Global Economy
Consumer prices in the United States (US) maintained a downward trend in September, as headline inflation moderated by 10bps to 2.4% y/y in September (August: 2.5% y/y) – above market expectations of +2.3% y/y. The slowdown in inflationary pressures was due to a further contraction in energy prices (-6.8% y/y vs August: -4.0% y/y) influenced by lower gasoline and fuel oil costs. However, food prices (2.3% y/y vs August: 2.1% y/y) rose to an eight-month high driven by the upward price pressure across the food away from home (3.9% y/y vs August: 3.8% y/y) and food at home (1.3% y/y vs August: 0.9% y/y) sub-baskets. Additionally, core inflation (3.3% y/y vs August: 3.2% y/y) increased partly due to a softer decline in costs of used cars and trucks (-5.1% y/y vs August: -10.4% y/y) amid moderation in shelter cost (4.9% y/y vs August: 5.2% y/y).
On a month-on-month basis, headline inflation remained steady at 0.2% m/m in September (August: +0.2% m/m). While the data print signals relief on price pressures, we highlight that the outturn remains above the Fed’s 2.0% target. In addition, sticky services and core inflation may keep consumer prices high in the short term. As a result, we expect the FOMC to adopt a cautious approach at the next policy meeting. Indeed, the CME FedWatch tool now indicates the probability of 84.3% that the Fed will ease the key interest rate by 25bps in the 7 November policy meeting.
According to the United States Department of Labor, the initial jobless claims in the US increased sharply by 33,000 to 258,000 in the week ending 5th October (vs. the week ending 28 September: 225,000). While the data print highlights the loss of momentum in the labour market, we believe the recent outturn was partly induced by the impact of (1) Hurricane Helene in some states, including Florida, North Carolina, South Carolina, and Tennessee; (2) the Boeing machinist strike that affected workers in the aerospace industry, and (3) sharp layoffs in Michigan’s manufacturing and management sectors. On a non-seasonally adjusted basis, notable increases were recorded across Michigan (+9,490), North Carolina (+8,534), California (+4,484) and Florida (+3,842), while the most significant declines were recorded in Louisiana (-140) and Massachusetts (-103).
On a 4-week moving average, we highlight that the initial jobless claims increased by 6,750 to 231,000 (vs week ending 28 September: 224,250). Looking ahead, we anticipate that labour market conditions may remain soft in the near term, especially as claims are expected to stay elevated in states impacted by Hurricane Helene and the Boeing strike. However, we believe the FOMC may overlook these temporary disruptions, concentrating instead on the broader economic outlook. This aligns with the Fed chair’s signal of a 25bps cut at the coming meeting.
Global Equities
Global equities experienced mixed sentiment this week as investors analysed incoming information including a higher-than-expected US inflation report and unemployment claims for clues on the trajectory of interest rates. Additionally, uncertainty surrounding China’s stimulus plans contributed to the subdued mood. As of the time of writing, US equities (DJIA: +0.2%; S&P 500: +0.5%) were poised to close higher, fueled by optimism about the economy and a rally in tech stocks earlier in the week. Meanwhile, mixed sentiments dominated European equities (STOXX Europe: +0.2%; FTSE 100: -0.7%) as investors digested UK growth data ahead of big US banks’ earnings and an important Chinese fiscal policy briefing this weekend.
In Asia, Japanese equities (Nikkei 225: +2.5%) advanced in hopes of solid earnings from local firms. In contrast, Chinese equities (SSE: -3.6%) posted a weekly loss as enthusiasm over recent measures to boost the economy waned following the National Development and Reform Commission’s (NDRC) failure to announce new stimulus initiatives. Meanwhile, the Emerging Market (MSCI EM: -1.9%) index declined, impacted by a sharp decline in Chinese stocks (-3.6%), while the Frontier Market (MSCI FM: +0.7%) index advanced, following gains in Vietnam (+1.1%).
Nigeria: Domestic Economy
According to the National Bureau of Statistics (NBS), capital importation into Nigeria declined by 22.9% q/q to USD2.60 billion in Q2-24 (Q1-24: USD3.38 billion). The slowdown in capital importation reflects weaker foreign investor confidence induced by (1) unfavourable macroeconomic conditions and (2) lingering FX liquidity constraints. Accordingly, the breakdown provided shows a broad-based contraction across foreign direct investment (-75.0% q/q to USD29.83 million), foreign portfolio investment (-32.3% q/q to USD1.40 billion) and other investments (-1.0% q/q to USD1.17 billion).
However, on a year-on-year basis, capital importation rose substantially by 152.8%, primarily driven by a low statistical base effect from the corresponding period of 2023. Looking ahead, we still expect foreign investors to remain cautious in the near term, closely monitoring the activities of the apex authorities in improving FX liquidity and ensuring sustainability. Notwithstanding, if local FX liquidity and carry trade improve, and investors can easily repatriate capital, then foreign capital inflows may increase over the short-to-medium term.
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market declined by 22.8% m/m to NGN379.52 billion in August (July: NGN491.61 billion). We think the lower participation in the local bourse reflects the dual impact of (1) higher yields in the fixed-income market and (2) lingering FX liquidity constraints. Parsing through the breakdown provided, we highlight that domestic transactions (84.9% of gross transactions) dropped by 25.8% m/m to NGN322.05 billion (July: NGN434.09 billion) following contraction of 33.5% m/m and 12.9% m/m across inflows from retail and institutional investors respectively.
