Global Economy
The Federal Open Market Committee (FOMC) held its second meeting for the year on 19 and 20 March, during which it again voted to maintain the target range for the federal funds rate at 5.25% – 5.50%. Notably, the Committee retained its projection of three interest rate cuts for 2024. However, it indicated that the timing of these cuts would depend on further evidence of inflation moving towards its target. The US Fed expects a year-end inflation of 2.40%, unchanged from the December projection. In our view, the Committee is proceeding with caution and is concerned about the risks of easing rates too soon, which could lead to a resurgence in inflation. Therefore, we expect the FOMC to keep interest rates steady in the short term to better assess the economy’s performance and direction. Consistent with this expectation, the CME Fed Watch tool currently shows an 88.3% probability of the FOMC maintaining its “HOLD” stance at the May meeting.
According to the Office for National Statistics (ONS), the UK’s inflation rate declined to 3.4% y/y in February (January: 4.0% y/y) – the lowest level since September 2021 (3.1%). Notably, the inflation print was below market expectations of 3.5%. Analysing the breakdown provided, food prices (5.0% y/y vs January: 6.9% y/y) and core inflation (4.5% y/y vs January: 5.1% y/y) increased at a slower pace. We attribute this to reduced consumer demand, lower energy prices and weak economic activities as borrowing costs remain high. Similarly, month-on-month inflation moderated to 0.6% m/m (January: 1.0% m/m). Moving forward, we anticipate that inflation in the UK will sustain its downward trajectory, due to the impact of (1) favourable base effects from the previous year, (2) low energy prices, and (3) weak consumer demand due to high borrowing costs. The Bank of England (BoE) forecasts the inflation rate to converge towards its 2.0% target in the second quarter of the year, potentially facilitating a rate reduction at its May meeting.
Global Equities
Positive sentiments dominated global equities this week following the outcome of the Federal Reserve policy meeting, as investors found solace from the news that policymakers are still considering rate cuts this year. Consequently, upbeat sentiments dominated US equities (DJIA: +2.8%; S&P 500: +2.4%) on the back of the US Fed’s rate decision and forecast for imminent rate cuts. Similarly, European equities (STOXX Europe: +1.0%; FTSE 100: +2.0%) were headed for another weekly gain as investors cheered dovish comments from the Federal Reserve and the Bank of England, and a surprise interest rate cut by the Swiss National Bank. Meanwhile, in Asia (Nikkei 225: +5.6%; SSE: -0.2%), the Japanese market rallied following the Bank of Japan (BOJ) and the Federal Reserve policy announcements which spurred investors’ appetite for risk assets. Additionally, the Japanese yen’s ongoing depreciation against the US dollar, coupled with Japan’s exit from deflation, further supported risk sentiments. Conversely, bearish sentiments prevailed in the Chinese market due to disappointing earnings from bellwether companies coupled with a lack of positive economic cues. Elsewhere, bullish sentiments in India (+0.3%) and Taiwan (+2.8%) drove the Emerging market (MSCI EM: +1.3%) index higher. The Frontier markets (MSCI FM: +1.1%) index also saw gains, supported by positive performances in Vietnam (+1.4%) and Romania (+2.2%).
Nigeria
Domestic Economy
According to data released by the Nigerian Upstream Regulatory Commission (NUPRC), the average crude oil production (including condensates) declined by 6.33% to 1.54mb/d in February (January: 1.64mb/d). Crude oil production declined across the major production terminals, including Bonny (-25.24% m/m), Brass (-16.05% m/m), Qua Iboe (-13.66% m/m), Forcados (-13.21% m/m), and Escravos (-12.04% m/m). Whilst the government is intensifying its efforts to curb oil theft and pipeline vandalism, we opine that frequent leaks from pipelines induced by poor maintenance will pose a downside risk to crude oil production in the near term. As a result, we maintain our average crude oil production estimate (including condensate) of 1.59 mb/d in 2024E (vs FGN’s estimate: 1.78 mb/d).
According to the NBS, VAT collections in Q4-23 increased by 26.61% q/q to NGN1.20 trillion relative to Q3-23 (NGN948.07 billion), bringing the total VAT collections to NGN3.64 trillion in 2023FY (2022FY: NGN2.51 trillion). We attribute the significant uptick in VAT collections to the impact of (1) the spike in prices of goods and services, (2) continued improvement in the automation of the country’s tax administration processes, including the updated VAT filing processes and (3) currency depreciation on foreign VAT collections. VAT collections increased across all segments, including local (+20.67% q/q to NGN630.00 billion), NCS-import (+10.22% q/q to NGN244.04 billion) and foreign (+59.48% q/q to NGN326.27 billion) VAT collections. On a year-on-year basis, collections from VAT jumped by 72.12% (Q4-22: NGN697.38 billion). While acknowledging the impact of constrained consumer wallets on domestic demand, we believe that VAT collections will remain strong. We expect the depreciation of the naira to influence foreign collections in the short term, particularly in Q1-24, while higher prices of goods and services will maintain increases in local collections. Consequently, we expect the combined impact of higher VAT and CIT collections to support FGN’s non-oil revenue over the short-to-medium term.
