Global Economy
According to the Bureau of Economic Analysis (BEA), the US economy grew by 2.8% q/q in Q2-24 (Q1-24: 1.4% q/q) – above market expectation (2.0% y/y). We understand that the higher growth was supported by increased consumer spending, government expenditures and business investments in the review period. Analyzing the breakdown, consumer spending (+2.3% q/q vs Q1-24: +1.5% q/q) expanded mainly due to robust consumption of goods, while the improvement in government expenditures (+3.1% y/y vs Q1-24: +1.8% y/y) was triggered by increased defense spending. At the same time, gross private domestic investment (+8.4% y/y vs Q1-24: +4.4% y/y) settled higher, led by increased activities across the non-residential and equipment sub-segments.
On a year-on-year basis, the economy grew by 2.9% y/y in Q2-24 (Q1-24: +3.1% y/y). We are optimistic that the economic growth in the United States will remain resilient throughout the rest of 2024FY, especially with the anticipated rate cut in September, which is expected to boost consumer confidence and enhance both residential and non-residential investments. However, we recognize potential downside risks from a slowing labour market, which could affect wage gains and dampen consumption. Overall, the IMF expects the US economy to grow by 2.7% y/y in 2024FY (2023FY: 2.5% y/y).
At the July monetary policy meeting, the People’s Bank of China (PBoC) voted to cut the one-year loan prime rate (LPR) and the 5-year mortgage rate by 10bps each to 3.35% and 3.85% (Previous: 3.45% and 3.95%), respectively. We believe the move signals the bank’s intentions to embark on monetary easing policies to offset the weak growth momentum witnessed in Q2-24 (+4.7% y/y | Q1-24: +5.3% y/y | Q2-23: +6.3% y/y) due to the lingering effect of (1) the property sector crisis, (2) weak household spending, and (3) currency pressure. At the same time, the apex bank slashed the seven-day reverse repo rate to 1.7% (Previous 1.8%), through which it injected CNY235.10 billion into the market to maintain reasonably ample month-end banking system liquidity conditions.
Although we anticipate more concrete fiscal measures to support the ailing economy and boost domestic confidence, we do not foresee a large-scale cut by the apex bank in the short term, given efforts to stabilize long-term yields and keep currency depreciation in check. Thus, we believe the PBoC will “HOLD” the key policy rates at the August monetary policy meeting before possibly implementing another rate cut in September.
Global Equities
The global equities market traded with mixed sentiments as (1) a batch of disappointing corporate results in the United States and Europe, and (2) economic growth concerns in Asia, weighed on sentiments. Consequently, US equities (DJIA: -0.9%; S&P 500: -1.9%) were poised to close the week lower, as of the time of writing, due to negative reactions to underwhelming earnings reports from major tech companies such as Tesla Inc and Alphabet Inc. Conversely, European equities (STOXX Europe: +0.1%; FTSE 100: +1.2%) were headed for modest gains as investors balanced the expectations of Federal Reserve interest rates cuts against continued weakness in tech stocks following disappointing earnings. Asian equities (Nikkei 225: -6.0%; SSE: -3.1%) recorded huge losses, underpinned by a stronger Japanese yen and concerns over China’s economic growth. Finally, the Emerging Markets index (MSCI EM: -1.4%) and Frontier Markets index (MSCI FM: -1.8%) reflected the negative global market sentiment, with losses in China (-3.1%) and Vietnam (-2.0%) contributing to the respective declines.
Nigeria
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to increase the Monetary Policy Rate (MPR) by 50bps to 26.75% (Previous: 26.25%) at the July monetary policy meeting. The Committee’s decision to raise the policy rate was hinged on their goal to ensure price stability, given the persistent increase in inflationary pressures. Notably, the MPC’s interest rate hike is the slowest increase this year, primarily due to an anticipated disinflation trend in the near term.
Additionally, the MPC tightened the asymmetric corridor around the MPR to +500bps/-100bps (Previous: +100bps/-300bps) while holding other parameters constant – the Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 45.0% and 14.0% respectively, and the liquidity ratio at 30.0%. Considering our expectation of a disinflation in the near term, as the price shock from the subsidy removal and the currency devaluation in June 2023 begins to fade, we believe the MPC will lean towards a neutral monetary policy stance in subsequent meetings, choosing to allow the impact of previous rate increases permeate the economy.
At the same time, we think the surge in the government’s borrowing cost following the uptick in fixed income yields will underpin the MPC’s decision to pause its policy rate hikes. Consequently, we expect the MPC to “HOLD” MPR and other parameters constant at their meeting on the 23 and 24 September.
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market contracted marginally by 0.2% m/m to NGN354.55 billion in June (May: NGN355.38 billion). We highlight that foreign investors primarily drove the decline in the review period, with foreign inflows (23.2% of market transactions) dropping by 33.9% m/m to NGN82.19 billion (May: NGN124.28 billion) as investors’ sentiments weakened primarily due to renewed FX liquidity constraints.
Meanwhile, domestic transactions (76.8% of gross transactions) increased by 17.9% m/m to NGN272.36 billion (May: NGN231.10 billion) supported by a 34.7% m/m and 0.4% m/m surge across institutional and retail investors, respectively. While we expect domestic investors to continue contributing the bulk of total transaction value, we think buying activities will be constrained by elevated yields in the fixed-income market following the MPC’s tight monetary policy stance. Also, FPIs who have exhibited a lackluster interest in domestic equities are likely to remain on the sidelines due to sustained FX liquidity challenges and elevated interest rates in advanced countries.
