Global Economy
According to the Office for National Statistics (ONS), headline inflation in the UK slowed by 30bps to 2.0% y/y in May (April: 2.3% y/y) – the lowest print since July 2021 (2.0% y/y). We highlight that the deceleration was primarily due to the slowdown in food and energy prices relative to the corresponding period of last year. Analysing the breakdown provided, food prices (+1.7% y/y vs April: +2.9% y/y) slowed for the fourteenth consecutive month to settle at a 32-month low.
We attribute the slower food inflation mainly to the moderation in bread and cereals prices as wheat costs eased. At the same time, energy prices (-15.9% y/y vs April: -16.7% y/y) remained in the negative trajectory, though the pace of contraction softened due to higher motor fuel costs in the review period. On a month-on-month basis, headline inflation was steady at 0.3% (April: +0.3% m/m). Despite the data print indicating a significant easing in inflationary pressures, providing some relief to consumers and policymakers, we expect a short-term rebound in inflation primarily due to the rising energy prices, particularly as the government phases out its energy price cap.
At the recently concluded June meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 7 – 2 to maintain the bank rate at 5.25% for the seventh consecutive time. Notably, the decision to “HOLD” the key policy rate was “Finely balanced” among committee members, indicating that a careful consideration of various economic data will be necessary to make any firm decision.
The apex bank further acknowledged that the restrictive monetary policy impacts economic activity, causing a looser labour market even as inflationary pressures slows. However, they maintained that the key interest rate would need to remain restrictive till inflation steadily returns to the 2.0% target of the committee. Looking ahead, we anticipate the BoE will remain cautious and maintain a tight monetary policy stance, waiting for further signs of inflationary pressure softening before considering a shift in stance.
Global Equities
Global equities were broadly positive amid a series of central bank decisions and US economic data releases, including retail sales and jobless claims. US equities (DJIA: +1.4%; S&P 500: +0.8%) were on track for a weekly gain, as of the time of writing, propelled by a rally in tech stocks earlier in the week and growing expectations of interest rate cuts in response to disappointing retail sales and jobless claims data.
European equities (STOXX Europe: +1.3%; FTSE 100: +1.5%) also rebounded from last week’s loss, buoyed by positive reactions to improved UK retail sales numbers as recently released by the Office for National Statistics (ONS), and the latest interest rate decisions from the Bank of England and Swiss National Bank. Meanwhile, Asian markets were negative, with both Japanese (Nikkei 225: -0.6%) and Chinese (SSE: -1.1%) markets closing lower on concerns over the normalization of the Bank of Japan’s monetary policy following the cooler-than-expected May inflation (2.5%), and uncertainties surrounding policy support for the Chinese economy amid trade frictions with the European Union. Elsewhere, the Emerging (MSCI EM: +1.8%) and Frontier (MSCI FM: +0.6%) market indices posted gains underpinned by India (+0.2%) and Romania (+2.3%), respectively.
Nigeria: Domestic Economy
According to recently released data by the Debt Management Office (DMO), Nigeria’s public debt outstanding increased by 25.0% q/q to NGN121.67 trillion in Q1-24 (Q4-23: NGN97.34 trillion). We highlight that the increase primarily reflects new borrowings to finance rising government expenditures against the persistent revenue underperformance, and the impact of the naira depreciation on foreign debt. Accordingly, the total domestic debt stock rose by 11.0% q/q to NGN65.65 trillion (Q4-23: NGN59.12 trillion).
Meanwhile, the total external debt decreased by 15.5% q/q to USD91.46 billion Q4-23: USD108.23 billion) due to the FG’s settlement of matured external obligations. However, in naira terms, external debt stock amounted to NGN56.02 trillion in Q1-24 (Q4-23: NGN38.22 trillion). Looking ahead, we anticipate a significant increase in Nigeria’s total debt due to (1) increased borrowings by the FG to fund the 2024 budget deficit, and (2) the impact of the depreciation of the naira on foreign debt. We project total public debt to settle at NGN134.51 trillion (or 50.9% of GDP) in 2024E.
Based on data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) rose to the highest level in three months, increasing by 1.5% m/m to 1.47 mb/d in May (April: 1.45 mb/d). Interestingly, the improvement in May was partly driven by the significant rebound in production from the Akpo terminal (+979.7% m/m) which recorded a five-month high print due to improved activities in Akpo West Field as TotalEnergies commenced operation at the field.
Production volumes also increased across the Escravos (+6.6% m/m) and Bonga (+6.6% m/m) terminals, while the Bonny (-9.7% m/m), Qua Iboe (-7.8% m/m) and Forcados (-3.6% m/m) terminals recorded declines. While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that (1) frequent leaks from pipelines, (2) intermittent oil terminal shutdowns for repairs, and (3) International Oil Companies (IOC) divestment still pose downside risks to crude oil production in the near term. Nonetheless, we revise our average crude oil production estimate (including condensate) downwards to 1.52 mb/d in 2024E (Previous: 1.54 mb/d).