Capital Markets
Equities
Despite two positive trading sessions towards the end of the week, the local stock market ultimately ended lower as investors opted to lock in profits on bellwether stocks following the recent run-up in share prices. Specifically, the All-Share index dipped by 0.4% to close at 104,647.37 points, undermined by the loss in MTNN (-12.3%). Consequently, the MTD and YTD returns moderated to +4.7% and +40.0%, respectively. Activity level remained subdued as the total trading volume and value decreased by 2.1% w/w and 7.8% w/w, respectively. Across sectors, the Insurance (+8.9%), Banking (+4.2%), Industrial Goods (+0.6%) and Oil and Gas (+0.3%) posted gains while the Consumer Goods (-0.4%) index declined.
In the week ahead, we believe investors will be focused on the outcome of the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the FI market. As a result, we envisage an extension of the cautious trading theme, especially from domestic investors.
Money market and fixed income
Money market
The overnight (OVN) rate contracted by 379bps w/w to 27.3%, as debits for the FGN bond auction (NGN608.86 billion) was offset by the inflows from FGN bond coupon payments (NGN134.66 billion) and liquidation of DMBs’ special bills with the CBN. Nonetheless, we highlight that the significant moderation of banks’ borrowing from the CBN’s SLF window resulted in the average system liquidity closing lower at a net long position of NGN760.53 billion (vs. a net long position of NGN2.50 trillion in the previous week).
Barring significant outflows next week, the OVN rate is likely to decline further as the inflows from FAAC disbursements (NGN800.35 billion) and FGN bond coupon payments (NGN164.29 billion) are expected to support system liquidity.
Treasury bills
The Treasury bills secondary market traded with bullish sentiments following substantial demand at the mid and long segments of the curve as players looked to sterilise their excess cash. Subsequently, the average yield across the market contracted by 74bps to 17.9%. Across the market segments, the average yield declined by 91bps to 17.7% in the NTB secondary market and dipped by 29bps to 18.5% in the OMO segment.
In the coming week, we envisage sustained downward movement of yield in the T-bills secondary market as we believe the liquidity surfeit in the financial system should drive more interest in bills. In addition, the CBN is scheduled to hold an NTB PMA on Wednesday (27 March), where it is expected to roll over NGN161.33 billion worth of maturities.
Bonds
Bearish sentiments persisted in the Treasury bonds secondary market as the average yield advanced by 82bps to 19.3%. We attribute this week’s performance to players reacting to the DMO’s private auction of NGN2.36 trillion worth of FCY bonds on behalf of the CBN to settle its outstanding Forwards. Bonds issued include a MAR-2026 (NGN700.00 billion | new issue), MAR-2027 (NGN1.10 trillion | re-opening) and MAR 2028 (NGN558.24 billion | new issue), all closing at a stop rate of 21.00%. At this month’s FGN bond auction, the DMO offered instruments worth NGN450.00 billion to investors through new issuance of the 19.94% FGN MAR 2027 (Bid-to-offer: 1.8x; Stop rate: 19.9%), and re-openings of the 18.50% FGN FEB 2031 (Bid-to-offer: 0.4x; Stop rate: 20.0%) and 19.00% FGN FEB 2034 (Bid-to-offer: 2.0x; Stop rate: 20.5%) bonds. The subscription level settled lower at NGN615.01 billion (vs previous auction: NGN1.92 trillion), translating to a bid-to-offer ratio of 1.4x. The DMO eventually over-allotted instruments worth NGN608.86 billion (non-competitive allotments: NGN133.20 billion), resulting in a bid-to-cover ratio of 1.0x.
Demand in the FGN bonds secondary market has remained weak since the beginning of the year as investors maintained a risk-off stance for instruments amid the apex bank’s tight control on money supply into the economy. In addition to the preceding, we expect that (1) anticipated monetary policy administration globally and domestically and (2) sustained imbalance in the demand and supply dynamics, will keep yields elevated in the market over the short-term.
Foreign Exchange
Nigeria’s FX reserve paused its five-week accretion trend this week as the gross reserves level decreased by USD96.41 million w/w to USD34.32 billion (20 March). Also, the naira appreciated by 12.0% to NGN1,431.49/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), as the apex bank intervened in the market thrice within the week with total sales of USD195.00 million. At the NAFEM, total turnover (as of 21 March 2024) increased by 16.4% WTD to USD1.21 billion, with trades consummated within the NGN1,300.00 – NGN1,640.00/USD band. In the Forwards market, the naira rates recorded appreciation across the 1-month (+9.6% to NGN1,460.81/USD), 3-month (+9.4% to NGN1,500.26/USD), 6-month (+8.4% to NGN1,562.99/USD) and 1-year (+6.5% to NGN1,705.82/USD) contracts.
We note the CBN’s increased intervention in the FX market this week, including the (1) payment of the last portion of the FX backlogs – USD1.50 billion and the (2) commencement of retail sales of US dollars to banks within the range of NGN1,300.00/USD – NGN1,400.00/USD to boost confidence in the FX market and stabilise the naira. While the CBN is expected to continue its FX intervention in the near term, we do not expect a substantial increase in FX liquidity due to the relatively weak FX reserves. However, barring any notable shocks, the reduced currency speculation and improved FPI inflows due to high naira yields may continue to strengthen the local currency in the near term.
Cordros
