Global Economy
According to the recently released data from Eurostat, headline inflation in the Euro area printed below market expectation (+2.6% y/y), moderating by 20bps to 2.4% y/y in March (February: +2.6% y/y). Parsing through the breakdown provided, we note that prices moderated across the food, alcohol & tobacco (+2.7% y/y vs February: +3.9% y/y), and non-energy industrial goods (+1.1% y/y vs February: +1.6% y/y) items, while energy costs (-1.8% y/y vs March: -3.7% y/y) remained in the negative territory, although with a soft pace of decline in the review period. Meanwhile, on a month-on-month basis, consumer prices rose for the second consecutive month to settle at 0.8% in March (February: +0.6% m/m) – the highest print since March 2023 (+0.9% m/m). We expect consumer prices to moderate over the short term, primarily due to the favourable statistical base effects in the corresponding periods of the prior year. That said, we highlight that the recent surge in crude oil prices and wage increases pose a downside risk to our expectations. Thus, we expect the European Central Bank (ECB) to maintain a ‘HOLD’ stance at its next meeting in April, with the possibility of considering its first rate cut during the June policy meeting.
In the United States (US), private sector activity softened amidst lingering cost pressure in March. According to the flash estimates from S&P Global, the US Services PMI settled at 51.7 points in March (February: 52.3 points), while the Manufacturing PMI moderated to 51.9 points (February: 52.2 points). We understand that price pressures and weak external demand weighed down business activity. However, it remained above the 50-point psychological benchmark for the fourteenth consecutive month, signaling evidence of robust activity despite the prolonged period of high interest rates from the US Fed. Similarly, factory activity was impacted by rising labour costs and higher energy prices, albeit it remained resilient for the third consecutive month. Overall, the Composite PMI settled at 52.2 points (February: 52.5 points), reflecting a weakened expansion rate across private sector firms. We expect overall private business activity in the US to remain in expansionary territory over the short term, supported by improved business confidence, amid signs of pick-up in the broader economy. Nonetheless, we think the higher living costs arising from elevated energy prices will pose a downside risk to our expectations.
Global Equities
Global equities were broadly negative this week as a combination of factors including (1) escalating tensions in the Middle East, (2) rising oil prices, and (3) comments from US Federal Reserve officials indicating a reluctance to cut rates until further confirmation of declining inflation, dampened sentiments. Consequently, US equities (DJIA: -3.0%; S&P 500: -2.0%) were poised to end the week lower as investors scaled back expectations of a rate cut in the upcoming June meeting. European equities (STOXX Europe: -1.4%; FTSE 100: -0.6%) were set for a weekly loss driven by the hawkish remarks from some US Fed officials and heightened tensions in the Middle East. In Asia, the Chinese market (SSE: +0.9%) saw gains as a rebound in the manufacturing sector spurred optimism about the nation’s economic recovery. Conversely, the Japanese market (Nikkei 225: -3.4%) declined due to concerns of a strengthened yen hurting exports, rising Middle East tensions, and negative sentiments on Wall Street. Finally, Emerging Markets index (MSCI EM: +0.5%) closed higher driven by gains in China (+0.9%), while the Frontier Markets index (MSCI FM: +0.2%) recorded a marginal gain following bullish sentiments in Romania (+0.6%).
Nigeria: Domestic Economy
Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) increased by 41.7% m/m to USD3.75 billion in March (February: USD2.64 billion) – the highest level since March 2019 (USD6.07 billion). We attribute the outturn to the higher inflows across local (59.0% of total transactions) and foreign sources (41.0% of gross transactions). Analyzing the breakdown, inflows from local sources increased by 43.2% m/m to USD2.21 billion in March (February: USD1.54 billion) driven by higher accretions from Individuals (+405.8% m/m), Non-Bank Corporates (+157.7% m/m), and Exporters (+14.6% m/m) segments, while inflow from the CBN (-65.7% m/m) declined. Simultaneously, collections from foreign sources surged by 39.6% m/m to USD1.54 billion (February: USD1.10 billion), representing a 50-month high as foreign investors reacted positively to the recent CBN initiatives and increased FX interventions aimed at ensuring liquidity and stability within the FX Market. Overall, total inflows into the NAFEM window averaged USD2.47 billion in Q1-24 (Q4-23: USD1.34 billion | Q1-23: USD1.09 billion). In the near term, we anticipate improvement in FX liquidity conditions, although still weak relative to historical standards. We acknowledge that the increased CBN interventions have (1) bolstered investors’ confidence, (2) reduced speculative activities and market distortions, and (3) improved liquidity in the FX market. As a result, we anticipate sustained improvement in foreign participation over the short term.
According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 93.7% y/y to NGN80.86 trillion in February (February 2023: NGN41.75 trillion). We attribute the sustained CPS growth to the dual impact of (1) CBN’s enforcement of the 65.0% loan-to-deposit ratio and (2) the depreciation of the local currency. On a month-on-month basis, the CPS increased by 6.0% in February (January: +22.0% m/m to NGN76.29 trillion). That said, the broad money supply grew by 77.6% y/y to NGN93.97 trillion, mirroring the increases observed in narrow money supply (+44.5% y/y) and quasi money (+99.3% y/y). Over the short to medium term, we expect the impact of the naira depreciation on the CPS to dissipate primarily due to the prospect of a stable naira over the short to medium term and CBN’s limit on Bank’s Net Open Position in Foreign Assets. On the other hand, we expect that the re-enforcement of CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) will drive the willingness of commercial banks to create risk assets in the short term. On the balance of factors, we expect the growth of Credit to Private Sector (CPS) to remain in double digits in the short term, before shrinking to single digits in the medium term.
