Global Economy
In line with market expectations, the Federal Open Market Committee (FOMC), at the recently concluded November policy meeting, voted to reduce the target range for the federal funds rate by 25bps to 4.50% – 4.75% (Previous: 4.75% – 5.00%). The committee observed that while the broader economy continues to grow, labour market conditions have generally softened, with a relatively low unemployment rate (4.0% m/m). The FOMC further acknowledged the progress made towards bringing inflation close to the 2.0% target, noting that inflation remains somewhat elevated due to the sticky non-food basket.
Further out, the committee now believes that the risks to achieving the employment and inflation goals are roughly balanced – a shift from the September assessment, which indicated “greater confidence” in the process. The preceding reflects a more cautious view of economic uncertainty, and the Committee stated they would remain attentive to the risks to both sides of the dual mandate (maximum employment and price stability). Looking ahead, we expect recent data – showing inflation close to target and softened labour market conditions – will spur the FOMC to proceed with another rate cut in the near term. Consequently, we anticipate the FOMC will cut the funds rate by 25bps at the next policy meeting, aligning closely with the CME FedWatch tool, which projects a 71.3% probability of a 25bps cut at the 18 December meeting.
Similarly, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 8 – 1 to reduce the key interest rate by 25bps to 4.75% (Previously: 5.00%). The committee highlighted that the decision to ease the bank rate was influenced by the continued slowdown in inflationary pressures, as external shocks have waned and domestic factors are gradually moderating. Nonetheless, the apex bank projects a 50bps increase in annual headline inflation by year-end, reflecting the direct impact of the expansionary 2024 Autumn Budget amid an uncertain labour market outlook.
The budget’s combined measures are expected to lift GDP growth higher by 0.75% y/y in 2025FY (previous estimate: 0.3% y/y) as increased government consumption and investment are anticipated to offset the impact of higher taxes on growth. Based on the preceding, the committee noted they might need to retain a “gradual approach” to policy easing while ensuring that monetary policy stays restrictive for sufficiently long until the risks to inflation returning sustainably to the 2.0% medium-term target dissipates further. In line with the BOE’s guidance, we anticipate the committee to adopt a cautious approach to easing monetary policy in the near term, given that inflation risks are tilted to the upside – core and services inflation remain high. Thus, we envisage that the BoE may HOLD the key interest rate constant in the December policy meeting.
Global Equities
Global stocks posted broad gains this week, buoyed by optimism around incoming President Donald Trump’s anticipated fiscal policies. Investors sentiments were further lifted by the Federal Reserve’s recent interest rate cut and expectations of additional stimulus in China. In line with this, US equities (DJIA: +4.0%; S&P 500: +4.3%) were set for a weekly gain as investors digested the Fed’s latest interest rate cut and Donald Trump’s electoral victory.
Elsewhere, European equities (STOXX Europe: -0.2%; FTSE 100: -0.4%) were on track to close lower as investors continued to digest Donald Trump’s presidential election win and political turbulence in Germany, while the Bank of England’s and Fed’s monetary policies remained focal points. Asian markets (Nikkei 225: +3.8%; SSE: +5.5%) posted solid gains, fueled by (1) positive sentiments on Wall Street and (2) expectations that China would front-load its fiscal stimulus to counter potential fallout from US trade policies. The Emerging Market (MSCI EM: +1.6%) and Frontier Market (MSCI FM: +0.5%) indices rose on the back of gains in China (+5.5%) and Morrocco (+2.3%), respectively.
Nigeria: Domestic Economy
In the October edition of the World Economic Outlook (WEO), the IMF expects Nigeria to grow by 2.9% y/y in 2024E (2023FY: +2.9% y/y) – 20bps lower than the July forecast (+3.1% y/y). The revised growth forecast primarily reflects concerns about the weaker-than-expected economic activity in H1-24, particularly in the agricultural and oil sectors, as flooding and security issues affected production. Accordingly, the IMF expects African oil-exporting countries to grow by 2.7% y/y in 2024E (2023FY: +2.4% y/y) in line with their growth expectations for Nigeria and Angola (2024E: +2.4% y/y vs 2023FY: +1.0% y/y).
Further out, the IMF expects a steady outlook for the global economy (2024E: +3.2% y/y vs. 2023FY: +3.2% y/y) amid concerns about potential supply disruptions and adverse trade policies. Although we align with the IMF on Nigeria’s growth outlook, our projection (2024E: 3.00%) is above the IMF’s forecast. Specifically, while ongoing currency pressures, elevated energy costs, and restrictive financial conditions are likely to weigh on economic activity in the non-oil sector, we anticipate a boost from the oil sector due to higher domestic oil production.
According to the data released by the CBN, International payments facilitated by the apex bank increased by 11.3% y/y to USD4.36 billion in 7M-24 (7M-23: USD3.92 billion). This growth is primarily driven by a significant increase in foreign debt service and payments (accounts for 63.8% of the total international payments), which soared by 53.6% y/y to USD2.78 billion (7M-23: USD1.81 billion) underpinned by repayments of matured multilateral and bilateral loans.
