Global Economy
According to the United States Bureau of Labor Statistics, total non-farm payroll employment in the US increased by 142,000 jobs in August (July: +89,000 jobs) – below market expectations (+160,000). Analyzing the breakdown, significant employment gains were noted across the construction (+34,000 jobs) and healthcare (+31,000 jobs) sectors. At the same time, the labour force participation rate was unchanged at 62.7% m/m (July: 62.7% m/m), while the employment-population ratio remained at 60.0% m/m (July: 60.0% m/m). In addition, the unemployment rate eased marginally to 4.2% m/m (July: 4.3% m/m). Overall, we highlight that despite the increased employment levels, the figure remained below 12 month and H1-24 averages of 202,000 jobs and 217,500 jobs, respectively, signaling a more relaxed labour market condition.
We believe that the weaker-than-expected employment figures affirm that the US job market has softened and may remain at current levels in the near term. Thus, we state that the data print reinforces the likelihood of the FOMC implementing a rate cut at its next meeting, though at a cautious pace given the recent drop in the unemployment rate. In light of this, we anticipate the committee will reduce the target range for the federal funds rate by 25bps to 5.00% – 5.25% (Currently: 5.25% – 5.50%) in the next meeting, synchronizing neatly with the CME FedWatch Tool indicating 53.0% chance of 25bps cuts on 18 September.
The Eurozone’s private sector activity rose to a 3-month high, as the Composite PMI settled at 51.0 points in August (July: 50.2 points). According to data from the Hamburg Commercial Bank (HCOB), the improvement was primarily driven by increased activity in the services sector following the buzz surrounding the Olympic games in Paris. Nonetheless, the Eurozone economy continued to show signs of weakness as new orders, employment activities, and business confidence deteriorated. Analysing the breakdown, the manufacturing PMI (45.8 points vs. July: 45.8 points) stalled, remaining below the 50-point threshold for the 26th consecutive month, in line with the plummeting new orders and rapidly depleting backlog of work.
Meanwhile, the services PMI increased to 52.0 points (July: 51.9 points), primarily driven by higher new business inflows underpinned by improved demand, especially from Germany and France. While factory activity is likely to remain underwhelming in the short term, we expect the services sector to continue to lift private sector activity over the short term. Nonetheless, we anticipate a weaker disposable income and reduced business optimism as potential downside risks to the outlook. As a result, we expect the slowing wage growth and favourable inflation data to steer the ECB toward easing the key interest rate in the next meeting. Indeed, the money market projects the ECB to reduce the deposit rate by 25bps in the 12 September meeting.
Global Equities
Sentiments across equities markets globally turned sour this week as a poor US manufacturing reading rekindled worries about a US recession, amid selloffs in global tech stocks and a firmer yen. Nevertheless, signs of continued economic cooling, as indicated by the recently released August report, have increased expectations for a more significant rate cut by the Federal Reserve at the next policy meeting. Accordingly, US equities (DJIA: -1.9%; S&P 500: -2.6%) are on track for a weekly decline, with widespread selloffs in tech stocks and growing concerns over economic health overshadowing the prospects of interest rate cuts. Similarly, European equities (STOXX Europe: -2.9%; FTSE 100: -2.0%) are poised to close lower this week, fueled by fears of a US economic slowdown and heightened global market uncertainties.
Asian markets (Nikkei 225: -5.8%; SSE: -2.7%) also experienced sharp declines due to (1) a slump in technology stocks following the global tech rout, (2) sell pressures on export-driven stocks amid a surge in the Japanese yen, and (3) weak corporate earnings amid slower growth in China. The Emerging (MSCI EM: -2.0%) and Frontier (MSCI FM: -0.4%) market indices posted losses, driven by declines in China (-2.7%) and Vietnam (-0.8%).
Nigeria: Domestic Economy
According to the CBN, private sector activities in Nigeria printed above the 50 points psychological threshold for the first time in 13 months as the composite PMI expanded to 50.2 points in August (July: 49.7 points). We highlight that the outturn was driven by improvement across the services and agriculture sectors while the industry sector remains subdued. Specifically, the services PMI (50.7 points vs. July: 50.3 points) settled higher on the back of increased business activity, a higher stock of raw materials and increased new business opportunities.
At the same time, the agriculture sector PMI (50.5 points vs. July: 49.7 points) inched to an expansionary level after three consecutive months of contraction due to improved crop production and agricultural support services in the period. Elsewhere, while the industry sector PMI (49.2 points vs July: 48.3 points) remains below the benchmark, the figure represents the highest level in seven months, signaling a gradual recovery in industrial activities.
For context, we attribute the improvement in the industry sector to increased activities across the mining, quarrying, electricity, and gas subsectors, while 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 high inflation – caused by naira depreciation, rising energy costs, and increased logistics expenses – and tight financial conditions are expected to constrain economic activities, particularly in the industrial sector.
Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose by 21.4% m/m to USD2.34 billion in August (July: USD1.92 billion). Analysing the breakdown, inflows from local sources increased by 15.5% m/m to USD1.94 billion in August (July: USD1.68 billion) driven by increased collections from Individuals (+162.5% m/m), Exporters (+28.3% m/m), and Non-Bank Corporates (+18.7% m/m) segments despite the weaker inflow from the CBN segment (-53.7% m/m).
