Global Macroeconomic Review

The common conversation among major economies in February was geared towards interest rate cut and relatively steady consumer prices. However, economic performance have so far been mixed across the region.

In the United States, inflation, as measured by the consumer price index (CPI) eased to 3.10% Y-o-Y, from 3.40% in December 2023, although, surpassing 2.90% estimate. The disinflation was impacted by decline in energy cost, amidst increase in food and shelter cost. In spite of the decline in headline inflation, core CPI remained sticker at 3.90% Y-o-Y (vs 3.90% in Dec’23) and 0.40% M-o-M (vs 0.30% in Dec’23).

Moving on, the US Bureau of Economic Analysis downwardly revised US GDP growth at 3.20% in Q4’2023, from 3.30% reported earlier. The lower reading was mostly due to subtraction in private inventories, while consumer and government spending reported a marginal increase compared to the advanced estimate.

The labour market continued to show strength, with 353k jobs (Est. 180k) added in January and 3.70% unemployment rate (Est. 3.80%). Against the backdrop of these data, the speaking engagement by many Fed’s official points towards an unlikely rate cut in March’s FOMC meeting.

In European Union, the headline inflation eased slightly to 2.80% Y-o-Y (from 2.90% in Dec’23). The decline was supported by lower prices of food, alcohol & tobacco, energy and non-energy industrial goods in the month. Also, the core consumer price index fell to 3.30% Y-o-Y, in line with estimate but lower than 3.40% reported in Dec’’2023. 

The Euro Area economy is at the edge of falling into a recession, given second and final GDP growth rate at 0.00% in Q4’23 from -0.1% in Q3’23.

Unlike the Euro Area, the United Kingdom officially entered a recession, following the pre-liminary GDP growth rate of -0.30% Y-o-Y in Q4’23 from -0.10% Y-o-Y in Q3’23. Although, inflation rate remained unchanged at 4.00% Y-0-Y in January, but slightly lower than 4.20% estimate.

In China, consumer prices declined for the fourth consecutive month at -0.80% Y-o-Y in January (Est. -0.30%). The weak consumer demand was induced by dwindling factory output and a real estate crisis. The People’s Bank of China (PBoC) cut its reference for mortgages, the 5-year loan prime rate, by 25bps to 3.95% at the February fixing, being its first rate cut since June 2023 and the largest since 2019. Meanwhile, the 1-year rate was retained at 3.45% defying market forecast of a 15bps cut.

Domestic Macroeconomic Review

In December, Nigeria’s inflation increased at 28.92% y/y, up from 28.20% in November 2023, contributing an additional 0.72 percentage points and surpassing Bloomberg’s estimate of 28.60%. In addition, Food inflation also increased to 33.93% y/y from 32.84% y/y in November, while core inflation (i.e excluding food and energy items), grew at 23.06% y/y in December, surpassing the 22.38% y/y recorded in November, as reported by the National Bureau of Statistics (NBS).

Outlook: Considering the current economic situation, inflation is not expected to cool in the interim because the key drivers of upward price pressures namely: Import-driven inflation, poor infrastructures, high energy cost, distribution-driven issues partly linked to insecurity and bad road networks have not been properly addressed. However, we continue to assess & reassess the policies targeted to solve the inflation problem and knock-on impacts in that regards.

Foreign Exchange Market –CBN’s initiatives temporarily strengthen Naira; FX supply constraints persist.

During the month, the CBN implemented several circulars and initiatives aimed at providing guidelines to all relevant parties regarding FX operations. These initiatives include harmonizing reporting requirements on Banks’ Foreign Currency exposures, eliminating allowable limits on Exchange rates by Money Transfer Operators, and revising International Money Transfer Service Guidelines in Nigeria. While these actions led to a temporary strengthening of the Naira against the USD in both the official and parallel markets, insufficient supply to meet the existing demand continues to impede progress.

Specifically, the Naira experienced a devaluation of c.0.10% (₦1.50) at the parallel market, closing at $/₦1,517.50, while NAFEM depreciated by 8.75% (₦139.52) to $/₦1,595.11, and NAFEX closed at $/₦1,620.98, marking an 8.69% (₦140.82) depreciation. However, Gross FX reserves increased by c.$320 million to $33.68 billion, driven by elevated crude oil prices, an uptick in oil production, and reforms implemented by the apex bank.

