Global Economy
According to S&P Global, the United States’ (US) Composite PMI rose to an eight-month high in February of 52.5 points (January: 52.0 points). We highlight that the improved reading reflects a sturdy upturn in factory activities and a resilient momentum in the services sector. The Manufacturing PMI expanded to 52.2 points (January: 50.7 points), its highest level since July 2022 (52.2 points), due to improvement in factory activities on account of (1) renewed increase in production and (2) sharper uptick in new orders. Although, the Services PMI (52.3 points vs January: 52.5 points) moderated partly due to softer new business from abroad and weak optimism stemming from the recent pull-back in rate cut expectations, the outturn was resilient as output remained above the 50-point psychological threshold for the thirteenth consecutive month. We expect the overall private business activity in the US to remain in expansionary territory over the short term, supported by rising domestic demand, amid the easing of the cost-of-living crisis and healthy labour market conditions. We emphasize that the PMI data indicates the sustained resilience of the US economy despite elevated interest rates, which may lead the US Fed to keep rates steady in the near term. Accordingly, the financial market anticipates ‘HOLD’ stances at both the March and May policy meetings, with the first rate cut expected in the June monetary policy meeting.
In line with market expectations, the Governing Council of the European Central Bank (ECB) voted to leave the three key interest rates unchanged at their recently concluded March policy meeting. Precisely, the main refinancing operations, marginal lending facility, and deposit lending facility were unchanged at 4.50%, 4.75% and 4.00%, respectively. In addition, the central bank emphasized its commitment to a data-dependent approach in determining the appropriate level and duration of restriction. Furthermore, they acknowledged that while most indicators of underlying inflation have softened in recent months, domestic price pressures remain elevated, partly due to robust wage growth. Another significant development from the meeting was the Governing Council’s intention to decrease the Pandemic Emergency Purchase Programme (PEPP) portfolio by an average of EUR7.50 billion per month starting from H2-24 and plans to discontinue reinvestments under the programme at the end of the year. While the softer inflation outlook and need to support the weak economy feeds expectations for policy easing, the committee’s tone at the press conference signals that they are not prepared to embark on policy easing in the near term and await more definitive evidence of declining inflation and movement in job figures before considering decisive rate cuts. At the same time, we think the ECB will likely mirror the actions of other major central banks, such as the US Fed and the Bank of England (BoE), which appear to be in no rush to implement rate cuts.
Global Equities
Sentiments in the global stock market were mixed, even as investors cheered the prospect of an imminent rate easing cycle led by major central banks while eagerly awaiting the release of US non-farm payrolls data later today (08 March) for insights into the labor market’s condition amidst higher interest rates. Consequently, the performance of US equities (DJIA: -0.8%; S&P 500: +0.4%) was influenced by sell-offs in tech stocks earlier in the week and dovish remarks from the Federal Reserve Chairman, which bolstered expectations of a potential interest rate cut this year. Meanwhile, European equities (STOXX Europe: +1.1%; FTSE 100: +0.1%) received a boost from the latest European Central Bank (ECB) announcement, which revised its annual inflation (2024E: 2.3% | prev.: 2.7%) and growth (2024E: 0.6% | prev.: 0.8%) forecasts while maintaining key interest rates unchanged. Elsewhere, in Asia (Nikkei 225: -0.6%; SSE: +0.6%), the Japanese market declined following speculation that the Bank of Japan might soon switch away from the negative interest rate cycle. Conversely, the Chinese market saw an uptick driven by the dovish stance of global central banks regarding interest rates. Finally, the Emerging market (MSCI EM: +0.5%) and Frontier markets (MSCI FM: +1.1%) indices edged higher underpinned by bullish sentiments in China (+0.6%) and Romania (+1.4%), respectively.
Nigeria: Domestic Economy
According to the recently released trade report by the National Bureau of Statistics (NBS), the trade balance recorded a deficit position in Q4-23 (NGN1.41 trillion vs surplus of NGN1.31 trillion in Q3-23) after two consecutive quarters of surplus. The trade deficit was due to a faster increase in total imports (+56.0% q/q to NGN14.11 trillion) relative to exports (+22.0% q/q to NGN12.69 trillion). We highlight that the significant increase in imports was due to (1) increased domestic demand despite the persistent FX challenges, (2) elevated global commodity prices, and (3) the significant importation of tanks and other armoured fighting vehicles (35.9% of total imports) in the period. At the same time, the higher export was due to a 20.8% q/q increase in crude oil exports (81.2% of total exports) influenced by improved crude oil production volumes in Q4-23 (1.53 mb/d | Q3-23 average: 1.43 mb/d). We expect an improvement in crude oil production amid higher crude oil prices to support Nigeria’s total exports in the short to medium term. At the same time, we envisage a reduction in total imports in the near term, influenced by weaker demand due to the lingering currency pressures. Overall, we expect the trade balance surplus to print higher in 2024FY relative to 2023FY levels.
According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 85.2% y/y to NGN76.94 trillion in January (January 2023: NGN41.54 trillion). We believe the continuous increase in CPS reflects the impact of CBN’s enforcement of the 65.0% loan-to-deposit ratio, and the naira depreciation. On a month-on-month basis, the CPS increased by 23.0% in January (December 2023: +4.8% m/m to NGN62.54 trillion). At the same time, the currency in circulation increased by 163.3% y/y to NGN3.65 trillion (January 2023: NGN1.39 trillion), mainly attributed to a notable increase in the money in circulation relative to the corresponding period last year, which saw a temporary reduction due to the Naira redesign policy. Looking ahead, we believe the re-enforcement of the CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) and the hike in CRR to 45.0% (previous: 32.0%) will continue to compel commercial banks to generate risky assets over the short to medium term. Overall, we project that the Credit to Private Sector (CPS) will maintain a double-digit expansion in 2024FY.