Similarly, collections from foreign transactions (15.1% of gross transactions) edged lower by 0.1% m/m to NGN57.47 billion in August (July: NGN57.52 billion), signaling the third consecutive month of contraction. While we expect domestic investors to continue to contribute the bulk of total transaction value, buying activities will likely be constrained by elevated yields in the fixed-income market following the MPC’s tight monetary policy stance. On the other hand, we expect FX liquidity constraints and naira volatility to limit foreign investor participation in the equities market.
Capital Markets: Equities
The domestic stock market traded with mixed sentiments as buying interest in SEPLAT (+5.1%), FIDELITYBK (+13.1%), FBNH (+4.0%), and JBERGER (+9.3%) offset sell pressures on OANDO (-7.3%), UBA (-3.1%), STANBIC (-1.6%) and WAPCO (-2.0%). Thus, the All-Share Index inched higher by 0.1% w/w to 97,606.63 points, with the MTD and YTD returns settling at -1.0% and +30.5%, respectively. Trading activities were mixed, as trading volume increased by 3.1% w/w, while trading value declined by 76.4% w/w. On sectors, the Oil & Gas (+1.6%), Banking (+0.5%), and Insurance (+0.1%) indices advanced, while the Consumer Goods (-1.3%) and Industrial Goods (-0.1%) indices declined.
Looking ahead, we expect investors to maintain a cautious trading approach, with sentiments likely skewed towards the bearish side as investors monitor activities in the fixed-income market. As such, we expect intermittent profit-taking to persist. However, this could be balanced by bargain-hunting activities as investors prepare for the upcoming Q3-24 earnings season.
Money Market and Fixed Income
The overnight (OVN) rate expanded by 23bps w/w to 33.0% as OMO auction (NGN905.23 billion) and FX swap debits dwarfed net inflows from OMO maturities (NGN54.45 billion), further pressuring system liquidity. Thus, the average liquidity closed at a net short position of NGN651.32 billion (vs net short position of NGN174.26 billion in the prior week).
Barring any liquidity management measures by the CBN next week, we believe expected inflows from FGN bond coupon payments (NGN153.69 billion) will cause the OVN rate to trend lower.
Treasury Bills
In line with our expectations, bearish sentiments persisted in the Treasury bills secondary market this week as the liquidity dearth in the financial system continues to undermine demand for instruments. Consequently, the average yield across all instruments expanded by 115bps to 24.3%. Across the market segments, the average yield advanced by 42bps to 23.1% in the NTB segment and increased by 192bps to 25.7% in the OMO segment. At the bi-weekly NTB auction, the DMO offered NGN81.90 billion worth of instruments to investors – NGN28.47 billion for the 91D, NGN22.67 billion for the 182D and NGN30.76 billion for the 364D bills. Aggregate subscription settled lower at NGN271.87 billion (bid-to-offer: 3.3x), compared to the previous auction (NGN304.27 billion | bid-to-offer: 1.3x). Eventually, the DMO allotted exactly the amount offered – NGN12.96 billion for the 91-day, NGN3.91 billion for the 182-day and NGN65.03 billion for the 364-day papers – at respective stop rates of 17.00% (unchanged), 17.50% (unchanged) and 19.86% (previous: 20.00%).
Also, the CBN also conducted an OMO auction on the 11th of October, offering instruments worth NGN300.00 billion – NGN25.00 billion for the 95D, NGN25.00 billion for the 179D and NGN250.00 billion for the 361D – to investors. Total subscription settled at NGN908.23 billion (bid-to-offer: 3.0x), with the CBN allotting NGN905.23 billion for the 361D at a stop rate of 24.3% (unchanged), while no sales were made of the 95D and 179D bills.
Based on our expectation of a possible liquidity deficit in the coming week, we expect yields in the Treasury bills secondary market to trend higher, as participants in the market look to fulfil their funding needs.
Bonds
The Treasury bonds secondary market traded on a calm note this week, as the average yield inched higher by 2bps to 19.1%. Across the benchmark curve, the average yield increased at the mid-segment (+7bps) of the curve following selloffs of the FEB-2031 (+20bps) bond, while it remained unchanged at the short and long segments. Notably, moderate interest was observed on the MAR-2025 bond (-14bps) but was limited to retail sizes, causing the average yield to hold steady at the short end of the curve. We attribute this to the weak naira liquidity, as evidenced by the bank’s excessive activities at the CBN’s SLF window (NGN4.40 trillion).
Next week, we expect pockets of demand as the recently published Q4-24 bond calendar indicates that the DMO intends only to offer instruments worth c. NGN200.00 billion through re-openings of the 19.30% FGN APR 2029 and 18.50% FGN FEB 2031 bonds, while the FGN MAY 2033 bond is now off-the-run. 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
The naira depreciated this week by 0.6% w/w to NGN1,641.27/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) despite the CBN intervening at the official window, selling c. USD50.00 million to authorized dealers. Notably, we saw continued growth in the country’s FX reserves for the 6th consecutive week, as the gross reserves level grew by USD63.06 million w/w to USD38.67 billion (10 October). Total turnover at the NAFEM as of 10 October decreased by 31.9% WTD to USD880.34 million, with trades consummated within the NGN1,540.00/USD – NGN1,650.00/USD band. In the forwards market, the naira rates increased across the 1-month (+0.6% to NGN1,673.94/USD) and 3-month (+0.8% to NGN1,745.22/USD) contracts, while it decreased across the 6-month (-0.3% to NGN1,855.46/USD) and 1-year (-1.7% to NGN2,086.30/USD) contracts.
The naira is expected to trade with less volatility in the short term, given that the CBN sustains efforts to keep the naira stable through intervention in the FX market and improving Nigeria’s carry trade by keeping naira yields elevated.