However, payments for letters of credit dipped by 57.0% y/y to USD391.91 million (7M-23: USD912.36 million), partly reflecting lower imports amid weaker consumer demand induced by high inflationary pressures. Similarly, direct remittances declined by 0.8% y/y to USD1.18 billion due to decreased payments for international services by Nigerian residents. Looking ahead, we expect international payments to remain elevated, driven by the FG’s debt repayment and servicing obligations. Elsewhere, we expect payments for letters of credit to stay subdued as naira depreciation and fragile consumer demand induced by high inflation continue to suppress total non-oil imports.
Capital Markets: Equities
Profit-taking pressure kept the domestic stock market in the red for the week, despite gains in three of the five trading sessions. Consequently, the All-Share Index fell by 0.2% w/w to 97,236.19 points, bringing the Month-to-Date and Year-to-Date returns to -0.4% and +30.0%, respectively. Specifically, sell pressures on OANDO (-22.0%), MTNN (-3.4%), and TRANSCORP (-4.0%) outweighed gains in ACCESSCORP (+11.5%) and UBA (+6.9%), contributing to the weekly decline. Meanwhile, the trading activity remained strong, with total volume and value rising by 156.5% and 46.2% w/w, respectively. Analysing by sectors, the Oil & Gas (+5.4%), Banking (+2.8%) and Insurance (+4.0%) indices advanced while the Consumer Goods and Industrial Goods indices closed flat.
We anticipate mixed sentiments in the week ahead with investors focusing on recent bank earnings releases. In the medium term, we expect investors’ sentiments to be shaped by developments in the macroeconomic landscape and the movement of yields in the fixed-income market.
Money Market and Fixed Income
The overnight (OVN) rate expanded by 12.80ppts w/w to 32.5% as OMO auction (NGN1.45 trillion) debits and net NTB issuance (NGN112.90 billion) pressured system liquidity. Thus, the average liquidity closed at a net short position of NGN631.08 billion (vs net long position of NGN390.67 billion in the prior week).
Next week, we believe the expected inflows from FGN bond coupon payments (NGN46.16 billion) will be insufficient to support system liquidity. Thus, we expect the OVN rate to remain elevated.
Treasury Bills
The Treasury bills secondary market traded with bullish sentiments this week as the average yield across all instruments declined by 12bps to 24.9%. We attribute this performance to participants looking to fill unmet bids at this week’s NTB PMA. Across the market segments, the average yield dipped by 26bps to 24.0% in the NTB segment but increased by 11bps to 26.3% in the OMO segment. At Wednesday’s NTB auction, the DMO offered NGN513.43 billion – NGN20.75 billion for the 91D, NGN5.44 billion for the 182D and NGN487.24 billion for the 364D bills – worth of instruments to investors. Aggregate subscription settled higher at NGN669.93 billion (bid-to-offer: 1.3x), compared to the previous auction (NGN489.84 billion | bid-to-offer: 1.3x).
Eventually, the DMO allotted NGN626.33 billion – NGN14.00 billion for the 91D, NGN3.40 billion for the 182D and NGN608.93 billion for the 364D papers – at respective stop rates of 18.00% (previous: 17.00%), 18.50% (previous: 17.50%) and 23.00% (previous: 20.65%). Also, the CBN conducted an OMO auction on Tuesday offering instruments worth NGN300.00 billion – NGN25.00 billion for the 95D, NGN25.00 billion for the 179D and NGN250.00 billion for the 365D – to investors. Total subscription settled at NGN1.45 trillion (bid-to-offer: 4.8x), with the CBN allotting exactly what was demanded at the long end at a stop rate of 24.28% (unchanged), with no sales at the short and mid segments.
Following our expectation of a possible liquidity deficit in the coming week, we expect demand for bills to wane, causing yields to trend higher.
Bonds
Similarly, proceedings in the FGN bond secondary market were bullish as the average yield declined by 8bps to 19.4%. We attribute this to the surplus interbank liquidity at the start of the week. Across the benchmark curve, the average yield decreased at the short (-23bps) end following demand for the APR-2025 (-66bps) bond, but expanded at the mid (+16bps) segment driven by sell pressures on the FEB-2031 (+40bps) bond. The average yield closed flat at the long end.
Next week, we envisage a possible upward repricing of bonds as we expect participants to sell off their positions in anticipation of higher yields. Meanwhile we also maintain our short-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 this week by 0.7% w/w to NGN1,678.87/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) despite the CBN’s intervention, selling c. USD51.00 million to authorized dealers. Notably, the country’s FX reserves crossed the USD40.00 billion mark for the first time in 35 months growing by USD270.10 million w/w to USD40.04 billion (as of 6 November). Total turnover at the NAFEM (as of 7 November) decreased by 12.8% WTD to USD814.11 million, with trades consummated within the NGN1,591.60/USD – NGN1,700.00/USD band. In the forwards market, the naira rates decreased across the 1-month (-0.9% to NGN1,714.79/USD), 3-month (-0.6% to NGN1,775.34/USD) contracts, 6-month (-1.0% to NGN1,867.26/USD) and 1-year (-0.9% to NGN2,042.33/USD) contracts.
Although we note the sustained accretion in the FX reserves, we highlight that the CBN’s conservative approach towards FX reserves depletion will continue to underpin moderate intervention in the FX market. Thus, we expect the naira to remain volatile in the short term.
Cordros
