Global Economy
According to the Bureau of Labor Statistics (BLS), headline inflation in the United States slowed by 40bps to 2.5% y/y in August (July: 2.9% y/y), marking the lowest print since February 2021 (1.7% y/y). We attribute the deceleration in consumer prices to the sharp contraction in energy prices (-4.0% y/y vs July: +1.1% y/y) due to declines in gasoline and fuel oil prices. At the same time, food prices (+2.1% y/y vs July: +2.2% y/y) eased marginally to a 3-month low as prices dropped across food away from home (+4.0% y/y vs July: +4.1% y/y) and food at home (+0.9% y/y vs July: +1.1% y/y). On a month-on-month basis, headline inflation settled at 0.2% m/m in August (July: +0.2% m/m).
While we anticipate further deceleration in consumer prices to be supported by the combined impact of slower wage growth, declining energy prices and improved supply chains, we point out that the sticky services inflation will likely keep consumer prices above the Fed’s 2.0% target in the near term. As a result, we anticipate the FOMC will implement a rate cut at the next policy meeting, albeit at a moderate pace. Indeed, the CME FedWatch tool now indicates a 57.0% chance that the Fed will cut the key interest rate by 25bps (vs 43.0% chance of 50bps cut) in the 18 September policy meeting.
At their recently concluded September policy meeting, the Governing Council of the European Central Bank (ECB) voted to ease the deposit lending facility by 25bps to 3.50% (Previously 3.75%), reflecting the second reduction of the key interest rate this year. The decision was influenced by recent data indicating slower economic growth across the Eurozone and a closer-to-target inflation rate (2.0% vs August: 2.2% y/y). At the same time, the apex bank lowered the main refinancing operations and marginal lending facility rates by 60bps apiece to 3.65% and 3.90% (previously: 4.25% and 4.50%, respectively). This adjustment aligns with the ECB’s objective to maintain a 15bps spread between the main refinancing operations and the deposit facility rates while keeping the spread between the marginal lending facility and the main refinancing operations rates unchanged at 25bps.
Although no forward guidance was provided, the Council reiterated their commitment to maintaining a “data-dependent” approach, evaluating policy on a meeting-by-meeting basis without any pre-commitments. Considering the underlying tone of the Council and the near-term impact of higher wages on inflationary pressures, we anticipate the ECB will adopt a cautious approach in the near term, monitoring incoming data before making any significant decisions. Consequently, we do not expect further rate cuts at the October policy meeting. Nonetheless, we do not rule out the possibility of an additional rate cut by December to create a soft landing for the economy.
Global Equities
Global equities market traded with positive sentiments this week, lifted by optimism surrounding rate cuts by major central banks. In line with this, US equities (DJIA: +1.9%; S&P 500: +3.5%) are poised for a weekly gain as recent consumer price and labour (jobless claims) data strengthened expectations for a 25bps rate cut from the Federal Reserve next week. Likewise, European equities (STOXX Europe: +1.5%; FTSE 100: +0.9%) rebounded from last week’s losses as investors digested the European Central Bank’s recent rate cut and its implications for future monetary policy.
In Asia, Japanese equities (Nikkei 225: +0.5%) advanced, supported by positive momentum on Wall Street and a softer-than-expected producer price inflation reading, which countered the Bank of Japan’s hawkish stance. Meanwhile, Chinese equities (SSE: -2.2%) declined, driven by (1) concerns over the country’s economic and earnings outlook, and (2) the potential for additional US trade restrictions. The Emerging Market (MSCI EM: +0.1%) index inched higher supported by gains in India (+2.2%) while the Frontier Market (MSCI FM: -0.8%) index remained in the negative territory due to bearish sentiments in Vietnam (-1.8%).
Nigeria: Domestic Economy
According to the recently released trade report by the National Bureau of Statistics (NBS), total exports rose significantly by 201.8% y/y to NGN19.42 trillion in Q2-24 (Q2-23: NGN6.44 trillion | Q1-24: NGN19.17 trillion), supported by growth across the components of the country’s exports. Notably, crude oil exports (75.0% of total exports) grew by 190.9% y/y (NGN14.56 trillion vs Q2-23: NGN5.01 trillion), in line with higher crude oil production (1.41 mb/d vs Q2-23: 1.22 mb/d) amid volatility in oil prices. Additionally, exports of other oil products grew by 293.5% y/y to NGN2.92 trillion (Q2-23: NGN740.74 billion), primarily due to increased exports of refined petroleum products in the quarter.
Meanwhile, whilst total imports in naira terms grew by 97.9% y/y to NGN12.47 trillion in Q2-24 (Q1-24: +54.3% y/y), we note that total imports declined by 26.2% y/y in US dollar terms (Q2-24: USD8.97 billion vs Q2-23: USD12.15 billion) reflecting reduced petroleum imports, and the adverse effect of FX liquidity constraints, higher import duty costs and weaker domestic consumption on non-oil imports in the quarter. Overall, the trade balance maintained a surplus, increasing to NGN6.95 trillion in Q2-24 (Q2-23: NGN133.18 billion | Q1-24: NGN5.20 trillion). Looking ahead, we expect Nigeria’s oil earnings to be supported by higher crude oil production amid the volatility in global crude oil prices, which will likely enhance overall export performance in the near term. Meanwhile, total imports are likely to remain constrained by persistent FX liquidity challenges amid an expected reduction in petroleum imports due to increased domestic refining activities. Overall, we believe the trade balance will maintain a surplus position in 2024FY.
