Global Economy
In line with market expectations, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 7- 2 to maintain the key policy rate at 5.25%. In terms of voting pattern, two members voted for a 25bps cut, while seven members voted to maintain the rate at 5.25%. In its assessment, the Committee acknowledged that inflationary pressures are on course to hit its 2.0% medium target and should drop to c. 1.9% in two years.
At the same time, the MPC judged that the labour market continues to loosen, although it remains tight relative to historical standards. In addition, the Committee highlighted that the economy would maintain a positive growth trajectory over the medium term; however, demand may remain weaker than potential supply growth, leading to a margin of economic slack. That said, the MPC judged that in determining the extent of future interest rate stances, it would continue to monitor the indication of price pressures, resilient labour market conditions and wage increases closely.
The BoE’s tone suggests a potential interest rate cut soon after inflation was observed to be “moving in the right direction”. At the same time, the market anticipates a 55.0% chance of a “HOLD” decision and a 45.0% probability of a 25bps cut in the June policy meeting. All told, the financial markets are still factoring in two 25bps cuts in the key policy rate this year.
Recent data from the United States Department of Labor showed that the initial jobless claims in the US rose sharply by 22,000 to 231,000 in the week ending 4 May (vs the week ending 27 April: 209,000). This outturn marks the highest level in eight months, suggesting potential cooling in the US labour market. The elevated figures underscore the impact of the Federal Reserve’s monetary tightening measures on economic activity, supporting the case for a gradual loosening of its monetary policy.
Similarly, continuing claims for unemployment insurance rose by 17,000 to settle at 1.79 million claims (vs the previous week: 1.77 million claims). On a 4-week moving average, the initial jobless claims increased by 4,750 to 215,000 (vs the week ending 27 April: 210,250). Looking ahead, the US labour market’s performance is expected to remain subdued in the near term, as the effects of the US Federal Reserve’s monetary tightening and reduced government spending continue to impact overall economic activity in the US.
Global Equities
Global equities markets posted broadly positive performances this week fueled by strong corporate earnings, optimism surrounding potential interest rate cuts by central banks, and positive developments in geopolitical tensions. Accordingly, US equities (DJIA: +1.8%; S&P 500: +1.7%) were on pace for a third consecutive weekly gain driven by solid corporate earnings from AAPL (Apple Inc.) and speculation about potential interest rate cuts from the Federal Reserve, especially given the weaker-than-expected April jobs report. European equities (STOXX Europe: +2.6%; FTSE 100: +2.7%) traded with positive sentiments buoyed by (1) strong corporate earnings from banking names like Swiss bank and Unicredit, (2) growing confidence from the European Central Bank regarding the possibility of interest rate cuts in June, and (3) a gradual easing of tensions in the Middle East. In Asia (SSE: +1.6%; Nikkei 225: 0.0%), the Chinese market rallied on the country’s upbeat trade data and fresh signs of support for the property market, while the Japanese market ended the week mixed amid concerns about the business outlook during the ongoing earnings season. The Emerging (MSCI EM: +0.2%) and Frontier (MSCI FM: +0.8%) Markets indices mirrored the broader positive trend across global markets and were driven by bullish sentiments in China (+1.6%) and Vietnam (+1.7%), respectively,
Nigeria: Domestic Economy
According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) declined by 11.9% m/m to NGN71.21 trillion in March (February: NGN80.86 trillion). We believe the figure reflects reduced private sector borrowing, highlighting the impact of CBN’s hawkish stance to curb the rising inflation and stabilise the economy. However, on a year-on-year basis, CPS increased by 65.6% in March 2024 (March 2023: NGN43.01 trillion). Overall, broad money supply increased by 69.0% y/y to NGN92.34 trillion (March 2023: NGN54.63 trillion), reflecting increases in narrow money supply (+51.8% v/y) and quasi money (+82.5% y/y). Whilst the CBN’s re-enforcement of the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) will continue to support commercial banks’ willingness to create risk assets in the short term, we think that the intensification of its tightening measures could tether growth of the Credit to the Private Sector (CPS) in the near term.
Based on data released by the Central Bank, international payments made by the CBN increased by 22.7% q/q to USD1.61 billion in Q1-24 (vs Q4-23: USD1.31 billion). We attribute the significant increase to higher foreign debt service and payments (+18.7% q/q to USD1.12 billion) and direct remittances (+127.0% q/q to USD 282.62 million). On the other hand, payments for letters of credit declined by 15.6% q/q to USD204.47 million (vs Q4-23: USD242.29 million). Notably, debt service payments accounted for 69.7% of total CBN international payments in Q1-24, explaining the large drawdowns on the FX reserves witnessed in the near-recent past. We highlight that the higher debt service can be linked to interest payments on commercial (Eurobond), bilateral and multilateral loans. Looking forward, we expect FG’s external debt service to remain elevated, owing largely to the country’s high external debt, underpinning increased international payments by the CBN. This is likely to sustain the depletion of the external reserves in the near term, barring any significant inflows from external trade and international borrowings.
