Year-End Economic and Market Report

Global economy

The recovery in Chinese factory activity continued in December albeit slower than the prior month, as it marked its tenth consecutive month of positive readings since the relaxation of COVID-19 lockdown measures in March. Data from the National Bureau of Statistics showed that the Manufacturing PMI slowed to 51.9 points (November: 52.1 points), following higher input costs (68.0 points vs. November: 62.6 points) and output charges (58.9 points vs. November: 56.5 points) which outweighed strong export demand (51.3 points vs. November: 51.5 points) during the period. Although the Non-Manufacturing PMI moderated to 55.7 points (November: 56.4 points), it remains supported by strong domestic demand from the government fiscal stimulus. In the interim, we expect activity levels to slow down considering the rekindling of COVID-19 measures by the country’s trade partners to limit the renewed spread of the virus. Additionally, the recent rise in local infections is also expected to place a cap on domestic demand despite stimulus packages. 

According to the U.S. Labour Department, initial jobless claims for the week ended December 25th slowed to 787,000 (vs. 806,000 in the prior week) which is better than consensus expectations of 833,000. We highlight that this is the second consecutive decline since reaching a three-month high of 892,000 in the week ended December 12th. This comes after the USD900.00 billion stimulus packages were passed, thus giving employers a lifeline despite a renewed surge in COVID-19 infections. Although the latest data represents the eighteenth consecutive week new jobless claims were below 1 million, we highlight that it is still well above historical levels and above the peak of 665,000 during the Global Financial Crisis. Meanwhile, continuous claims declined to 5.22 million (Prior week: 5.32 million) but still well above the 1.7 million levels reported back in February. With the fresh USD900.00 billion fiscal stimulus recently signed by the President, and an expected wide administration of the COVID-19 vaccines in the coming weeks, we expect a deceleration in the jobless claims in the coming months.

Global markets

Global stocks were on course for ending the last trading week of 2020 with gains, in what has been a turbulent year.  Investors sentiment was lifted by President Trump’s assent to the USD900 billion stimulus package even as the EU and UK signed the post-Brexit trade deal at the eleventh-hour. Consequently, US (DJIA: +0.7%; S&P: +0.8%) stocks were set to close the week in the green territory. However, in Europe, the STOXX Europe (+0.8%) and FTSE 100 (-0.6%) posted mixed performances, as investors were caught between the euphoria that ushered the signing of the post-Brexit deal and continued surge in case numbers amid the discovery of a new strain of virus. Asian (Nikkei 225: +3.0%; SSE: +2.3%) markets ended the ultimate trading week of 2020 with strong gains, as investors sentiment was buoyed by positive factory production data and news on locally sourced vaccines. Emerging markets stocks (MSCI EM: +2.8%) recorded robust gains driven largely by gains in China (+2.3%) and South Korea (+2.4%) while Frontier (MSCI FM: -0.4%) market stocks were on track to close lower following losses in Kuwait (-0.6%) which outweighed the robust gain in Nigeria (+3.8%).    

Nigerian Economy

In line with our expectation, the Manufacturing PMI slipped back into contractionary territory in December to 49.6 points (November: 50.2 points), the seventh contraction in the last eight months. Similarly, the Non-manufacturing PMI (45.7 points vs. November: 47.6 points) appears to have fallen off a cliff due to the resurgence of a second wave, as it remained in the contractionary zone for the ninth consecutive month. For the manufacturing sector, we observed broad-based declines across the five key indices used in gauging activity level: employment level (-1.0 points to 46.3 points), raw materials inventories (-1.6 points to 46.9 points), supplier delivery time (-1.0 points to 51.2 points), new orders (-0.3 points to 50.2 points) and production level (-0.1 points to 51.6 points). Heading into 2021, we expect further weakening in activity levels as the impact of festive-induced demand begins to dissipate amidst the rising cases of new COVID-19 infections. This, in addition to elevated inflationary pressures and lingering liquidity constraints in the FX market, is expected to stall the recovery process.      