Capital Markets: Equities
The domestic equities market recorded its third consecutive weekly loss as investors contended with the potential implications of the recently announced bank recapitalization plans by the Central Bank of Nigeria (CBN). Notably, significant selling pressure was evident across tier-1 banking stocks, with FBNH (-14.2%), GTCO (-8.6%), ACCESSCORP (-7.8%), and ZENITHBANK (-4.5%) recording declines. Furthermore, profit-taking activities in MTNN (-2.2%), contributed to the overall market downturn. Consequently, the All-Share index declined by 1.1% w/w, leading to a moderation in the Year-to-Date return to +38.3%. Despite the overall market decline, activity levels surged, with the total traded volume and value increasing by 104.0% w/w and 11.2% w/w, respectively. Reflecting the prevailing market sentiments, the Banking (-6.7%) index recorded the most substantial loss, followed by the Insurance (-0.9%) and Industrial Goods (-0.3%) indices. Conversely, the Consumer Goods (+0.9%) index advanced, while the Oil and Gas index closed flat.
We expect to see more of a choppy trading pattern in the week ahead as cautious trading dominates trading activities. In the short-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 521bps w/w to 23.0%, despite the debits for the CBN’s OMO auction (NGN676.65 billion). Nevertheless, the average system liquidity settled lower at a net long position of NGN467.73 billion (vs a net long position of NGN770.32 billion in the previous week).
We envisage pressure on the system liquidity next week following a possible net NTB issuance at the Wednesday PMA, amid no significant inflow into the financial system. Thus, we believe the OVN rate will likely head northwards.
Treasury bills
The Treasury bills secondary market closed on a bearish note this week, as the average yield across all instruments expanded by 91bps to 18.9%. We attribute this week’s performance to the liquidity dearth occasioned by players’ funding for the OMO auction held on Wednesday. Across the segments, the average yield increased by 125bps to 18.9% in the NTB secondary market but declined by 8bps to 18.4% in the OMO segment. At the OMO auction, the CBN offered NGN500.00 billion – NGN75.00 billion of the 95-day, NGN75.00 billion of the 179-day, and NGN350.00 billion of the 361-day – in bills. The total subscription level settled at NGN1.20 trillion (bid-to-offer: 2.4x) with more interest on the longer-dated bills (NGN1.16 trillion translating to 96.9% of the total subscription). The auction closed with the CBN allotting NGN649.65 billion – NGN17.00 billion of the 95-day, NGN7.25 billion of the 179-day, and NGN652.40 billion of the 361-day instruments – at respective stop rates of 19.00% (unchanged), 19.50% (unchanged), and 21.13% (previously 21.50%).
Considering our expectation of tight liquidity conditions next week, we anticipate a further increase in yields in the T-bills secondary market. In addition, the CBN is scheduled to hold an NTB PMA on Wednesday (10 April) with NGN149.64 billion worth of maturities on offer.
Bonds
Trading in the FGN bonds secondary market turned bullish this week, as investors showed interest in short- and mid-dated instruments. As a result, the average yield contracted by 10bps to 19.3%. Across the benchmark curve, the average yield declined at the short (-12bps) and mid (-36bps) segments due to demand for the MAR-2027 (-78bps) and FEB-2031 (-67bps) bonds, respectively. Meanwhile, the average yield was flat at the long end.
Sequel to the release of the Q2-24 bond auction calendar by the DMO, we expect players to reshuffle their portfolios in anticipation of the upcoming PMA where increased supply into the market is expected. Notwithstanding, we maintain our short-term view 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.
Foreign Exchange
This week, Nigeria’s FX reserves decreased by USD317.95 million w/w to USD33.51 billion (03 April). Meanwhile, the naira appreciated by 4.7% to NGN1,251.05/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), even as total turnover at the window (as of 04 April 2024) decreased by 70.7% WTD to USD633.65 million, with trades consummated within the NGN1,200.00 – NGN1,312.00/USD band. In the Forwards market, the naira rates appreciated across the 1-month (+4.4% to NGN1,277.79/USD), 3-month (+5.5% to NGN1,302.91/USD), 6-month (+5.7% to NGN1,360.09/USD) and 1-year (+4.2% to NGN1,479.02/USD) contracts.
We acknowledge the CBN’s continuous efforts in the FX market to stabilise the naira, reflected in the (1) sustained sale of US dollars to eligible BDCs and (2) maintenance of high yields on naira-denominated assets to support FPI inflows. Whilst CBN’s intervention in the FX market is poised to remain frail in the near term given its low FX reserves, we expect the naira to remain stable in the short term, supported by tighter monetary policy conditions and improved FX liquidity.
Cordros
