Global Economy
According to the recently released data from Eurostat, consumer prices in the Eurozone eased by 10bps to 2.5% y/y in June (May: +2.6% y/y). We highlight that the lower inflationary pressure was underpinned by the slowdown in food and energy prices amid elevated services costs.
Precisely, prices moderated across the food, alcohol & tobacco (+2.5% y/y vs May: +2.6% y/y), and energy (+0.2% y/y vs May: +0.3% y/y) baskets, while non-energy industrial goods (+0.7% y/y vs May: +0.7% y/y) and services (+4.1% y/y vs May: +4.1% y/y) costs remained flat. On a month-on-month basis, consumer prices were steady at 0.2% in June (May: +0.2% m/m).
While we expect slower food prices to further ease inflationary pressures in the near term, we think that wage increases and sticky services costs could keep overall inflation above the ECB’s 2.0% target. Thus, we expect the ECB to keep the key interest rate steady at the 18 July monetary policy meeting.
According to the United States Bureau of Labor Statistics, total non-farm payroll employment in the US increased at a slower pace in June, rising by 206,000 jobs relative to the 218,000 jobs recorded in May. Notably, while significant job gains were recorded across Government employment (+70,000 jobs), healthcare (+49,000) and employment in social assistance (+34,000 jobs), job losses occurred in professional and business services (-17,000 jobs), retail trade (-9,000 jobs) and manufacturing (-8000 jobs).
The unemployment rate settled at a 32-month high, rising to 4.1% m/m (May: +4.0% m/m). Consequently, the labour force participation rate settled lower at 62.3% m/m (May: 62.5% m/m) while the employment to population ratio printed 60.1% (May: 60.2%). We highlight that labour market conditions are cooling aligned with the tight financial conditions in the US.
Therefore, the labour market is expected to continue to show signs of easing in the short term as high borrowing costs weigh on economic activities and overall employment. Nevertheless, we expect the resilient economy and still tight labour market to lead to the US Fed maintaining its policy rate at restrictive levels in the near term. Accordingly, the CME FedWatch tool indicates a 95.3% probability that the Fed will keep the key policy rate unchanged in the 31 July policy meeting.
Global Equities
Global stocks markets were mostly higher this week driven by signs of slowing inflation, a cooling labor market, and dovish comments from the Federal Reserve that reinforced expectations of upcoming rate cuts. As of the time of writing, US equities (DJIA: +0.5%; S&P 500: +1.4%) were set to close higher as investors reacted favourably to dovish Fed comments on inflation and ISM Manufacturing PMI numbers which indicated softer price trends and weakening labour market. Similarly, European equities (STOXX Europe: +1.5%; FTSE 100: +1.3%) were set for a weekly gain, boosted by optimism over potential US rate cuts and positive reactions to the UK Labour Party’s election victory.
In Asia, Japanese equities (Nikkei 225: +3.4%) surged as the yen’s weakness against the US dollar fueled strong buying interest in real estate and tech stocks, while Chinese equities (SSE: -0.6%) declined due to trade war fears following the European Union’s new tariffs on Chinese electric vehicles. Elsewhere, gains in India (+1.0%) and Taiwan (+2.3%) lifted the Emerging Markets index (MSCI EM: +1.7%), while the Frontier Markets index (MSCI FM: +1.5%) was supported by positive sentiments in Vietnam (+2.8%).
Nigeria: Domestic Economy
According to the data released by the National Bureau of Statistics (NBS), capital importation into Nigeria in Q1-24 rose significantly by 198.1% y/y to USD3.78 billion (Q1-23: -28.0% y/y to USD1.13 billion) – the highest level since Q1-20 (USD5.85 billion). For us, the increase reflects the combined impact of (1) implemented FX reforms and increased interventions within the FX market by the CBN, (2) higher fixed income yields, and (3) the settlement of FX backlogs.
Thus, capital inflows increased across foreign direct investments (+150.4% y/y to USD119.18 million), portfolio investments (+219.7% y/y to USD2.08 billion), and other investments (+171.1% y/y to USD1.18 billion). Similarly, capital importation rose by 210.2% on a quarter-on-quarter basis. Looking ahead, we believe that foreign investors will adopt a cautious stance in the near term, closely monitoring the activities of the apex authorities in improving FX liquidity and ensuring sustainability. Notwithstanding, if local FX liquidity improves, market rates increase, and investors can easily repatriate capital, then foreign capital inflows may increase over the short-to-medium term.
Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined to a six-month low in June, dropping by 53.7% m/m to USD1.45 billion (May: USD3.12 billion). We attribute the decline to low market confidence stemming from frail CBN intervention in the FX market.