Capital Markets: Equities
The Nigerian equities market could not consolidate the gains of the prior week following pressure from profit-taking activities during the week. Accordingly, the NGX ASI declined marginally by 0.2% w/w, driven by losses in TRANSCOHOT (-10.0%) and MTNN (-2.7%). Based on the preceding, the month-to-date and year-to-date returns settled at +0.4% and +33.4%, respectively. Despite the shortened trading week, the activity level improved with trading volume and value increasing by 25.3% and 21.8% w/w, respectively. Sectoral performance was mixed, as the Consumer Goods (+0.3%), Oil & Gas (+0.2%), and Industrial Goods (+0.1%) indices posted gains, while the Insurance (-1.3%) index closed lower. Meanwhile, the Banking index closed flat.
In our opinion, we still expect the domestic bourse to exhibit a choppy trading pattern next week as the lack of significant positive catalysts fuels investors’ cautious stance. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and corporate actions.
Money market and fixed income
The overnight (OVN) rate contracted by 21bps w/w to 26.0%, as the healthy liquidity from last week, was further boosted by additional inflows from FAAC allocations (c. NGN600.00 billion), FGN bond coupon payments (NGN29.84 billion) and OMO maturities (NGN15.00 billion) amid debits for the mid-week OMO auction (NGN986.88 billion). Nonetheless, banks accessing the CBN’s SDF window caused the week’s average system liquidity to close at a net short position of NGN563.87 billion (vs net long position of NGN684.11 billion in the prior week).
We envisage the funding for next week’s June 2024 FGN bond PMA and a possible net issuance at the NTB auction would mount pressure on the financial system, more so as no notable inflows are expected. Consequent to this, we expect the OVN rate to trend higher in the coming week.
Treasury bills
The T-bills secondary market closed on a bearish note, with most pressure on the 34DTM (+129bps) paper and a few long-dated bills. Consequently, the average yield across all instruments advanced by 2bps to 21.9%. Across the market segments, the average yield expanded by 6bps to 22.0% at the NTB segment but contracted by 7bps to 21.7% at the OMO segment. At this week’s OMO auction, the CBN offered instruments worth NGN500.00 billion – NGN75.00 billion of the 90-day, NGN75.00 billion of the 174-day, and NGN350.00 billion of the 363-day.
Notably, investors remained averse to the 90-day bill and largely focused on the 1-year bill (99.9% of the total subscription), with the aggregate subscription settling at NGN986.88 billion (bid-to-offer: 2.0x). Eventually, the CBN filled all available bids – NGN1.00 billion for the 174-day and NGN985.88 billion for the 363-day instruments – at respective stop rates of 19.48% (previous: 19.64%) and 22.30% (previous: 22.34%).
Based on our expectation of a possible liquidity dearth next week, we anticipate demand for instruments in the Treasury bills secondary market will likely weaken, causing yields in the market to rise further. In addition, the DMO is scheduled to conduct an NTB auction on Wednesday (26 June), where it is expected to roll over NGN228.72 billion worth of maturities.
Bonds
Sentiments in the FGN bonds secondary market were mixed this week, as players exited their short and long positions, while huge demand was recorded on the privately issued MAR-2027 (-100bps) bond. As a result, the average yield increased slightly by 1bp to 18.8%. Across the benchmark curve, the average yield expanded at the short (+6bps) and long (+14bps) ends following profit-taking activities on the JAN-2026 (+20bps) and JUN-2038 (+96bps) bonds, respectively. Conversely, the average yield declined at the mid (-9bps) segment due to interest in the APR-2032 (-16bps) bond.
Next week, we believe the outcome of this month’s FGN bond auction holding on Monday (24 June) will influence the direction of yields in the secondary market. At the auction, the DMO is set to offer instruments worth NGN450.00 billion through re-openings of the 19.30% FGN APR 2029, 18.50% FGN FEB 2031 and 19.89% FGN MAY 2033 bonds. Meanwhile, 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 improved further this week, as the gross reserves level grew by USD297.97 million w/w to USD33.64 billion (20 June). Elsewhere, the naira depreciated by 0.2% w/w to NGN1,485.53/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the total turnover (as of 20 June) at the market declined by 65.0% WTD to USD351.83 million, with trades consummated within the NGN1,390.00/USD – NGN1,514.82/USD band. In the forwards market, the naira rate decreased at the 1-month (-0.4% to NGN1,506.13/USD), 3-month (-0.1% to NGN1,550.10/USD), 6-month (-0.2% to NGN1,620.54/USD) and 1-year (-0.4% to NGN1,768.74/USD) contracts.
FX liquidity was relatively lower this week, partly due to the shortened holiday week and muted inflows from the CBN. We highlight that despite improved inflows from FPIs in line with the CBN’s OMO issuances, the naira depreciated, primarily due to increased demand pressure. Going forward, we anticipate an improvement in FX liquidity as the partial disbursement (USD 750.00 million) of the World Bank’s Development Policy Financing loan (USD1.50 billion) allows for more CBN interventions in the FX market.
Cordros