Capital Markets: Equities
Positive sentiments returned to the Nigerian equities market this week, as the bourse recorded gains on all trading days following bargain hunting in MTNN (+10.3%), BUACEMENT (+4.4%), FBNH (+15.3%) and increased demand for TRANSCORP (+10.0%) – after the recent listing of its subsidiary (TRANSPOWER) on the NGX on 04 March. Eventually, the All-Share Index advanced by 2.6% w/w, with the MTD and YTD returns increasing to +1.4% and +35.5%, respectively. Analysing activity levels, total traded volume and value improved by 14.6% w/w and 218.7% w/w, respectively. Notably, TRANSCORP accounted for 34.0% of the total traded volume, while TRANSPOWER accounted for 48.5% of the total traded value. From a sectoral standpoint, the Industrial Goods (+1.6%) index advanced, while the Insurance (-5.2%), Banking (-1.4%) and Consumer Goods (-1.2%) indices declined. The Oil and Gas index closed flat.
We expect investors to continue to cherry-pick fundamentally sound stocks, given the absence of any significant positive catalysts. However, the awaited earnings releases from the banks and potential dividend declarations may catalyse another rush of positive sentiments, supporting buying activities on the bourse.
Money market and fixed income
The overnight (OVN) rate expanded by 281bps w/w to 31.0%, as the debits for last week Friday’s OMO auction (NGN1.06 trillion), net NTB issuances (NGN979.79 billion) and the transfer of NNPC’s remittance obligations from commercial banks to the CBN’s Treasury Sales Account (TSA) impacted the system. However, due to DMBs’ utilisation of the CBN’s SLF facility, the average system liquidity settled higher at a net long position of NGN1.37 trillion (vs a net long position of NGN642.18 billion in the previous week).
Barring any liquidity mop-up action by the CBN next week, we envisage the OVN rate to trend southwards as the principal and coupon payments for the maturing FGN MAR 2024 bond (NGN771.11 billion) are expected to support system liquidity.
Treasury bills
This week, activities in the T-bills secondary market remained bearish, as the average yield across all instruments expanded by 140bps to 18.8%. Across the market segments, the average yield advanced by 156bps to 18.8% in the NTB segment and increased by 89bps to 18.8% in the OMO secondary market. At this week’s NTB auction, the apex bank offered instruments worth NGN337.89 billion – NGN14.42 billion of the 91-day, NGN10.55 billion of the 182-day, and NGN312.92 billion of the 365-day bills – to participants. Total subscription at the auction settled at NGN1.66 trillion (bid-to-offer: 4.9x), with more demand skewed towards the longer-dated bill (NGN1.54 trillion | 92.9% of total subscription). The auction closed with the CBN allotting precisely what was offered for the 91D and 182D bills but over-allotting for the 365D bill (NGN1.29 trillion) at respective stop rates of 17.24% (previously: 17.00%), 18.00% (previously: 17.50%), and 21.49% (previously: 19.00%).
Following our expectations of liquidity surfeit in the system next week, we anticipate a likely recovery in participants’ demand for bills, resulting in a contraction of yields in the Treasury bills secondary market. Additionally, the CBN is scheduled to hold an NTB PMA on Wednesday (13 March), where it is expected to roll over maturing bills worth NGN161.49 billion.
Bonds
Proceedings in the Treasury bonds secondary market sustained the bearish momentum from prior weeks, as the average yield advanced further by 76bps to 18.0%. Across the benchmark curve, the average yield expanded at the short (+73bps), mid (+46bps), and long (+96bps) segments as investors sold off the FEB-2028 (+115bps), APR-2032 (+99bps) and MAR-2036 (+238bps) bonds, respectively.
While the overall system liquidity may have otherwise resulted in increased demand in the bonds secondary market and decline in yields, we expect investors to be focused on attractive yields on short-term securities. That being said, we do not rule out pockets of demand which may cause a moderate paring of market yields during the week. Notwithstanding, we expect market participants to be focused on the March 2024 bond auction holding later in the month. Finally, we maintain our view that (1) expected monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics, will keep yields in the FGN bonds secondary market elevated over the short term.
Foreign Exchange
Nigeria’s FX reserves grew further this week, as the gross reserves level increased by USD347.53 million w/w to USD34.11 billion (07 March). Meanwhile, the naira depreciated by 4.9% to NGN1,627.40/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). At the NAFEM, total turnover (as of 07 March 2024) decreased by 35.4% WTD to USD1.00 billion, with trades consummated within the NGN1,400.00 – NGN1,652.00/USD limit. In the Forwards market, the naira rates on the 1-month (-1.2% to NGN1,600.35/USD), 3-month (-2.5% to NGN1,664.04/USD), 6-month (-2.6% to NGN1,723.11/USD) and 1-year (-2.1% to NGN1,841.52/USD) contracts all declined.
Notwithstanding the recent policy actions by the CBN, the currency has remained under pressure, given that the market supply remains frail. However, we are encouraged by the pace of market reforms and the apex bank’s renewed interventions – the CBN further reduced the FX backlog after providing a further USD200.00 million during the prior week which reduces the backlog to c. USD1.60 billion. In our view, as the CBN forges forward with its initiatives – which have included ensuring the naira assets are attractive to foreign participants (to drive capital importation), and domestic participants (to drive investments over speculation – and clears the FX backlog that dynamics in the FX market may improve and consequently lead to improved liquidity over the medium term.
Cordros Research
