Economy & Market

Economic and Market Report: Week Ended 31-01-2025

Global Economy

In line with market expectations, the Federal Open Market Committee (FOMC) at the recently concluded January policy meeting voted to keep the target range for the federal funds rate steady at 4.25% – 4.50% after three consecutive months of easing the key interest rate. Notably, the Committee highlighted that recent indicators point to steady economic expansion, with inflation still elevated, job gains moderating yet remaining strong, and the unemployment rate stabilizing.

Considering the sturdy labour market and persistent inflationary pressures, we expect the Fed to keep rates unchanged in the near term, allowing time to assess the economy’s performance and trajectory more thoroughly, particularly as they begin to consider the potential impacts of significant economic policy shifts under the incoming Trump administration. Indeed, the CME FedWatch tool indicates an 84.0% chance that the Fed will “HOLD” the key interest rate at the 19 March policy meeting.

Meanwhile, the Governing Council of the European Central Bank (ECB) voted to cut their key interest rate at the January monetary policy meeting. Accordingly, the Committee eased the deposit lending facility rates, main refinancing operations and marginal lending facility by 25bps to 2.75%, 2.90%, and 3.15%, respectively (previously: 3.00%, 3.15%, and 3.40%).

This decision underscores the ECB’s commitment to support the fragile economy amid downside risks stemming from a subdued manufacturing sector and weak consumer confidence while inflation hovers around target levels, supporting the case for additional rate cuts. Overall, the council stated that future decisions will follow a data-dependent, and meeting-by-meeting approach to determine the appropriate level and duration of restrictive measures.

While inflationary pressures risk persists, we expect the ECB to continue their rate-cutting trajectory, particularly given the pronounced downside risks to growth. As a result, we anticipate the Committee will implement an additional 25bps rate cut at its March monetary policy meeting, synchronizing neatly with market expectations.

Global Market

The global equities markets were mixed this week as investors digested a wave of corporate earnings reports, policy rate decisions from the US Federal Reserve and the European Central Bank (ECB), GDP data from the US and Eurozone, and escalating tariff threats from the US. Accordingly, US equities (DJIA: +1.0%) were poised to end the week higher as investors shifted from the technology sector to defensive sectors like healthcare and telecoms, reacting to the Federal Reserve’s hawkish pause on rates and mounting concerns over semiconductor stocks.

At the same time, the S&P 500 (-0.5%) faced downward pressure following the launch of DeepSeek’s low-cost Chinese AI model (R1), which rattled market sentiment amid the assessment of earnings from the “Magnificent 7” and a Q4-24 GDP print that fell short of expectations. In contrast, European equities (STOXX Europe: +2.0%, FTSE 100: +2.1%) were on track to end the week positively, driven by the ECB’s decision to cut interest rates alongside dovish signals for further easing to support the hailing Eurozone economy.

Market sentiment was further bolstered by a strong set of corporate earnings updates in the UK. In Asia, Japanese equities (Nikkei 225: -0.9%) settled lower, pressured by losses in chip-related stocks linked to the US AI value chain and the Bank of Japan’s hawkish rate hike. Similarly, Chinese equities (SSE: -0.1%) inched lower in the holiday-shortened week as investors traded cautiously ahead of the unveiling of President Trump’s trade and tariff policy on 01 February. Elsewhere, the Emerging Market (MSCI EM: +0.5%) settled higher, reflecting gains in India (+1.2%), while the Frontier Market (MSCI FM: +0.0%) index closed flat.

Nigeria: Domestic Economy

The Purchasing Manager’s Index (PMI) printed above the 50-point threshold in December after two consecutive months of contraction, indicating an expansion in business activities in Nigeria. According to CBN, the composite PMI expanded to 51.0 points in December (November: 48.9 points), driven by broad-based increases across the industry, agriculture, and service sectors.

Specifically, the agriculture sector PMI (52.7 points vs November: 51.0 points) expanded for the sixth straight month, supported by the ongoing late harvest season, which bolstered farming activities. Furthermore, the Industrial sector (50.0 points vs November: 49.3 points) expanded for the first time since January 2024, albeit to a stationary level, primarily reflecting stronger activities in the primary metal, fabricated metal products and food, beverage & tobacco products subsectors.

On the other hand, the Services sector PMI (52.0 points vs November: 47.4 points) moved back to the expansionary level supported by the Motion pictures & Music production, Wholesale trade and Finance & Insurance sub-sectors. Looking ahead, we expect a further uptick in private sector activities supported by improving macroeconomic conditions, including naira stability and moderating inflationary pressures. Nonetheless, tight financial conditions are likely to pose a downside risk to overall activities in the near term.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse rose to a seventeen-month high, increasing by 52.3% m/m to NGN673.66 billion in December (November: NGN442.34 billion). The performance was primarily driven by the higher participation from both domestic investors (90.1% of gross transactions) and foreign investors (9.9% of gross transactions). On a year-on-year basis, total transactions increased by 56.1% to NGN5.59 trillion (2023FY: NGN3.58 trillion).

