Global Economy
According to the Bureau of Labor Statistics (BLS), United States headline inflation fell below market expectations (3.4% y/y) as it moderated for the second consecutive month, easing by 10bps to 3.3% y/y in May (April: 3.4% y/y). Analysing the breakdown provided, we highlight that a slowdown in food (+2.1% y/y vs April: +2.2% y/y), shelter (+5.4% y/y vs April: +5.5% y/y) and transport (+10.5% y/y vs April: +11.2% y/y) costs were the primary drivers of the overall downturn in consumer prices in the review month.
Meanwhile, energy prices (+3.7% y/y vs April: +2.6% y/y) maintained an uptrend for the third consecutive month due to increased electricity and gasoline prices relative to the corresponding period last year. On a month-on-month basis, headline inflation was flat, with consumer prices remaining unchanged in May (April: +0.3% 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, we note that the elevated energy prices and the wage growth stemming from tight labour market conditions may keep consumer prices elevated over the short term. As a result, we expect the FOMC to maintain its tight monetary policy stance and maintain rates at current levels, while awaiting greater confidence in the sustainable return of inflation to target. Indeed, the CME FedWatch tool now indicates a probability of 87.6% that the Fed will keep rates unchanged at its July policy meeting.
At the June Monetary Policy meeting, the Federal Open Market Committee (FOMC) voted to keep the target range for the federal funds rate steady at 5.25% – 5.50% for the seventh consecutive meeting. The Committee acknowledged progress in bringing inflation closer to target levels whilst economic activities remain solid.
However, the Committee indicated it would not be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2.0% target. In providing forward guidance, the Committee projected only one interest rate cut in 2024, reflecting a more conservative outlook than the three cuts projected at the March meeting. In addition, the FOMC reiterated it will continue reducing its holdings of Treasury securities, agency debt and agency mortgage-backed securities in accordance with its previously announced plans.
Based on the Committee’s tone, we think the Fed is proceeding cautiously and may not be in a hurry to reduce interest rates and will navigate potential future rate adjustments with care. While acknowledging the need to avoid keeping rates elevated indefinitely, the Fed is also cautious about easing rates prematurely and triggering a resurgence in inflation. As a result, we believe the Fed will keep rates unchanged in July, allowing for a clearer assessment of the economy’s performance and trajectory.
Global Markets
Mixed sentiments persisted in the global stock market this week as investors assessed a deluge of information which could potentially influence future global monetary policy administration. As of the time of writing, US equities (DJIA: -0.4%; S&P 500: +1.6%) showed mixed results as investors weighed lower-than-expected inflation readings (CPI and PPI) for May against the Fed’s hawkish comments on interest rates.
Meanwhile, European equities (STOXX Europe: -1.4%; FTSE 100: -1.0%) are poised to end the week on a negative note following (1) growing concerns about political turmoil in France and (2) negative reactions to the US Fed’s latest monetary policy decision. In Asia, Japanese equities (Nikkei 225: +0.3%) rose as investors responded positively to the Bank of Japan’s decision to keep its benchmark interest rate unchanged while considering reducing its purchase of Japanese government bonds.
Conversely, Chinese equities (SSE: -0.6%) posted a weekly loss as the latest inflation data (May: +0.3% y/y) sparked worries about domestic demand. Elsewhere, the Emerging markets index (MSCI EM: +0.2%) closed positively following bullish sentiments in India (+0.3%) while the Frontier (MSCI FM: +0.0%) market index closed flat as gains in Vietnam (+1.2%) offset losses in Romania (-1.2%).
Nigeria: Domestic
According to the recently released trade report by the National Bureau of Statistics (NBS), Nigeria’s trade balance increased to NGN6.52 trillion in Q1-24 (Q4-23: NGN3.64 trillion | Q1-23: NGN20.94 billion). We highlight that the improvement was largely influenced by the lingering impact of naira depreciation (65.5% to NGN1,338.20/USD in Q1-24 vs. Q1-23: NGN461.54/USD).
Analysing the breakdown, total exports increased by 195.5% y/y in Q1-24 to NGN19.17 trillion (Q1-23: NGN6.49 trillion | Q4-23: NGN12.69 trillion), primarily due to higher crude oil production (1.57mb/d vs Q1-23: 1.51mb/d) amid elevated oil prices in the quarter. However, we note that total exports increased marginally by 1.9% in US dollar terms (Q1-24: USD14.32 billion vs Q1-23: USD14.06 billion).
Elsewhere, whilst total imports were higher (+95.5% y/y to NGN12.64 trillion vs Q1-23: NGN6.47 trillion) in naira terms, we note that imports were relatively lower in US dollar terms (Q1-24: USD9.45 billion vs Q1-23: USD14.01 billion) reflecting weak domestic consumption, FX liquidity constraints and higher import duty costs. Looking ahead, we anticipate that increased crude oil production and higher oil prices will continue to support Nigeria’s oil earnings and enhance overall exports in the short term.
Concurrently, while we expect increased domestic refining activities to reduce oil imports, we anticipate an increase in non-oil imports due to an improvement in FX liquidity, supporting higher total imports. However, we expect the gains from total exports to surpass the rise in total imports in the short term due to favourable terms of trade, potentially leading to a surplus in the balance of trade.