Based on data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) increased for the fifth consecutive month, rising by 2.4% m/m to 1.57 mb/d in August (July: 1.53 mb/d). We attribute the improvement in the period to higher production volume recorded across the Forcados (+16.0% m/m), Bonny (+6.4% m/m) and Odudu (+4.6% m/m) production terminals, while the Qua Iboe (-8.0% m/m), Agbami (-6.4% m/m) and Escravos (-4.4% m/m) terminals recorded declines.
Despite the improvement, we note that overall crude oil production remains below pre-COVID levels (Q1-20 average: 2.14 mb/d) due to the lingering effects of insecurity, infrastructure decay as well as low investment in the sector exacerbated by the exit of international oil companies (IOCs) and unresolved issues regarding the approval of oil asset transfers. While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that challenges plaguing the sector still pose downside risks to crude oil production in the near term. Nonetheless, we maintain our average crude oil production estimate (including condensate) at 1.52 mb/d in 2024E (FGN budget: 1.78 mb/d).
Capital Markets: Equities
The domestic equities market closed the week on a positive note, as bargain hunting in MTNN (+7.4%), FBNH (+31.5%), OANDO (+9.4%), and NESTLE (+9.9%) lifted overall market performance. As a result, the All-Share Index rose by 1.1% w/w to 97,456.62 points, bringing the MTD and YTD returns to -0.3% and +30.3%, respectively. Trading activity was mixed, with a 20.2% w/w increase in volume, while value dipped slightly by 0.5%. Sectoral performance was positive as the Banking (+5.1%), Oil and Gas (+2.0%), Insurance (+1.6%), Consumer Goods (+1.5%), and Industrial Goods (+0.2%) indices gained.
We anticipate mixed sentiments in the near term with investors focusing on bank stocks based on recent corporate actions. However, we acknowledge the possibility of profit-taking activities on stocks that have experienced notable appreciation in recent weeks. 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 inched higher by 7bps w/w to 31.7% despite the inflow from OMO maturities (NGN35.20 billion). Consequently, average liquidity position remained positive, closing at a net long position of NGN612.68 billion (vs net long position of NGN198.32 billion in the previous week).
For next week, we envisage moderation in the OVN rate as we believe the combined inflows of NGN452.75 billion from FGN bond coupon payments (NGN442.75 billion) and OMO maturities (NGN10.00 billion) will boost liquidity in the financial system.
Treasury Bills
Trading in the Treasury bills secondary market was bearish this week following profit-taking activities on short- and long-dated bills. Thus, the average yield across all instruments expanded by 79bps to 21.6%. Across the market segments, the average yield expanded by 62bps to 20.3% at the NTB segment and increased by 92bps to 23.6% at the OMO segment. At the NTB auction, the DMO offered maturing bills worth NGN161.88 billion – NGN6.78 billion for the 91-day, NGN4.92 billion for the 182-day and NGN150.18 billion for the 364-day bills. The subscription level settled lower at NGN563.17 billion (previous auction: NGN1.13 trillion), with a bid-to-offer ratio of 3.5x recorded. The auction closed with the DMO allotting instruments worth NGN161.88 billion – NGN10.84 billion for the 91-day, NGN2.52 billion for the 182-day, and NGN148.52 billion for the 364-day papers – at respective stop rates of 16.63% (previous: 17.00%), 17.00% (previous: 18.94%) and 18.59% (previous: 18.94%).
We expect that the ample liquidity in the system next week will likely spur demand for instruments, leading to a decline in yields in the secondary market.
Bonds
The FGN bonds secondary market turned bearish this week, as most traders opened short positions ahead of this month’s bond auction. Thus, the average yield inched higher by 15bps to 18.8%. Across the benchmark curve, the average yield expanded at the short (+15bps) and mid (+24bps) segments driven by sell pressures on the MAR-2025 (+147bps) and FEB-2031 (+53bps) bonds, respectively, while it declined at the long end (-4bps) following demand for the JAN-2042 bond. Notably, the DMO postponed the September 2024 FGN bond auction to 23 September due to the public holiday on Monday.
We expect quiet proceedings in the secondary market as investors adjust their portfolios in anticipation of the upcoming auction. 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
This week, Nigeria’s FX reserves recorded accretion, as the gross reserves level increased by USD337.89 million w/w to USD36.73 billion (10 September), possibly reflecting inflows from the proceeds (c. USD900.00 million) of the recently concluded domestic FGN US Dollar bond. Following the CBN’s intervention of c.USD 121.00 million during the week, the naira appreciated by 3.0% w/w to NGN1,546.41/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), undermining the CBN’s intervention of c.USD 121.00 million during the week. Total turnover at the NAFEM as of 12 September decreased by 15.7% WTD to USD980.92 million, with trades consummated within the NGN1,499.00/USD – NGN1,668.00/USD band.
In the forwards market, the naira rate decreased across the 1-month (-0.5% to NGN1,668.65/USD) and 3-month (-0.2% to NGN1,738.23/USD) contracts, but increased across the 6-month (+0.2% to NGN1,838.87/USD) and 1-year (+1.1% to NGN2,052.05/USD) contracts.
The naira is likely to remain under pressure despite recent efforts by the CBN to stabilize the currency. We expect market demand may continue to outweigh supply given the CBN’s mild intervention and weak FPI inflows
Cordros
