Global Economy
At the recently concluded September policy meeting, the United States Federal Open Market Committee (FOMC) voted to cut the key interest rate for the first time since March 2020. Specifically, the US Fed unanimously voted to ease the target range for the federal funds rate by 50bps to 4.75% – 5.00% (Previously: 5.00% – 5.50%). The decision to ease the funds rate reflects the FOMC’s confidence in progress towards the 2.0% inflation target and a balanced outlook on employment and inflation risks. Additionally, the apex bank will continue reducing the holdings of Treasury securities, agency debt and agency mortgage-backed securities.
The FOMC indicated that future rate adjustments would be data-dependent, considering evolving economic conditions and potential risks. The underlying tone of the FOMC suggests that further rate cuts are imminent, considering the softer labour market conditions and sustained disinflation towards the apex bank’s 2.0% target. As such, we anticipate the US fed to ease the funds rate further by 25bps in the next policy meeting. Indeed, the CME FedWatch tool indicates a 60.7% chance that the Fed will cut the key interest rate by 25bps in the 7 November policy meeting.
In line with market expectations, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 8 – 1 to maintain the bank rate at 5.00%. We believe the decision to “HOLD” reflects the commitment to return inflation to the target of 2.0% sustainably. Additionally, the MPC voted to reduce the stock of purchased government bonds (gilts) by another GBP100.00 billion pounds to GBP569.00 billion over the next 12 months from October 2024 to September 2025.
Further, the central bank reiterated that it would continue closely monitoring the risks of inflation persistence and would decide the appropriate degree of monetary policy restrictiveness at each meeting. The BOE’s tone suggests a cautious approach to easing monetary policy, given that inflation risks are tilted to the upside – core and services inflation remains high. Nonetheless, we think the BoE may implement a 25bps cut in the November policy meeting, synchronizing neatly with the market expectations.
Global Equities
The global equities market rallied this week as investors digested a series of policy decisions from the world’s major central banks and their impact on the global economy. Accordingly, US equities (DJIA: +1.5%; S&P 500: +1.6%) were set for another weekly gain driven by positive reactions to the Fed’s larger-than-expected 50bps rate cut and the four-month low print in weekly jobless claims, which reinforced expectations that lower borrowing costs could support labour demand without reigniting inflation.
Similarly, European equities (STOXX Europe: +0.4%; FTSE 100: +0.1%) tracked global optimism, heading for a positive close, as investors assessed the Bank of England’s decision to keep interest rates steady, alongside the US Federal Reserve’s rate decision. Asian markets (Nikkei 225: +3.2%; SSE: +1.2%) posted gains, buoyed by (1) the Bank of Japan’s decision to maintain interest rates, (2) expectations of further stimulus from China, and (3) the positive sentiments surrounding the US Fed’s monetary easing. Finally, the Emerging Market (MSCI EM: +1.6%) index advanced, driven by gains in China (+1.2%) and India (+1.3%), while the Frontier Market (MSCI FM: -0.1%) index closed lower following selloffs in Kazakhstan (-0.1%).
Nigeria: Domestic Economy
According to the National Bureau of Statistics (NBS), consumer prices eased for the second consecutive month as the high statistical base from the prior year supported performance. Specifically, headline inflation moderated by 125bps to 32.15% y/y in August (July: 33.40% y/y). Analyzing the breakdown, food prices (-201bps to 37.52% y/y) eased to a 7-month low, while core inflation (+11bps to 27.58% y/y) remained at the highest level since March 2004 (32.60% y/y).
On a month-on-month basis, headline inflation slowed by 6bps to 2.22% (July: 2.28% m/m), underpinned by the decline in food prices. In the near term, we expect a significant increase in the PMS base price (+50.5% to NGN855.00/litre) to heighten inflationary pressures within the core basket. While we anticipate sustained deceleration in food prices, we anticipate a slower pace of decline due to higher logistic costs. On a balance of factors, we forecast headline inflation to increase by 7bps to 2.29% m/m (August: 2.22% m/m) in September, translating to a 25bps increase in the inflation rate to 32.40% y/y (August: 32.15% y/y).
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in September (from the total revenue generated in August) declined by 11.4% m/m to NGN1.20 trillion (August: NGN1.36 trillion). We attribute the decline in disbursement to lower receipts from Companies’ Income Tax (CIT), Value Added Tax (VAT), Import and Excise Duties, Electronic Money Transfer Levy (EMTL), Petroleum Profit Tax (PPT), Oil and Gas Royalty and Customs External Tariff levies (CET).