Outlook: We foresee a gradual strengthening of the Naira against the dollar, attributed to the recent measures by the CBN to curb illicit activities among some BDCs and cryptocurrency trading platforms. Additionally, the continued allotment of high-yielding OMO bills by the CBN has attracted a sizable amount of Foreign Portfolio Investors’ flows into Nigeria, further bolstering the Naira.

Money Market Review – Liquidity tightens as CBN’s aggressive measures drive up interest rates.

The OMO auction held at the end of the prior month, amounting to ₦350 billion, set the stage for February with a negative balance of ₦287.27 billion. As the month progressed, the Central Bank of Nigeria (CBN) injected some CRR funds back into the system, temporarily alleviating the liquidity crunch. This injection resulted in a temporary drop in interbank rates to approximately 14.50% -17.00%. However, this relief was short-lived as the debits for the NTB auctions (approximately ₦2.59 trillion) and FGN bond auction (₦1.49 trillion) pushed the market into a deficit balance, which persisted for the major part of the month despite coupon inflows and FAAC credits.

Throughout the month, the CBN maintained an aggressive approach to curbing inflation by mopping up excess liquidity from the system and offering attractive interest rates on naira investments. This stance was underscored in the first MPC meeting of the new administration (the first since July 2023), where significant decisions were made. These included a substantial increase in the benchmark interest rate to 22.75% from 18.75%, adjustments to the asymmetric corridor from +100/-300bps to +100/-700bps, and an increase in the CRR from 32.50% to 45.00%.

Overall, the average system liquidity decreased from ₦56.70 billion to a deficit balance of ₦149.97 billion. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) rose to 19.87% and 20.82%, respectively, compared to the previous month’s figures of 16.49% and 17.56%.

Outlook: We anticipate a sustained tightening in the money market, which is evident from the substantial liquidity mop-ups through the NTB and OMO auctions, alongside CRR debits. The estimated liquidity for the month comprises ₦642.38 billion from OMO and NTB maturities, ₦202.77 billion from Promissory notes, ₦8.24 billion from FGN Sukuk Rentals, and ₦1,107.09 billion from FGN bond maturity and coupons.

Treasury Bills – CBN’s tightening measures through increased auction sales drive surge in yields.

The month began with an intriguing development in the treasury bills market, as the DMO adjusted the initial NTB auction offer from c.₦417.06 billion to a total of ₦1 trillion across the standard tenors. This adjustment aligned with the tightening measures planned by the CBN, as disclosed in the preceding month. The increased auction size instigated bearish sentiments, prompting investors to divest their existing holdings in anticipation of higher yields resulting from the anticipated surge in supply at the auction.

The DMO conducted two NTB auctions, selling a total of around ₦2.59 trillion, with subscription levels reaching about ₦4.22 trillion. Stop rates for the 91, 182, and 364-day papers experienced significant increases compared to the previous month, surpassing the rates observed in the prior month’s OMO auctions, as the DMO aimed to align with the CBN’s efforts to enhance the attractiveness of naira investments for both local and foreign investors.

The month concluded on a relatively bullish note, as modest demand from traditional buyers and foreign investors entered the market, particularly on the long end of the curve, driven by the appealing yields.

Overall, the average mid-yield saw a notable increase of c.833 bps, settling at 18.31% M-o-M.

Outlook: We anticipate a continued rise in government borrowing costs via the NTB window, as the CBN and DMO synchronize interest rate direction to curb inflation, we foresee the CBN maintaining the issuance of OMO bills with elevated yields to incentivize further dollar inflows.

FGN Bond Market – Bearish sentiments prevailed, amid exceptional auction offer and liquidity crunch

The noteworthy event in the FGN bonds market was the DMO’s announcement of an unprecedented total size of ₦2.5 trillion for the February 2024 FGN bond auction, with a specific focus on the 2031 (7-year) and 2034 (10-year) new issues, each valued at ₦1.25 trillion. This unexpected development prompted a repricing of the bond yield curve, resulting in a brief bullish trend at the long end and a bearish trend at the short end and middle of the curve. As the auction date neared, the market exhibited a fully bearish stance, characterized by selling pressure across the entire curve.

During the auction, demand fell short of expectations due to liquidity constraints, resulting in the DMO allotting only ₦1.49 trillion across the two maturities. The 7-year and 10-year papers were closed at record-high rates of 18.50% and 19.00%, respectively.

Following the auction, mixed to bearish sentiments prevailed as limited demand was observed for the newly issued papers. Some investors opted to sell their existing holdings to invest in these high-yielding papers. However, overall market activity was hampered by the liquidity crunch in the system. Consequently, the average mid-yield rose by c.281 basis points, reaching 17.19% M-o-M.

