Global Economy
According to the Bureau of Labor Statistics (BLS), headline inflation in the United States rose for the second consecutive month, expanding by 10bps to 2.7% y/y in November (October: 2.6% y/y). The increase was primarily due to higher food prices and a slower decline in gasoline prices. Specifically, food prices increased by 2.4% y/y (October: +2.1% y/y) due to higher costs of food at home (+1.6% y/y vs October: +1.1% y/y) while prices for food away from home (+3.6% y/y vs October: +3.8% y/y) rose at a slower pace.
At the same time, the decline in energy prices (-3.2% y/y vs October: -4.9% y/y) was lower than the previous month as fuel and gasoline prices declined at a slower pace relative to the prior year. Elsewhere, the core basket remained steady at 3.3% y/y (October: 3.3% y/y) for the third consecutive month. On a month-on-month basis, headline inflation rose by 0.3% (October: 0.2% m/m). We believe the rising gasoline oil prices will continue to exert upward pressure on energy inflation in the short term. In addition to the elevated core and services inflation, the preceding may likely ensure that broad inflationary pressures remain intact, remaining above the 2.0% target in the near term.
Nonetheless, we believe the US Fed will proceed with monetary policy easing in line with financial market expectations. Indeed, the CME FedWatch tool indicates a 94.7% chance that the Fed will cut the funds rate by 25bps at the 18 December monetary policy meeting.
In line with market expectations, the Governing Council of the European Central Bank (ECB) voted to lower its key interest rate for the fourth consecutive time. Specifically, at the recently concluded December meeting, the council reduced the deposit lending facility rates, main refinancing operations, marginal lending facility and deposit lending facility rates by 25bps to 3.00%, 3.15% and 3.40%, respectively (previously: 3.25%, 3.40%, and 3.65%).
This decision underscores the ECB’s commitment to support the broader economy in the face of mounting downside risks to growth, including (1) heightened global trade tensions, particularly due to uncertainties surrounding the expected change to tariff policy by the incoming Donald Trump administration, and (2) faltering consumer and business confidence. The rate cut was further justified by expectations of slower inflationary pressures (2024FY: 2.4% y/y | 2025FY: 2.1% y/y) despite persistent upward pressures from elevated services inflation and relatively high wages.
Overall, the committee reiterated that future policy interest rate decisions will be based on incoming economic and financial data, and the strength of monetary policy transmission. For us, we think the fading medium-term inflation pressures and sluggish growth prospects will spur the ECB to cut the key interest rates further in the near term. Precisely, we believe the committee will cut the interest rates by at least 25bps in the 30 January monetary policy meeting, aligning with market expectations.
Global Market
Global stock markets experienced volatile trading this week as investors assessed a wave of economic data, including inflation data from the US, the policy rates adjustment by the European Central Bank (ECB), and updates on China’s economic stimulus measures. As of the time of writing, US equities (DJIA: -1.6%; S&P 500: -0.6%) were poised to end the week lower as a hotter-than-expected U.S. inflation report dampened market sentiment. European equities (STOXX Europe: -0.2%, FTSE 100: 0.0%) faced pressure from concerns over slowing economic growth in the UK, potential trade tensions with the US, and political instability in France and Germany.
In Asia, the Japanese market (Nikkei 225: +1.0%) advanced, supported by stronger-than-expected Q3 GDP data and an improvement in the Q4 BSI Manufacturing Index. Meanwhile, Chinese Equities (SSE: -0.2%) retreated from earlier week gains as investors were unimpressed by the lack of specifics in recent stimulus announcements by Chinese authorities. The Emerging Market (MSCI EM: 0.7%) closed higher, driven by gains in South Korea (+2.7%), while the Frontier Market (MSCI FM: 0.0%) index closed flat, as gains in Romania (+4.4%) and Iceland (+2.0%) were offset by losses in Vietnam (-0.5%) and Morocco (-0.6%).
Nigeria: Domestic Economy
According to the recently released trade report by the National Bureau of Statistics (NBS), Nigeria’s total foreign trade increased by 81.3% y/y to NGN35.16 trillion in Q3-24 (Q3-23: NGN19.39 trillion). We attribute the sharp increase to the currency translation effect resulting from the sharp depreciation of the naira (59.1% y/y to NGN1,586.76/USD in Q3-24 vs Q3-23: NGN649.05/USD) from the prior year. For proper context, total trade fell in US dollar terms by 25.8% y/y to USD22.16 billion (Q3-23: USD29.87 billion) due to the decline in both total exports (-19.0% y/y to USD12.91 billion) and imports (-34.0% y/y to USD9.25 billion).
The moderation in total exports was primarily due to lower oil prices (Q3-24: USD75.74/barrel vs Q3-23: USD88.69/barrel) despite the increase in domestic crude oil production (Q3-24: 1.34mb/d vs Q3-23: 1.29mb/d). On imports, while increased domestic production of petroleum products resulted in lower oil imports, higher import tariffs, persistent naira depreciation, and weak consumer demand continued to subdue non-oil imports.
Overall, the trade balance increased by 82.1% y/y to USD3.66 billion, given the faster decline in imports relative to exports. Looking ahead, we expect domestic crude oil production to increase; however, weaker oil prices are likely to cap gains in the medium term, potentially lowering growth in total exports. At the same time, reduced petroleum product imports, as well as the prevailing challenges constraining non-oil imports, will likely keep total imports lower. Nonetheless, we expect the trade balance to remain in surplus in 2024E primarily due to weaker imports.