Analysing the breakdown, domestic investors inflows surged by 51.2% m/m to NGN606.91 billion (November: NGN401.40 billion) due to increases in collections from institutional and retails investors by 97.1% m/m and 2.8% m/m, respectively. On the other hand, inflows from foreign investors rose after a month of contraction, rising by 63.0% m/m to NGN66.75 billion in December (November: NGN40.94 billion), partly due to the improved market confidence following a more efficient FX market. While we expect domestic investors to continue to contribute the most to total transaction value, we think buying activities will be constrained by elevated yields in the fixed-income market. Also, we expect the stability of the naira to support increased foreign investors’ participation in the equities market.

Capital Markets: Equities

The Nigerian equities market closed the week higher as investors responded positively to a slew of corporate earnings results and dividend declarations. Precisely, gains in NESTLE (+11.4%), STANBIC (+8.2%) and NB (+15.5%) drove the All-Share Index (ASI) higher by 0.9% w/w to 104,536.46 points with the Year-to-Date return settling at +1.6%.  However, trading activity was mixed as the total trading volume advanced by 6.3% w/w, while trading value declined by 8.0% w/w. Sectoral performance was mixed as the Consumer Goods (+4.0%), Banking (+2.5%) and Oil & Gas (+1.0%) indices gained, while the Insurance (-2.9%) and Industrial Goods (-0.5%) indices settled lower.

Looking ahead, market performance is expected to be influenced by the ongoing earnings season, with sentiment likely remaining positive for companies delivering strong earnings and attractive dividends.

Money Market and Fixed Income

The overnight (OVN) rate expanded by 207bps w/w to 29.6% as late system debits on the last trading day and outflows for the FGN bond PMA (NGN601.04 billion) offset the inflows from OMO maturities (NGN317.66 billion). Nonetheless, the average liquidity for the week was strong, settling at a net long position of NGN514.01 billion (vs net short position of NGN23.68 billion in the prior week).

Barring any liquidity management measures by the CBN next week, we expect system liquidity to remain strong, causing the OVN rate to trend lower.

Treasury Bills

The Treasury bills secondary market was bullish this week as the average yield across all instruments declined by 96bps to 25.2%. We attribute this to the surplus liquidity in the financial system at the start of the week, which drove demand for bills. Across the market segments, the average yield decreased by 141bps to 23.4% in the NTB segment and declined by 48bps to 27.6% in the OMO segment.

Given our projection of strong system liquidity next week, we expect this to boost demand for instruments, leading to a decline in yields in the secondary market. Additionally, the DMO is scheduled to hold an NTB PMA next Wednesday (February 5), with NGN955.37 billion worth of maturing bills on offer.

Bonds

Similarly, activities in the bonds secondary market were bullish, driven by investor’s interests in the auction bonds and as traders reduced short positions. Thus, the average yield declined by 3bps to 20.7%. Across the benchmark curve, the average yield declined at the short (-48bps) and mid (-7bps) segments, driven by demand for the MAR-2025 (-148bps) and APR-2032 (-16bps) bonds, respectively, while it expanded at the long (+1bp) end, specifically as investors sold off the JAN-2042 (+16bps) bond.

At Monday’s PMA, the DMO offered instruments worth NGN450.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 0.9x; Stop rate: 21.79%) and 18.50% FGN FEB 2031 (Bid-to-offer: 1.2x; Stop rate: 22.50%) bonds, while opening the JAN-2035 (Bid-to-offer: 2.0x; Stop rate: 22.60%) bond. Total subscription level settled at NGN669.94 billion (previous: 278.82 billion), with a bid-to-offer ratio of 1.5x (previous: 2.3x). Eventually, the DMO allotted instruments worth NGN606.46 billion across the three tenors, resulting in a bid-to-cover ratio of 1.1x.

Next week, we anticipate continued post-auction activity on the auction bonds, particularly the newly issued JAN-2035 bond, given its relatively attractive rate. Also, we reiterate our forecast for a moderation in yields in the medium term driven by the (1) anticipated monetary policy administration and (2) slower borrowing pace by the Federal Government.

Foreign Exchange

The naira strengthened significantly this week, appreciating by 3.8% w/w to NGN1,474.78/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). This was driven by inflows from Foreign Portfolio Investors (FPIs), substantial contributions from International Oil Companies (IOCs), and the CBN’s USD18.40 million intervention to authorised dealers.

On reserves, the country’s FX reserves declined for the fourth consecutive week by USD218.05 million w/w to USD39.77 billion (29 January). In the forwards market, the naira rates increased across the 1-month (+3.8% to NGN1,533.09/USD), 3-month (+3.9% to NGN1,605.02/USD), and 6-month (+4.3% to NGN1,705.97/USD), and 1-year (+2.6% to NGN1,912.21/USD) contracts.

The renewed interest of Foreign Portfolio Investors (FPIs) in the FX market—driven by improved market confidence, a more efficient FX framework, and strengthening macroeconomic conditions—alongside the CBN’s sustained market interventions, is expected to support naira stability in the short term.

Cordros

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