Global Economy
At the August monetary policy meeting, the People’s Bank of China (PBoC) maintained its key lending rates, as anticipated. Specifically, the one-year loan prime rate (LPR) and the five-year mortgage rates were held steady at 3.35% and 3.85%, respectively. Notably, the bank highlighted that the decision to hold the rates was influenced by a cautious approach, aiming to strike a balance and avoid drastic measures for the economy following the 10bps rate cut implemented at the prior meeting.
In addition, the apex bank reiterated its commitment to supporting the economy through existing financial policies, proactive fiscal measures, and new initiatives to (1) boost domestic demand, (2) address the property sector issues, and (3) support the weak currency. While the PBoC may focus on stabilizing long-term yields and controlling currency depreciation in the near term, we still expect the PBoC to implement a rate cut in September to boost consumption and support investment recovery. Additionally, we think a potential rate cut by the US Fed in September could provide the PBoC with greater flexibility to ease the key interest rates at the next policy meeting.
According to the flash estimates from S&P Global, Manufacturing PMI in the US eased to an 8-month low, settling at 48.0 points in August (July: 49.6 points). We attribute the weak outturn to weaker demand conditions as the tight financial conditions and elevated price pressures weighed on factory activity. However, the Services PMI settled higher at 55.2 points (July: 55.0 points), driven by higher new orders and growth of new businesses. Overall, the Composite PMI moderated to 54.1 points (July: 54.3 points) – its lowest level in four months, given the sharp downturn in factory activity. We expect overall private business activity in the US to remain in expansionary territory over the short term, supported by improved business confidence, amid dovish signals by the FOMC and increased spending due to pre-election activities. Nonetheless, we think the higher living costs arising from elevated energy prices could pose a downside risk to our expectations.
Global Equities
Global stocks were broadly higher this week as investors reacted positively to dovish comments from the US Federal Reserve chief during his Jackson Hole speech, which hinted at potential interest rate cuts in the near term. At the time of writing, US equities (DJIA: +0.1%; S&P 500: +0.3%) were on track to close higher as investors digested jobless claims data and the latest comments from the Fed that hinted at a potential interest rate cut in September.
Meanwhile, mixed sentiments dominated European equities (STOXX Europe: +1.0%; FTSE 100: -0.1%) as optimism about potential interest rate cuts from major central banks in September were tempered by uncertainty about the outlook for economic growth in the region. In Asia, Japanese stocks (Nikkei 225: +0.8%) rose on the back of gains in technology stocks and positive signals on Wall Street, while Chinese stocks (SSE: -0.9%) declined due to profit-taking activities in consumer and electric vehicles stocks amid escalating trade tensions between China and the European Union. Lastly, the Emerging Markets (MSCI EM: +0.7%) and Frontier Markets (MSCI FM: +1.2%) indices rose, supported by positive sentiments in India (+0.8%) and Vietnam (+2.6%), respectively.
Nigeria: Domestic Economy
According to the July Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), the total transaction value in the domestic equities market increased by 38.7% m/m to NGN491.61 billion in July (June: NGN354.55 billion). The increase was mainly due to a 59.4% m/m increase in domestic transactions to NGN434.09 billion (June: NGN272.36 billion) following increases of 138.5% m/m and 2.4% m/m across institutional and retail investors, respectively.
Meanwhile, foreign transactions declined by 30.2% m/m from NGN82.19 billion in June to NGN57.52 billion in July, reflecting the impact of FX liquidity constraints. In the short to medium term, we expect domestic investors will continue to dominate market performance, even as buying activities will remain constrained by elevated yields in the fixed-income market. Also, FPIs who have exhibited a lacklustre interest for domestic equities are likely to remain on the sidelines due to sustained FX liquidity constraints and elevated interest rates in advanced countries.
According to the CBN’s monthly economic report, the FGN’s retained revenue declined by 0.6% m/m to NGN419.91 billion in April (March: NGN422.23 billion), primarily driven by lower receipt from the foreign exchange gain (-52.3% m/m) despite the significant 1,720.1% m/m increase in inflows from the federation account. On the other hand, aggregate expenditure contracted slightly by 0.1% m/m to NGN1.24 trillion (March: NGN1.25 trillion) due to weaker capital spending (-23.5% y/y).
Consequently, the overall fiscal deficit (NGN824.79 billion vs pro-rated budget: NGN764.91 billion) rose by 0.1% m/m compared to March (NGN823.91 billion), reflecting the sharper decline in retained revenue. We anticipate an underwhelming FGN’s retained revenue in 2024E, given the expected significant shortfall in oil revenue. At the same time, we expect the government to meet its expenditure targets in line with historical precedence amid increased spending on vulnerable groups. Overall, our baseline expectation is that the fiscal deficit will print NGN13.16 trillion (including GOEs and project-tied loans) in 2024E (2023E: NGN9.56 trillion). In addition, we think the FG’s introduction of a supplementary budget of NGN6.20 trillion will cause the fiscal deficit to scale up to NGN19.81 trillion (or 7.5% of GDP) in 2024E.