Based on data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) increased after two consecutive months of decline, rising by 9.9% m/m to 1.69 mb/d in November (October: 1.54 mb/d). We attribute the improvement in the period to higher production volume recorded across the Forcados (+65.8% m/m), Bonny (+20.6% m/m) and Qua Iboe (+1.3% m/m) production terminals, while the Brass (-9.2% m/m), Escravos (-6.1% m/m), Odudu (-4.1% m/m) and Agbami (-2.4% 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, given the recent improvement, we raise our average crude oil production estimate (including condensate) to 1.54 mb/d (previously: 1.52 mb/d) in 2024E.
Capital markets: Equities
The domestic stock market ended the week on a positive note, as gains in MTNN (+3.5%), OANDO (+9.5%), and CONOIL (+33.5%) drove the All-Share Index higher by 1.2% w/w to 99,377.62 points. Sequentially, the Month-to-Date and Year-to-Date returns improved to +1.9% and +32.9%, respectively. However, market activity was subdued, as trading volume and value declined by 30.1% w/w and 43.4% w/w, respectively. Sectoral performance was broadly positive, as the Oil & Gas (+7.6%), Insurance (+5.5%), Consumer Goods (+1.0%), and Banking (+0.2%), indices posted gains, while the Industrial Goods (-0.6%) index was the sole loser of the week.
Looking ahead, choppy trading is expected to persist but with a bullish undertone as investors continue to prioritise fundamentally strong stocks ahead of the new year.
Money Market and Fixed Income
The overnight (OVN) rate expanded by 475bps w/w to 32.9% as OMO auction (NGN1.56 trillion) and net NTB issuance (NGN252.13 billion) debits outweighed inflows from OMO maturities (NGN101.80 billion) and FGN bond coupons (NGN1.45 billion), thereby pressuring system liquidity. Thus, the average liquidity closed at a net short position of NGN1.14 trillion (vs net long position of NGN628.56 billion in the prior week).
Next week, in the absence of any notable inflows to support system liquidity, 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 5bps to 26.3%. 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 2bps to 25.7% in the NTB segment and decreased by 9bps to 27.2% in the OMO segment. At Wednesday’s NTB auction, the DMO offered NGN275.71 billion – NGN10.84 billion for the 91D, NGN8.36 billion for the 182D and NGN256.51 billion for the 364D bills – worth of instruments to investors.
Aggregate subscription settled significantly lower at NGN907.85 billion (bid-to-offer: 3.3x), compared to the previous auction (NGN2.55 trillion | bid-to-offer: 4.4x). Eventually, the DMO allotted NGN527.84 billion – NGN8.80 billion for the 91D, NGN7.03 billion for the 182D and NGN512.00 billion for the 364D papers – at respective stop rates of 18.00% (unchanged), 18.50% (unchanged) and 22.80% (previous: 22.93%). Also, the CBN conducted an OMO auction on Monday, offering instruments worth NGN600.00 billion – NGN300.00 billion for the 351D and NGN300.00 billion for the 365D – to investors. Total subscription settled at NGN1.56 trillion (bid-to-offer: 2.6x), with the CBN allotting exactly what was demanded for the 351D and 361D bills at respective stop rates of 23.95% (previous: 24.28%) and 23.98% (previous: 24.28%).
We believe the subdued system liquidity next week will undermine demand for instruments in the T-bills secondary market, causing yields to expand.
Bonds
In line with our expectations, the FGN bond secondary market experienced minimal activity for most of the week as the average yield increased by 4bps to 19.5%. Across the benchmark curve, the average yield expanded at the short (+2bps), mid (+8bps), and long (+4bps) segments, driven by selloffs of the JAN-2026 (+13bps), JUN-2033 (+31bps), and APR-2037 (+37bps), bonds.
Next week, we believe the direction of yields in the secondary market will be shaped by the outcome of this month’s FGN bond auction holding on Monday (16 December). At the auction, the DMO is set to offer instruments worth NGN200.00 billion through re-openings of the 19.30% FGN APR 2029 and 18.50% FGN FEB 2031 bonds. 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 appreciated this week by 2.2% w/w to NGN1,544.35/USD following the CBN’s intervention which saw the apex authority sell c. USD124.60 million to authorized dealers. Also, FX reserves grew by USD210.73 million w/w to USD40.53 billion (12 December). Total turnover at the NAFEM as of 10 November decreased by 70.5% WTD to USD619.61 million, with trades consummated within the NGN1,591.60/USD – NGN1,700.00/USD band. In the forwards market, the naira rates increased across the 1-month (+2.5% to NGN1,580.29/USD), 3-month (+4.4% to NGN1,639.10/USD) contracts, 6-month (+3.6% to NGN1,726.75/USD) and 1-year (+5.0% to NGN1,900.89/USD) contracts.
We note the slowdown in FPI inflows, which has further constrained overall FX liquidity despite the CBN’s moderate interventions. While we expect the CBN to maintain the tepid FX intervention, we think the naira will remain under pressure in the short term if FPI inflows do not improve substantially.