Capital Markets: Equities
The Nigerian equities market could not consolidate the prior week’s gains following pressure from profit-taking activities during the week. Particularly, sell pressures on AIRTELAFR (-10.3%), FBNH (-7.4%) and TRANSCORP (-10.6%) drove the benchmark index lower amid buying interests in MTNN (+2.3%), GTCO (+8.8%) and TRANSCOHOT (+5.6%). Thus, the All-Share Index declined by 1.4% w/w to 98,233.76 points. Accordingly, the Month-to-Date and Year-to-Date returns settled at -1.4% and +31.4%. Trading activity was healthy, as the total trading volume increased by 12.7% w/w, while the total trading value grew by 55.2% w/w. Sectoral performances were mostly negative, as the Consumer Goods (-1.2%), Insurance (-1.0%), Oil and Gas (-0.3%) and Banking (-0.1%) indices declined, while only the Industrial Goods (+0.1%) index gained.
Given the recent trading pattern in the local stock market, we expect the overall market sentiment to remain bearish in the coming week especially with no significant drivers to buoy investors’ interest. Nevertheless, we do not rule out the potential for bargain-hunting activities to emerge quietly, particularly for the banks, owing to the opportunities presented by the recent bearish trend.
Money market and fixed income
In line with our expectations, the overnight (OVN) rate expanded by 154bps w/w to 28.6%, due to debits for this week’s OMO auction (NGN260.65 billion) and net NTB issuances (NGN95.31 billion) amid no significant inflows. As a result, the average system liquidity this week closed lower at a net long position of NGN401.26 billion (vs. a net long position of NGN706.61 billion in the prior week).
We expect the OVN rate to rise further next week, as funding for the May 2024 FGN bond auction (NGN450.00 billion) pressures the system liquidity amid no expected inflows to support the system.
Treasury bills
Activities in the T-bills secondary market ended the week on a bearish note following huge sell-offs of the 17DTM bill in the beginning of the week. Consequently, the average yield across all instruments advanced by 42bps to 21.7%. Across the market segments, the average yield at the T-bills segment expanded by 19bps to 22.5% and increased by 128bps to 20.0% in the OMO segment. At the NTB primary auction, the CBN offered instruments worth NGN179.36 billion – NGN39.90 billion for the 91-day, NGN5.44 billion for the 182-day, and NGN134.02 billion for the 364-day bills. The auction was massively contested as the total subscription settled at NGN914.05 billion (bid-to-offer: 5.1x). Eventually, the CBN allotted bills worth NGN274.67 billion – NGN16.59 billion for the 91D, NGN5.44 billion for the 182D and NGN252.64 billion for the 365D – at respective stop rates of 16.24% (unchanged), 17.00% (unchanged) and 20.70% (unchanged). Likewise, the CBN offered participants instruments worth NGN500.00 billion at its OMO auction this week. The total subscription at the auction settled at NGN286.65 billion (bid-to-offer: 0.6x), with the eventual allotment amounting to NGN260.65 billion – NGN20.50 billion for the 99-day, NGN1.00 billion for the 183-day and NGN239.15 billion for the 365-day – at respective stop rates of 18.99% (previous: 19.00%), 19.48% (previously: 19.50%), and 21.50% (previously: 21.13%).
Based on our expectation of a dearth in liquidity levels next week, we think sell pressures will remain in the NTB secondary market as participants exit their holdings to meet their funding needs. As a result, we expect sustained increase in yields.
Bonds
Amid the quiet proceedings, trading in the Treasury bonds secondary market remained bullish, as players sought bargains in long-dated instruments. Consequently, the average yield dipped by 19bps to 18.6%. Across the benchmark curve, the average yield expanded at the short (+4bps) and mid (+13bps) segments driven by profit-taking activities on the MAR-2025 (+11bps) and FEB-2031 (+24bps) bonds, respectively. Conversely, the average yield contracted at the long (-57bps) end due to demand for the JAN-2042 (-110bps) bond.
Next week, we believe the outcome of this month’s FGN bond auction holding on Monday (13 May) will influence the sentiments in the secondary market. At the auction, the DMO is set to offer instruments worth over NGN450.00 billion through re-openings of the 19.30% FGN APR 2029 and 18.50% FGN FEB 2031 bonds and a new issuance, FGN MAY 2033 paper. Over the medium term, we expect yields to remain elevated, driven by the (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
Nigeria’s FX reserves recorded further accretion this week as the gross reserves level increased by USD89.76 million to USD32.39 billion (08 May). Elsewhere, the naira depreciated by 4.5% to NGN1,466.31/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the total turnover (as of 09 May) at the market decreased by 47.0% WTD to USD637.69 million, with trades consummated within the NGN1,285.00 – NGN1,465.00/USD band. In the Forwards market, the naira rates depreciated across the 1-month (-4.6% to NGN1,477.91/USD), 3-month (-5.4% to NGN1,530.14/USD), 6-month (-6.6% to NGN1,600.66/USD) and 1-year (-6.1% to NGN1,733.33/USD) contracts.
We emphasize the persistent tightness in FX liquidity, which has contributed to the ongoing depreciation of the naira, with limited inflows from both the CBN and offshore entities. Notably, there were no inflows from the CBN recorded during the week, and foreign participation in the domestic capital market remained subdued. Looking ahead, we note that risks to Foreign Portfolio Investment (FPI) inflows remain elevated given the prolonged conflict in the Middle East amid CBN’s limited ability to adequately supply the market due to the weak net FX reserves. As a result, FX liquidity is expected to remain constricted, resulting in sustained pressure on the naira in the short term.
Cordros
