Global Economy
According to the Office for National Statistics (ONS), economic activities in the United Kingdom (UK) remained positive, as the real GDP grew by 0.6% q/q in Q2-24 (Q1-24: 0.7% q/q). Analysing the breakdown, we highlight the improvement in general government expenditure (+1.4% q/q vs Q1-24: +0.00 q/q) underpinned by increased activities in public administration & defence and the education sector, despite the weaker health sub-sector. At the same time, household consumption (+0.2% q/q vs Q1-24: +0.4% q/q) was resilient following increased spending on transport, housing, recreation & culture. In addition, gross fixed capital formation (+0.4% q/q vs Q1-24: +0.9% q/q) grew slower as weak business investment offset the improved activities in buildings & structures and intellectual property products.
On a year-on-year basis, GDP increased by 0.9% in Q2-24 (Q1-24: 0.3% y/y). While we think elevated interest rates and sluggish wage growth may weaken demand in the near term, we believe the UK economy will remain resilient. We anticipate improved consumer confidence to be bolstered by expectations of a further rate cut by the Bank of England (BoE), which should support economic activities. Accordingly, the IMF projects the economy to grow by 1.5% y/y in 2024FY (2023FY: +0.1% y/y)
According to the Bureau of Labor Statistics (BLS), headline inflation in the United States eased by 10bps to 2.9% y/y in July (June: 3.0% y/y) – the lowest level since March 2021 (2.6% y/y). We attribute the slowdown in consumer prices to the moderation in shelter costs (+5.1% y/y vs June: +5.2% y/y), amid steady food prices (+2.2% y/y) as prices of food away from home (+4.1% y/y vs June: +4.1% y/y) and food at home (+1.1% y/y vs June: +1.1% y/y) were stable. However, energy prices (+1.1% y/y vs June: +1.0% y/y) rose marginally, mainly due to the uptick in gasoline prices.
On a month-on-month basis, headline inflation rose by 0.2% m/m in July (June: -0.1% m/m). We believe the still-tight monetary policy conditions will help sustain the downtrend in inflationary pressures. Nonetheless, consumer prices will remain above the Fed’s 2.0% target in the near term, given elevated services costs. Consequently, we expect the FOMC to implement a rate cut in September to support the economy amid the softening job market. Indeed, the CME FedWatch tool now indicates a 100.0% chance that the Fed will cut the key interest rate in the 18 September policy meeting.
Global Equities
Global stocks rebounded this week as signs of easing inflation and stronger-than-expected economic data (retail sales and jobless claims) eased recession concerns and fueled the optimism for a potential interest rate cut by the US Federal Reserve in September. As of the time of writing, US equities (DJIA: +2.7%; S&P 500: +3.7%) were on course for a weekly gain as the inflation (2.9% vs June: 3.0%) and retail sales (+1.0% vs June: -0.2%) data were assessed as positive signals for a potential ‘soft-landing’ for the economy. Similarly, European equities (STOXX Europe: +2.4%; FTSE 100: +1.9%) were on track to close higher, buoyed by the positive momentum on Wall Street and better-than-expected UK economic data (GDP and inflation).
The Asian markets also mirrored the gains on Wall Street led by the Nikkei 225 (+7.9%) as Japan’s GDP growth (July: 0.8%) exceeded the market’s expectation (0.5%), signaling a robust economic recovery. Likewise, the Chinese market (SSE: +0.6%) recorded modest gains, driven by hopes for further stimulus measures from Beijing despite mixed economic data. Finally, the Emerging (MSCI EM: +0.7%) and Frontier (MSCI FM: +0.9%) market indices closed positively underpinned by bullish sentiments in China (+0.6%) and Vietnam (+2.3%), respectively.
Nigeria: Domestic Economy
According to the National Bureau of Statistics (NBS), consumer prices eased for the first time in 19 months, mainly due to the high statistical base from the prior year. Specifically, headline inflation moderated by 80bps to 33.40% y/y in July (June: 34.19% y/y). Analysing the breakdown, we highlight that food prices (-134bps to 39.53% y/y) moderated after eighteen consecutive months of increase, while the core inflation (+6bps to 24.47% y/y) rose marginally. On a month-on-month basis, headline inflation slowed by 3bps to 2.28% (June: 2.31% m/m), mainly due to a moderation in food prices.
Looking ahead, we anticipate further moderation in food inflation primarily driven by the ongoing green harvest and a reduced exchange rate pass-through on imported food products. Meanwhile, we expect an uptick in PMS prices due to supply constraints to push core inflation higher. On a balance of factors, we forecast headline inflation to moderate marginally by 2bps to 2.26% m/m (July: 2.28% m/m) in August, translating to a 119bps slowdown in the y/y inflation rate to 32.21% (July: 33.40% y/y).