Analysing the breakdown provided, we highlight a broad-based contraction across both the local (70.0% of total transaction value) and foreign (30.0% of total transaction value) investors. Precisely, inflows from local market participants dipped by 52.6% m/m to USD1.01 billion in June (May: USD1.42 billion), due to a slowdown across the Individuals (-68.0% m/m), non-bank corporates (-35.7% m/m) and Exporters (-33.5% m/m). Additionally, there were no inflows from the CBN.
In the same vein, inflows from foreign sources decelerated by 55.9% m/m to USD434.10 million (May: USD: 984.40 million) as foreign investors remained cautious awaiting signals on the CBN’s plans to improve FX liquidity. Looking ahead, we expect FX liquidity conditions to remain tepid in the near term should inflows from the CBN remain weak, undermining market confidence and increasing pressure on the naira.
Capital Markets: Equities
This week, investors remained cautious with market activities remaining subdued as companies entered their close periods ahead of half-year (H1-24) earnings releases. Accordingly, the All-Share Index declined by 4bps w/w as investors sold off MTNN (-9.3%), resulting in the Year-to-Date return settling at +33.8%. Trading activity was subdued, as the total traded volume and value decreased by 14.6% w/w and 37.6% w/w, respectively. However, sectoral performance was broadly positive, as the Banking (+3.9%), Oil and Gas (+3.0%), Insurance (+2.3%), and Industrial Goods (+0.2%) indices advanced, while the Consumer Goods (-0.7%) index closed lower.
As the half-year earnings season approaches, we believe investors will look for signs of improvement following the broadly lackluster Q1-24 corporate earnings. Consequently, we expect mixed market performance in the coming week, with bargain hunting balanced by intermittent profit-taking activities.
Money Market and Fixed Income
The overnight (OVN) rate expanded significantly by 753bps w/w to 32.5%, as the dual impact of last Friday’s late OMO auction (NGN264.33 billion) and Tuesday’s CRR maintenance (c.NGN500.00 billion) debits pressured the liquidity in the system. Consequently, deposit money banks (DMBs)’ borrowing from the CBN’s SLF window surged (NGN5.38 trillion), causing the week’s average liquidity to close at a net long position of NGN1.13 trillion (vs net short position of NGN253.60 billion in the previous week).
Next week, we expect the system liquidity to remain relatively subdued, more so as we do not expect any significant inflows to saturate the financial system. Consequently, we expect the OVN rate to rise further amid a possible net issuance at next Wednesday’s NTB auction exerting more pressure on liquidity levels.
Treasury Bills
Proceedings in the Treasury bills secondary market remained bearish this week, as market participants (especially banks) sold off bills to satisfy their funding needs. Subsequently, the average yield across all instruments advanced by 83bps to 23.4%. Across the market segments, the average yield expanded by 69bps and 91bps to 22.8% and 24.4%, respectively, at the NTB and OMO segments.
We believe the sustained dearth in the system liquidity next week will continue to undermine demand for instruments in the T-bills secondary market, causing yields to expand further. Additionally, the DMO is scheduled to hold an NTB PMA next Wednesday (10 July) where it will roll over NGN166.11 billion worth of maturing bills.
Bonds
Trading in the FGN bonds secondary market was mixed, with most activities observed at the short and long ends of the curve. As a result, the average yield expanded by 2bps to 18.8%. Across the benchmark curve, the average yield advanced at the short (+8bps) end, following sell pressures on the MAR-2025 (+17bps) bond but closed flat at the mid segment. Conversely, the average yield pared at the long (-1bp) end as players demanded the MAR-2035 (-28bps) bond.
In the upcoming week, we envisage a possible upward repricing of yields, particularly on short-term instruments. However, we do not rule out pockets of demand on some attractive maturities as the recently published Q3-24 bond issuance calendar indicates reduced supply to the market. For the rest of the year, we maintain our medium-term 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
This week, Nigeria’s FX reserves rose to a 13-month high as the gross reserves level increased by USD465.21 million w/w to USD34.66 billion (04 July). On the other hand, the naira depreciated further by 0.3% w/w to NGN1,509.67/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the total turnover (as of 04 July) at the market decreased by 43.0% WTD to USD678.58 million, with trades consummated within the NGN1,430.00/USD – NGN1,550.00/USD range. In the forwards market, the naira rates on the 1-month (-0.9% to NGN1,535.26/USD), 3-month (-1.0% to NGN1,594.38/USD), 6-month (-1.5% to NGN1,677.57/USD) and 1-year (-1.9% to NGN1,847.48/USD) contracts declined.
Activities in the FX market this week still reflect that FX liquidity remains frail, given weak inflows from the CBN – despite the recent accretion to FX reserves – and low confidence in the FX market; thus, sustaining the weakness in the naira. We expect FX liquidity to remain frail in the short term, amid no significant supply from the CBN; consequently, heaping pressure on the naira.
Cordros