At the same time, inflows from foreign sources increased by 62.1% m/m to USD394.50 million (July: USD243.30 million), although remained below the H1-24 average (USD790.57 million), reflecting still weak foreign investor confidence. Looking ahead, we expect FX liquidity conditions to remain tepid in the near term should inflows from the CBN remain weak, which could lower market confidence and increase pressure on the naira.
Capital Markets: Equities
Despite starting the week on a strong note, the Nigerian equities market could not sustain last week’s bullish momentum as profit-taking activities in DANGSUGAR (-5.5%), ZENITHBANK (-2.0%) and WAPCO (-3.5%) triggered a 0.2% w/w decline in the All-Share Index to 96,433.53 points. Consequently, the Year-to-Date return moderated to +29.0%. Activity levels also remained subdued, with total trading volume and value falling by 23.7% w/w and 3.3% w/w, respectively. Analysing by sectors, the Insurance (-4.5%), Consumer Goods (-1.2%), Industrial Goods (-0.2%) and Banking (-0.1%) indices settled lower, while the Oil and Gas (+1.5%) index advanced.
We anticipate a mix of cautious trading and selective buying as market participants watch out for any signs of broader market interest. However, we acknowledge the likelihood of profit-taking activities on stocks that have experienced notable appreciation in recent weeks.
Money Market and Fixed Income
The overnight (OVN) rate expanded significantly by 11.56ppts w/w to 31.7% as OMO auction (NGN459.60 billion) and CRR (NGN200.00 billion) debits dwarfed OMO maturities (NGN15.90 billion), thus, pressuring system liquidity. Consequently, the average system liquidity settled at a net long position of NGN198.32 billion (vs a net short position of NGN622.65 billion in the previous week).
Next week, we envisage the OVN rate will likely remain elevated given that expected inflows from OMO maturities (NGN32.50 billion) may be insufficient in supporting the system amid a possible net issuance at the NTB auction scheduled for Wednesday.
Treasury Bills
In line with our expectations, the Treasury bills secondary market traded on a bullish note owing to pockets of post-auction demand from participants who lost out at the Wednesday NTB PMA. Accordingly, the average yield in the market declined by 103bps to 20.8%. Across the market segments, the average yield dipped by 154bps to 19.7% at the NTB segment and inched lower by 17bps to 22.7% at the OMO segment. At this week’s NTB auction, the DMO offered participants instruments worth NGN233.31 billion – NGN19.61 billion for the 91-day, NGN10.55 billion for the 182-day and NGN203.15 billion for the 364-day bills.
Notably, aggregate subscriptions at the auction settled at NGN1.13 trillion (bid-to-offer: 4.8x), higher than the NGN1.03 trillion recorded at the previous auction. Eventually, the DMO rolled over the exact maturing bills worth NGN233.31 billion – NGN7.86 billion for the 91-day, NGN1.99 billion for the 182-day, and NGN223.46 billion for the 364-day papers – at respective stop rates of 17.00% (previous: 18.20%), 17.50% (previous: 19.20%) and 18.94% (previous: 20.90%).
Meanwhile, the CBN also conducted an OMO auction on Monday, offering instruments worth NGN500.00 billion – NGN25.00 billion for the 85-day, NGN25.00 billion for the 183-day and NGN450.00 billion for the 365-day – to investors. Total subscription settled at NGN678.00 billion (bid-to-offer: 1.3x), with the CBN allotting NGN459.60 billion for the 365-day at a stop rate of 21.8% (previous: 21.9%), while the 85-day and 183-day bills made no sales.
We expect sentiments in the Treasury bills market to be determined by the NTB PMA scheduled for Wednesday, during which the DMO is expected to roll over NGN161.88 billion worth of maturities.
Bonds
Bullish sentiments prevailed in the Treasury bonds secondary market this week with most activities observed at the short and long ends of the curve. As a result, the average yield contracted by 26bps to 18.7%. Across the benchmark curve, the average yield declined at the short (-44bps), mid (-10bps), and long (-24bps) segments as investors demanded the MAR-2025 (-168bps), JUN-2033 (-25bps), and APR-2037 (-95bps) bonds, respectively.
In the coming week, we envisage a possible downward repricing of yields, particularly on short-term instruments spurred by the expected downward repricing in the NTB secondary market. 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
Nigeria’s FX reserves decreased by USD1.03 million w/w to USD36.30 billion (04 September), marking the 5th consecutive week of depletion. Meanwhile, the naira remained resilient against the greenback, appreciating by 0.3% w/w to NGN1,593.32/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), despite the total NAFEM turnover declining by 24.5% WTD to USD764.61 billion (as of 05 September), with trades consummated within the NGN1,400.00/USD – NGN1,650.00/USD range. In the forwards market, the naira rates recorded on the 1-month (-2.3% to NGN1,660.59/USD), 3-month (-3.7% to NGN1,733.99/USD), 6-month (-5.0% to NGN1,843.32/USD) and 1-year (-8.2% to NGN2,074.04/USD) contracts decreased.
We still expect FX pressures to persist as supply remains tight. Consequently, barring any meaningful intervention from the Central Bank of Nigeria (CBN), the naira is expected to depreciate in the near term.
Cordros