Based on the recently released data by the National Bureau of Statistics (NBS), collections from Value-Added Tax (VAT) increased by 101.7% y/y to NGN1.43 trillion in Q1-24 (Q1-23: +20.6% y/y to NGN709.59 billion). We attribute the increase to the combined impact of (1) resilient domestic consumption, (2) higher consumer prices compared to 2023FY levels, and (3) the impact of the depreciation of the naira on foreign collections.
On a quarter-on-quarter basis, we highlight that the VAT collection increased by 19.2% in Q1-24 (vs Q4-23: +26.6% q/q to NGN1.20 trillion) underpinned by increased collections across the local (+5.3% q/q to NGN631.18 billion), foreign (+33.6% q/q to NGN435.73 billion) and Nigerian Customs Service import (+36.1% q/q to NGN332.01 billion) VAT. Whilst we expect the increase in consumer prices to support VAT collections in the short term, we think the weak consumer demand dampened by high inflationary pressures and a slower naira depreciation effect on foreign collections will pose downside risks to the growth in VAT collections.
Capital Market: Equities
Despite the shortened trading week, due to the public holiday on Wednesday to celebrate Nigeria’s democracy day, bullish sentiments returned to the local bourse following renewed interest in banking stocks. Notably, bargain-hunting activities in ZENITHBANK (+8.3%) and GTCO (+5.6%) drove the weekly gain as the All-Share Index advanced by 0.7% w/w to close at 99,925.29 points.
Consequently, the Month-to-Date and Year-to-Date returns increased to +0.6% and +33.6%, respectively. Activity levels improved, as traded volume and value increased by 54.6% w/w and 43.1% w/w, respectively. Similarly, performance across sectors was largely bullish, following gains in the Oil & Gas (+5.3%), Banking (+3.6%), Insurance (+3.4%), Consumer Goods (+1.1%), and Industrial Goods (+0.3%) indices.
In the coming week, we expect the overall market sentiment to be mixed, especially given the lack of significant drivers to buoy investors’ interest over the near-term before the earnings season. One potential factor that could change the direction of activities may be upcoming share issuances by banks. Notwithstanding, we advise investors to trade cautiously over the near term in fundamentally justified names.
Money market and fixed income
The overnight (OVN) rate contracted by 440bps w/w to 26.3%, as inflows from FAAC disbursements (c.NGN400.00 billion) completely offset the debits for Thursday’s net NTB issuance (NGN11.00 billion) and supported financial system liquidity. Consequently, the average system liquidity for the week settled at a net long position of NGN684.11 billion (vs NGN377.38 billion in the prior week).
In the upcoming week, we anticipate the expected inflows from FGN bond coupon payments (NGN29.84 billion) and OMO maturities (NGN15.00 billion) will likely keep the system liquidity healthy in the absence of any significant mop-up action by the CBN. Thus, we expect the OVN rate to temper from current levels.
Treasury bills
Trading in the Treasury bills secondary market was bullish this week as the average yield across all instruments declined by 11bps to 21.9%. We attribute this week’s performance to participants looking to fill unmet bids from the week’s NTB PMA at the secondary market. Across the market segments, the average yield contracted by 9bps to 21.9% at the NTB segment and dipped by 16bps to 21.8% at the OMO segment. At the NTB auction, the DMO offered bills worth NGN44.23 billion – NGN5.73 billion for the 91-day, NGN6.35 billion for the 182-day and NGN32.15 billion for the 364-day bills. Subscription level settled lower at NGN538.02 billion (previous auction: NGN713.89 billion), with a bid-to-offer ratio of 12.2x. The auction closed with the DMO allotting instruments worth NGN55.23 billion – NGN6.78 billion for the 91-day, NGN8.36 billion for the 182-day, and NGN40.09 billion for the 365-day papers – at respective stop rates of 16.30% (previous: 16.50%), 17.44% (previous: 17.50%) and 20.50% (previous: 20.67%).
Following our outlook of liquidity surfeit in the financial system next week, we expect yields in the Treasury bills secondary market will likely maintain its downward trend.
Bonds
Proceedings in the FGN bonds secondary market were quiet this week, as the average yield inched higher by 3bps to 18.8%. Across the benchmark curve, the average yield expanded at the short (+5bps) and mid (+8bps) segments driven by sell pressures on the MAR-2025 (+14bps) and FEB-2031 (+15bps) bonds, respectively. Conversely, the average yield closed flat at the long end.
Next week, we expect the holiday-shortened week and the DMO rescheduling the month’s bond auction to June 24, to cause players in the Treasury bonds secondary market to remain on the sidelines, while reshuffling their portfolio in preparation for the 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 USD273.77 million w/w to USD33.16 billion (11 June). Likewise, the naira appreciated by 0.1% w/w to NGN1,482.72/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the total turnover (as of 13 June) at the market declined by 46.4% WTD to USD683.83 million, with trades consummated within the NGN1,400.00/USD – NGN1,505.00/USD band. In the forwards market, the naira rate was flat at the 1-month (NGN1,500.00/USD) contract, but declined across the 3-month (-0.2% to NGN1,548.66/USD), 6-month (-0.3% to NGN1,617.29/USD) and 1-year (-0.7% to NGN1,761.62/USD) contracts.
Whilst no inflows from the CBN were recorded in the week, we point out that the naira traded with less volatility primarily due to reduced demand pressure and moderate inflows from autonomous sources. In the short term, we anticipate a strengthening of the naira, given the World Bank’s approval of a USD2.25 billion loan, of which a first tranche of the loan (USD750.00 million, subject to request) is expected to follow, potentially supporting the CBN’s ability to boost FX liquidity.
Cordros