From the breakdown provided, we estimate that the amount disbursed is 52.8% of the total gross revenue (NGN2.28 trillion) generated in the month, with the remaining balance allocated for transfer, intervention and refunds (NGN992.62 billion) and the cost of collection (NGN81.98 billion). Consequently, the FGN received NGN374.93 billion (July: NGN431.08 billion), State Governments received NGN522.34 billion (July: NGN583.29 billion), while the Local Governments received NGN306.53 billion (July: NGN343.70 billion). Whilst gains from the exchange rate differential may continue to support government revenue from foreign sources in naira terms, we anticipate that the revenue to be distributed among the three tiers of government will be constrained by the combined effects of (1) below-target oil production levels (Budget: 1.78 mb/d vs Cordros forecast: 1.52 mb/d), and (2) the FG’s 150-day duty-free import on some food items.
Capital Markets: Equities
The Nigerian equities market extended its gains for the second consecutive week, primarily driven by demand for GEREGU (+15.0%), MTNN (+4.0%), and FIDELITYBK (+24.2%). Thus, the All-Share Index notched a 0.8% w/w gain to close at 98,247.99 points. Based on the preceding, the MTD and YTD returns increased to +1.7% and +31.4%, respectively. However, trading activity level was weak, as trading volume and value declined by 11.7% w/w and 11.9% w/w, respectively. Performance across sectors was mixed, following gains in the Banking (+1.3%) and Insurance (+0.9%) indices, while the Consumer Goods (-0.8%) and Industrial Goods (-0.1%) indices declined. The Oil & Gas index closed flat.
In the coming week, we expect investors to closely monitor the upcoming MPC meeting, NTB and bond auctions for insights on the direction of yields in the fixed income market and the potential impact on the equities market. As a result, we anticipate cautious trading.
Money Market and Fixed Income
The overnight (OVN) rate contracted by 176bps to 30.0%, as inflows from FGN bond coupon payments (NGN402.96 billion) saturated the system. Notwithstanding, average liquidity this week remained at a net short position, settling at NGN374.19 billion (previous: net short position of NGN437.84 billion).
In the upcoming week, we expect inflows from FAAC disbursements (NGN828.08 billion) and FGN bond coupon payments (NGN202.45 billion) to outstrip debits at the FGN bond PMA (NGN150.00 billion) and a possible net issuance at the Wednesday NTB auction, supporting system liquidity. Thus, we expect further moderation in the OVN rate.
Treasury Bills
Trading in the Treasury bills secondary market maintained the bearish trend from the previous week following the still tight system liquidity. Thus, the average yield across all instruments rose by 26bps to 21.8%. Across the market segments, the average yield advanced by 52bps to 20.8% in the T-bills segment and declined by 21bps to 23.4% in the OMO segment.
We expect the outcome of the MPC meeting scheduled for 23 and 24 September to influence sentiments in the T-bills secondary market. In addition, an NTB PMA is expected to be conducted next Wednesday (25 September), where the DMO is expected to roll over NGN227.54 billion worth of maturities.
Bonds
Proceedings in the FGN bonds secondary market turned bullish this week as investors reinvested coupon payments. Consequently, the average yield declined by 19bps to 18.7%. Across the benchmark curve, the average yield declined at the short (-27bps) and long (-2bps) segments following demand for the APR-2029 (-143bps) and JUN-2053 (-20bps) bonds, respectively, while it advanced at the mid (+2bps) end driven by profit-taking activities on the JUN-2033 (+38bps) bond.
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 (23 September). At the auction, the DMO is set to offer instruments worth NGN150.00 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 increased by USD451.73 million w/w to USD37.39 billion (19 September), marking the third consecutive week of accretion. The CBN doubled its efforts to support the naira, selling an additional USD46.00 million in the market this week, causing the naira to appreciate by 0.3% w/w to NGN1,541.52/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). Total turnover at the NAFEM as of 19 September decreased by 66.4% WTD to USD434.24 million, with trades consummated within the NGN1,530.00/USD – NGN1,670.00/USD band. In the forwards market, the naira rate increased across the 1-month (+1.8% to NGN1,639.48/USD), 3-month (+1.4% to NGN1,713.67/USD), 6-month (+1.4% to NGN1,812.71/USD), and 1-year (+1.6% to NGN2,019.55/USD) contracts.
We highlight the CBN’s effort to stabilise the naira following the interventions witnessed recently. While we expect FX demand pressure to remain, we anticipate reduced naira volatility in the near term provided the CBN consistently intervenes in the foreign exchange market.
Cordros
