGN1,870.30/USD) and 1-year (-2.1% to NGN2,095.43/USD) contracts.
Whilst we note the improved liquidity from increased FPI inflows, we think the naira is likely to face continued pressure as FX demand remains elevated.