Capital Markets: Equities
Nigerian stocks closed in the bear territory following bouts of profit-taking activities during the week. Notably, sell pressures on DANGCEM (-10.0%) and TRANSCOHOT (-6.3%) dragged the All-Share index 1.2% lower to 95,973.45 points. Consequently, the Month-to-Date and Year-to-Date returns settled at -1.8% and +28.4%, respectively. Market activity levels were mixed, with total trading volume increasing by 177.1% while the total trading value fell by 21.9% w/w. Across our sectors’ coverage, the Oil and Gas (+3.5%), Banking (+0.4%) and Insurance (+1.9%) indices advanced while the Industrial Goods (-4.9%) and Consumer Goods (-1.4%) indices declined.
In the near term, we believe the absence of a near-term catalyst will likely tilt overall market sentiment toward the negative and drive negative performances consequently. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed-income market.
Money Market and Fixed Income
The overnight (OVN) rate contracted by 681bps w/w to 26.2%, as inflows from FAAC disbursements (NGN926.92 billion), FGN bond coupon payments (NGN359.33 billion) and net NTB repayments (NGN118.94 billion) offset debits for the FGN bond PMA, (NGN374.75 billion), CRR debits (NGN550.31 billion), and other payments (NGN526.25 billion), saturating the financial system. Consequently, deposit money banks (DMBs) deposits at the CBN’s SDF window surged (NGN1.83 trillion), causing the average system liquidity for the week to settle at a net short position of NGN171.94 billion (vs net long position of NGN407.16 billion in the prior week).
Next week, we anticipate the system liquidity will likely remain under pressure as the inflows from OMO maturities (NGN16.00 billion) will be insufficient to support the financial system. Thus, we expect an expansion in the OVN rate.
Treasury Bills
Trading in the Treasury bills secondary market was bullish this week as the average yield across all instruments declined by 197bps to 23.3%. We attribute this week’s performance to participants looking to fill unmet bids from the week’s NTB PMA at the secondary market amid the anticipation of a decline in yields. Across the market segments, the average yield contracted by 263bps to 22.3% at the NTB segment and dipped by 72bps to 25.1% at the OMO segment.
At the NTB auction, the DMO offered bills worth NGN409.98 billion – NGN60.69 billion for the 91-day, NGN66.25 billion for the 182-day and NGN283.04 billion for the 364-day bills. Subscription level settled significantly higher at NGN1.03 trillion (previous auction: NGN486.87 billion), with a bid-to-offer ratio of 2.5x. The auction closed with the DMO allotting instruments worth NGN291.03 billion – NGN41.89 billion for the 91-day, NGN52.00 billion for the 182-day, and NGN197.14 billion for the 364-day papers – at respective stop rates of 18.20% (previous: 18.50%), 19.20% (previous: 19.50%) and 20.90% (previous: 21.89%).
Based on our expectation of a possible liquidity deficit in the coming week, we expect yields in the Treasury bills secondary market to trend higher, as participants in the market look to fulfil their funding needs.
Bonds
Trading in the Treasury bonds secondary market was generally calm, albeit with a bullish tilt as investors utilized coupon inflows to purchase short and mid-dated bonds. Subsequently, the average yield inched lower by 8bps to 19.6%. Across the benchmark curve, the average yield declined at the short (-26bps) and mid (-11bps) segments following demand for the MAR-2025 (-143bps) and JUN-2033 (-28bps) bonds, respectively, but inched higher at the long (+1bp) end due to profit-taking activities on the JUN-2053 (+10bps) bond. At Monday’s PMA, the DMO offered instruments worth NGN190.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 0.4x; Stop rate: 20.30%), 18.50% FGN FEB 2031 (Bid-to-offer: 0.9x; Stop rate: 21.00%) and 19.89% FGN MAY 2033 (Bid-to-offer: 7.4x; Stop rate: 21.50%) bonds. The auction recorded marked subscription from investors – with keen interest on the 9-year bond – as the total subscription level settled at NGN460.18 billion (previous: NGN279.66 billion), with a bid-to-offer ratio of 2.4x (previous: 0.9x). Eventually, the DMO allotted instruments worth NGN374.75 billion across the three tenors, resulting in a bid-to-cover ratio of 1.2x.
We envisage the trading pattern in the Treasury bonds secondary market to remain quiet as investors’ appetite for instruments remains low. This expectation is due to the expected impacts of the (1) subdued liquidity in the system and (2) unattractive yields, especially on mid- to long-dated bonds. Nonetheless, we maintain our medium-term expectation of yields remaining elevated 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 declined for the third consecutive week as the gross reserves level weakened by USD63.50 million w/w to USD36.44 billion (22 August). Elsewhere, the naira achieved its highest single-day appreciation (+3.1%) on 21 August since 22 July, when it gained 6.4%, before closing the week at NGN1570.14/USD (+0.6% w/w) at the Nigerian Autonomous Foreign Exchange Market (NAFEM). Total turnover at the NAFEM (as of 22 August) declined by 16.2% WTD to USD664.29 billion, with trades consummated within the NGN1,470.00/USD – NGN1,603.00/USD band. In the forwards market, the naira rates depreciated across the 1-month (-0.5% to NGN1,623.59/USD) and 6-month (-1.6% to NGN1,782.42/USD) contracts but appreciated across the 3-month (+0.4% to NGN1,681.93/USD) and 1-year (+1.6% to NGN1,972.27/USD) contracts.
Despite the CBN’s FX retail auction, we highlight persistent demand pressures causing the naira to trade with high volatility during the week. In the near term, we anticipate the naira will remain pressured owing to weak supply.
Cordros