According to the recently released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) increased for the fourth consecutive month, rising by 2.2% m/m to 1.53 mb/d in July (June: 1.50 mb/d). We attribute the improvement in the period to higher production volume recorded across the Escravos (+9.5% m/m), Forcados (+9.3% m/m) and Bonny (+0.9% m/m) production terminals, while Erha (-13.3% m/m), Odudu (-4.1% m/m) and Egina (-1.2% 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. Despite ongoing efforts to boost oil production—including government measures against theft and vandalism and the development of new fields—several factors are likely to constrain crude oil output in the near term. These include (1) frequent leaks from pipelines, (2) intermittent oil terminal shutdowns for repairs, and (3) International Oil Companies (IOC) divestments. Thus, 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 bourse reversed last week’s gains as profit-taking activities gained momentum following strong selloffs in BUACEMENT (-13.5%). Thus, the All-Share index declined by 1.5% w/w to close at 97,100.31 points, with the Month-to-Date and Year-to-Date returns moderating to -0.7% and +29.9%, respectively. Similarly, activity levels wavered as the trading volume and value declined by 24.1% w/w and 1.4% w/w, respectively. On the other hand, performance across our sectoral coverage was mixed following gains in the Oil & Gas (+5.3%), Insurance (+0.8%) and Consumer Goods (+0.4%) indices, while the Industrial Goods (-5.2%) and Banking (-2.3%) indices settled lower.
Looking ahead, we still expect bearish sentiments to remain the key theme as investors remain cautious and continue to exhibit weak appetite for equities. Furthermore, we believe the developments in the macroeconomic landscape and corporate actions of the upcoming earnings season will influence investors’ sentiments over the near-term.
Money Market and Fixed Income
The overnight (OVN) rate declined by 99bps w/w to 33.0% as the inflow from OMO maturities (NGN20.50 billion) and banks’ activity at the CBN SLF window (NGN1.82 trillion) supported system liquidity. Thus, the average system liquidity settled higher at a net long position of NGN407.16 billion (vs net long position of NGN10.61 billion in the previous week)
Barring any significant inflows next week, we expect debits for the FGN bond PMA (NGN190.00 billion) and a possible net issuance at the Wednesday NTB auction to pressure system liquidity, leading to a likely expansion in the OVN rate.
Treasury Bills
The Treasury bills secondary market turned bullish this week, following notable buying interests in mid-dated and long-dated papers. Consequently, the average yield across all instruments contracted by 67bps w/w to 25.3%. Across the market segments, the average yield declined by 86bps to 24.9% at the NTB segment and contracted by 31bps to 25.8% at the OMO segment.
We believe the subdued system liquidity next week will undermine demand for instruments in the T-bills secondary market, causing yields to expand. Additionally, the CBN is scheduled to hold an NTB PMA next Wednesday (21 August), with NGN409.98 billion worth of maturing bills on offer.
Bonds
Bullish sentiments prevailed in the Treasury bonds secondary market this week as traders sought to take advantage of current rates following the reduction in the offer size for the FGN bond PMA to NGN190.00 billion (previously: NGN300.00 billion) amid the positive CPI data print for July (-80bps to 33.40% y/y). Accordingly, the average yield contracted by 35bps to 19.7%. Across the benchmark curve, the average yield declined at the short (-43bps), mid (-21bps), and long (-12bps) segments following buying interests in the APR-2029 (-127bps), JUL-2030 (-60bps), and JUN-2053 (-52bps) bonds, respectively.
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 (19 August). At the auction, the DMO is set to offer instruments worth NGN190.00 billion through re-openings of the 19.30% FGN APR 2029, 18.50% FGN FEB 2031 and 19.89% FGN MAY 2033 bonds. Notwithstanding, we maintain our medium-term expectation of elevated yields consequent to (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics.
Foreign Exchange
Nigeria’s FX reserves decreased by USD301.32 million w/w to USD36.53 billion (15 August) following the CBN’s intervention through last week’s Retail Dutch Auction (RDAS). The naira depreciated by 0.4% w/w to NGN1,579.89/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) as the total turnover (as of 15 August) at the market declined by 11.8% WTD to USD756.54 million, with trades consummated within the NGN1,495.00/USD – NGN1,607.50/USD range. In the forwards market, the naira rates on the 1-month (+0.5% to NGN1,614.75/USD) and 6-month (+1.1% to NGN1,754.29/USD) contracts increased but decreased at the 3-month (-0.2% to NGN1,687.74/USD) and 1-year (-2.3% to NGN2,004.63/USD) contracts.
Whilst FX liquidity tightened during the week, the naira traded with less volatility due to waning demand pressure following the CBN’s FX retail auction last week. Looking ahead, we posit that the naira may remain pressured in the interim due to limited inflows from the CBN and weak FPI flows. However, the DMO is set to issue a Domestic FGN US Dollar Bond on 19 August with an offer of USD500.00 million. We highlight that the successful issuance of the bond will boost the external reserves, supporting the CBN’s ability to stabilise the naira in the medium term.
Cordros