The President during his meeting with the Presidential Economic Advisory Council at the State House reiterated his directive to the CBN not to grant foreign exchange to importers of food items and fertiliser. In the same vein, the President also highlighted that his administration will keep an eye on the rising cost of foodstuff starting from early 2021 to take proactive actions to change the narrative. Food inflation soared to a 34-month high of 18.3% y/y in November due to poor harvest, banditry in the food-producing regions, closure of the land borders and structural problems associated with the agricultural value chain. We believe the inability of food importers to access foreign exchange from official sources will continue to fuel demand for the greenback at the parallel market and limit the gains associated with the partial re-opening of the borders. As such, we think consumers will continue to contend with elevated food prices in the short term.

Capital Markets

In what has been a truly unusual year, the local bourse closed positive in all of the three trading sessions in the last trading week of 2020. The All-Share Index rose above the 40,000 psychological mark for the first time since 23 May 2018, closing at 40,270.72 points. Activity level was however weak, partly reflective of the shortened trading week, as volume and value declined by 34.5% w/w and 35.6% w/w respectively. Notably, investors’ buying interest in BUACEMENT (+28.9%), MTNN (+6.2%), UBA (+2.4%), and ZENITH (+1.2%) drove the benchmark index 3.8% higher. Accordingly, MTD return rose to 14.9% while the YTD return for index closed the year at 50.0%, which outperformed the 42.3% gain recorded in 2017. Performance across sectors was broadly positive. Save for the Banking (-0.6%) and Consumer Goods (-0.5%) indices that closed in the red, the Industrial (+10.4%), Insurance (+1.7%), Oil and Gas (+0.2%), and indices closed in the green.                        

In the first trading week of the new year, we expect the bulls to retain their dominance as buying activities due to positioning for FY 2020 dividends will likely suppress selling activities. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

The overnight (OVN) rate expanded slightly by 25bps w/w, to 0.8%, as outflows for CBN’s weekly auctions and CRR debits outweighed inflows from OMO maturities (NGN431.18 billion) and FX retail refunds.

In the coming week, we expect the OVN rate to contract, as inflow from OMO maturities (NGN411.04 billion) hits the system.

Treasury bills

The Treasury bills secondary market continued to trade with bearish sentiments through the week, following the sluggish momentum in the market despite the liquidity influx in the system. Thus, average yield across all instruments expanded by 6bps to 0.5%. Across the segments, average yield expanded by 3bps and 8bps to 0.6% and 0.5% at the OMO and NTB secondary markets, respectively. At this week’s NTB PMA, the CBN rolled over maturing bills worth NGN74.84 billion with allotments of NGN10.00 billion of the 91-day, NGN20.00 billion of the 182-day and NGN44.84 billion of the 364-day – at respective stop rates of 0.0350% (previously 0.0480%), 0.5000% (previously 0.5000%), and 1.2100% (previously 1.1390%).

In the coming week, we still expect activities in the T-bills secondary market to remain quiet, following the relative unattractiveness of instruments in the space.


Bearish sentiments prevailed in the Treasury bonds secondary market, as investors sustained profit-taking for year-end activities. Consequently, the average yield expanded by 21bps to 6.1%. Across the benchmark curve, average yield expanded at the short (+26bps) and mid (+62bps) segments, due to sell-offs of the JAN-2026 (+113bps) and MAR-2027 (+91bps) bonds, respectively. Conversely, average yield contracted at the long (-29bps) end, following buying interest in the MAR-2050 (-93bps) bond.

We expect the bearish sentiments in the FGN bonds secondary market to be sustained, as investors continue to reprice yields given stretched valuations.

Foreign exchange

Nigeria’s FX reserves grew slightly this week, despite the CBN’s interventions across the various foreign exchange windows. Precisely, reserves grew by USD377.97 million w/w to USD35.36 billion. Across the FX windows, the naira weakened against the US dollar by 4.5% w/w, to NGN410.25/USD at the I&E window, and by 1.1% to NGN470.00/USD in the parallel market. In the Forwards market, the rates on 1-month (-4.9% to NGN418.50/USD), 3-month (-5.5% to NGN428.25/USD), 6-month (-6.9% to NGN445.83/USD) and 1-year (-8.8% to NGN477.56/USD) contracts all weakened.

Given the expected pressure on the external reserves amid weak portfolio inflows, we expect the naira to depreciate closer to its fair value implied by long-run REER (NGN453.67) in the medium term. Our baseline expectation is that the CBN will depreciate the naira by 5.3% to NGN400/USD in the interbank market and 5.1% to NGN415/USD at the IEW.