Capital Markets: Equities
Although the local bourse started the week on a slightly positive note, negative sentiments resurfaced during the week as investors reacted negatively to the recent hike in the benchmark interest rate from 26.25% to 26.75%. Particularly, we observed increased sell pressures across industrial goods, consumer goods, and banking stocks, as profit-taking activities in DANGCEM (-10.0%), UBA (-7.9%), FBNH (-4.8%) and DANGSUGAR (-7.3%) triggered a 2.3% w/w decline in the All-Share Index to 98,201.49 points. Consequently, the Month-to-Date and Year-to-Date returns settled at -1.8% and +31.3%, respectively. However, activity levels improved as the total trading volume and value increased by 25.4% and 10.9% w/w, respectively. From a sectoral perspective, losses in the Industrial Goods (-5.9%), Banking (-2.9%), Consumer Goods (-0.7%), Oil and Gas (-0.5%), and Insurance (-0.3%) indices reflected the overall market performance.
While the recent decision of the MPC may further suppress investors’ sentiments in the near term, we anticipate that the ongoing H1-24 earnings season will ultimately guide market’s direction over the short-term.
Money market and Fixed income
The overnight (OVN) rate declined by 536bps w/w to 26.7%, after reaching a peak of 35.5% midweek due to the MPC’s decision to raise the MPR (+50bps) and tighten the asymmetric corridor (+500/-100). We highlight that system liquidity remained healthy as inflows from FAAC disbursements (NGN894.60 billion), FGN bond coupon payments (NGN216.59 billion) and OMO maturities (NGN44.00 billion) dwarfed debits for the FGN bond PMA (NGN225.72 billion) and Remita payments (c. NGN319.00 billion). Accordingly, the average liquidity for the week settled at a net long position of NGN292.31 billion (previous week: net long position of NGN870.92 billion).
Barring any liquidity management measures (OMO auction and/or CRR debits) by the CBN next week, we expect the liquidity in the financial system to remain strong, leading to a likely contraction in the OVN rate.
Treasury Bills
The Treasury bills secondary market sustained the bearish sentiments from last week, as the market repriced yields higher following the 50bps hike in the benchmark interest rate. As a result, the average yield across all instruments expanded by 45bps to 25.1%. Across the market segments, the average yield increased by 34bps to 25.2% in the T-bills segment and rose by 64bps to 25.0% in the OMO segment. At this week’s NTB auction, the DMO offered NGN277.96 billion – NGN16.48 billion for the 91-day, NGN6.44 billion for the 182-day and NGN255.04 billion for the 364-day bills – worth of instruments to investors. Aggregate subscription settled slightly higher at NGN373.95 billion (previous: NGN308.66 billion), with a bid-to-offer of 1.3x. The auction closed with the DMO allotting exactly what was offered at respective stop rates of 18.50% (previous: 16.33%), 19.50% (previous: 17.44%) and 22.10% (previous: 21.24%).
We anticipate that the liquidity surfeit in the system next week will likely drive demand for instruments, causing a decline in yields in the secondary market.
Bonds
Trading in the Treasury bonds secondary market was generally calm, as most players in the space took their bids to the primary market on Monday and largely got filled. Subsequently, the average yield inched higher by 4bps to 19.5%. Across the benchmark curve, the average yield expanded at the short (+5bps), mid (+4bps) and long (+5bps) segments, due to profit-taking activities on the JAN-2026 (+15bps), JUN-2033 (+15bps) and MAR-2050 (+45bps) bonds, respectively. At Monday’s primary market auction, the DMO offered instruments worth NGN300.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 0.2x; Stop rate: 19.89%), 18.50% FGN FEB 2031 (Bid-to-offer: 0.2x; Stop rate: 21.00%) and 19.89% FGN MAY 2033 (Bid-to-offer: 2.4x; Stop rate: 21.98%) bonds. Demand at the auction remained soft as total subscription level settled lower at NGN279.66 billion (previous: NGN305.26 billion), with a bid-to-offer ratio of 0.9x. Eventually, the DMO allotted instruments worth NGN225.71 billion across the three tenors, resulting in a bid-to-cover ratio of 1.2x
Given the demand trend witnessed in the FGN bonds secondary market in the past weeks, we envisage a sustained rise in yields in the near term as investors remain on the sidelines due to the relatively lower yields. While 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, we envisage that we are nearing the peak of yields during the cycle despite the still significant borrowing profile expected over H2-24.
Foreign Exchange
Further accretion was recorded to the country’s FX reserves this week, as the gross reserve level grew by USD424.91 million w/w to USD36.44 billion (25 July). Conversely, the naira fell slightly to NGN1609.29/USD (-0.8% w/w) at the Nigerian Autonomous Foreign Exchange Market (NAFEM), even as the apex bank sold a total of c. USD120.00 million to banks twice within the week. Total turnover at the NAFEM as of 26 July increased by 11.5% WTD to USD1.30 billion, with trades consummated within the NGN1,470.00/USD – NGN1,620.00/USD band. In the forwards market, the naira rates decreased across the 1-month (-1.4% to NGN1,625.74/USD), 3-month (-1.6% to NGN1,679.12/USD), 6-month (-1.5% to NGN1,761.53/USD) and 1-year (-1.0% to NGN1,921.87/USD) contracts.
Although the CBN maintained its intervention in the FX market, it remained insufficient to support the naira, as FX demand continued to outweigh overall supply. In the interim, we expect the naira to remain weak, driven by tight market liquidity due to the CBN’s limited capacity to significantly intervene in the FX market.
Cordros