Outlook: We expect a persistent increase in FGN bond yields as the DMO maintains borrowing at heightened rate levels. Nonetheless, we foresee a potential uptick in demand in March, driven by anticipated bond maturity and coupon inflows leading to increased liquidity.

Equities Market Performance in February –  Finding new support and resistance levels

The major catalysts in the month of February that spurred market correction and reshaped the short- and medium-term view of major players were the larger-than-expected FX revaluation losses of the bellwethers, market uncertainty on the outcome of most stocks, particularly on the banking and oil & gas sectors and the tighter monetary measures to curb inflation and address foreign exchange concerns. Overall, the All-Share Index (ASI) declined by 1.16% to 99,980.30 points at the end of February, representing +33.71% year-to-date return and ₦54.71 trillion in market capitalization.   

The month of February began with a bullish reversal, after the selloffs that was triggered by CBN’s circular on bank’s foreign currency exposures. While profit taking were most pronounced on the banking tickers, market maintained a bullish posture, given the bargain hunting on bellwether names like AIRTELAFRI, BUAFOODS, GEREGU, and SEPLAT amongst others.

At the second half of the month, the equity market sharply declined, given mounting selling pressures linked to some abysmal earnings report and the Central Bank decision to tighten the economy further, with 400bps rate hike to 22.75% and increasing CRR to 45.00% from 32.50%.

Profit Taking Rattled Most Sectorial Indices in February.

The Banking and Industrial Indices lost 2.01% and 13.33% respectively, while the Consumer and Oil & Gas Indices increased by 16.45% and 4.14%, respectively. Noticeably, only the banking sector closed the month with a negative year-to-date return.

Outlook: The month of March is expected to be mixed, given bias impact of FX revaluation on the financials of different sectors. While the banking stocks is expected to report net gains on foreign currency-dominated assets and liabilities, other sectors should suffer some losses on net loss.

Eurobonds Market – Nigerian curve witnessed a bullish theme; Egypt papers see an upsurge in prices amid positive triggers

The SSA Eurobond markets saw initial strength as the FOMC held interest rates steadied at 5.50%, sparking bullish activity. In North Africa, particularly in Egypt, an aggressive bullish trend emerged following the IMF’s revision of its financing agreement with Egypt to approximately $8 billion from $3 billion. However, sentiments shifted to bearish following Jerome Powell’s confirmation of three anticipated rate cuts this year.

Market sentiment partly returned to a bullish tone due to favorable policies such as Nigeria’s CBN meeting foreign-currency obligations. Nonetheless, Eurobond markets experienced fluctuations influenced by significant US economic data alongside country-specific concerns.

Thereafter, the hotter-than-expected US CPI data (3.10% vs Est. 2.90%) initially sparked bearish sentiment, later offset by increased buying activity driven by lower-than-expected US Retail Sales data. Particularly strong bullish sentiment was observed in North Africa, notably in Egypt, supported by positive developments including a $35 billion investment agreement between the United Arab Emirates and Egypt for premium land along Egypt’s coast. Additionally, Egypt’s anticipation of a potential $8 billion IMF inflow suggested further strengthening of the Egyptian pound, positively impacting its Eurobonds. Overall, the average mid-yield across Nigerian papers declined by c.33 bps, settling at 9.72% M-o-M.

Other notable information:

• Egypt’s central bank raised interest rates by 200bps to 21.25% (however, in March, they increased the benchmark rate by a significant 600bps to 27.25%), while the Bank of Ghana lowered rates by 100bps to 29%.

• Kenya returned to the global market with a new Eurobond issuance, its first since 2021. The issuance attracted significant investor interest, with orders exceeding $5 billion. Kenya accepted only $1.5 billion of the new seven-year debt, offering a coupon and yield of 9.75% and 10.375%, respectively.

• Benin’s inaugural dollar bond offering was oversubscribed by over six times. The West African nation received $5 billion in demand and sold $750 million of the 14-year instrument at 8.375%.

Outlook: We anticipate a continued bullish trend in March, albeit with a less aggressive momentum, as the Fed appears to have slowed down on the possibility of an early interest rate cut. Ghana is expected to inform its Eurobond holders about the agreed revised debt structuring terms this month. Additionally, we foresee Egypt continuing to experience substantial investor demand, driven by the positive news around the potential inflows from the UAE and the IMF.