Weekly Economic Update (Aug 12th – Aug 16th)

Key Developments

·         Mixed inflation trends in advanced economies

Inflation has become a pressing issue globally over the past few years, leading policymakers to implement aggressive monetary tightening. While these significant rate hikes seem to be achieving their intended effects, there are concerns about potential renewed inflationary pressures. Last week, two major economies released their CPI figures for July. In the US, consumer price inflation continued to decrease, reaching 2.9%—the lowest rate since March 2021. In contrast, the UK saw a slight reversal in its downward inflation trend, with the rate rising to 2.2%. Previously, UK inflation had steadily declined, reaching the 2% target, which prompted the Bank of England to lower the policy rate by 25 basis points to 5% at the last meeting, the first rate cut since August 2023.

Implications

The continued decline in US inflation has bolstered the case for the Federal Reserve to consider lowering interest rates, which have remained at 5.25% since July 2023. While the Fed is expected to begin its easing cycle in September, it is likely to proceed cautiously, as inflation is still above the Fed's 2% target. A reduction in US interest rates would alleviate currency pressures in emerging markets like Nigeria by reducing capital outflows. Additionally, the cost of borrowing in international debt markets is likely to decrease, easing the debt burden on African economies.

However, rising inflationary pressures in the UK might lead the Bank of England (BOE) to delay further rate cuts and potentially tighten monetary policy if these pressures persist. Higher UK interest rates would increase the cost of servicing debt owed to the UK government as well as organizations. It will also increase the cost of funds for Nigerians residing in the UK, thus reducing Diaspora remittances to Nigeria, given that the UK is a major source of these remittances.

·         CBN PMI falls by 1.84% to 49.7 points in July

The CBN composite Purchasing Managers’ Index (PMI), which measures the level of economic activities, remained in contraction for the thirteenth consecutive month, though it improved to 49.7 points in July from 48.8 points in June. Notably, three of the sub-indices showed expansion (output level, suppliers’ delivery time, and stock of inventory), while the other two (new orders and employment) continued to contract, albeit at a slower pace than the previous month. On a sectoral basis, the services sector expanded for the second consecutive month to 50.3 points, while the industry (48.3 points) and agricultural (49.7 points) sectors remained in contraction but showed improvement from June.

Implications

We expect a further recovery in the PMI reading in the coming months on the back of relative stability in the exchange rate and a bumper harvest. However, the resurgence in petrol queues and the hike in logistics costs could be a major constraint for suppliers’ delivery time.

·         Nigeria’s oil production rose by 1.46% to 1.39mbpd in July

According to the latest OPEC report, Nigeria's average crude oil production increased by 1.46% to 1.39mbpd in July from 1.37mbpd in June. Despite this improvement output level remains below OPEC's quota of 1.5mbpd. Notably, persistent challenges such as oil theft and pipeline vandalism have continued to significantly limit the country's oil production capacity and supply to local refineries.

Implications

We expect crude production to increase further in the near term as the government intensifies efforts to curtail oil theft and improve investment in the sector.

Market Update

Oil market – Volatile movement due to potential US rate cut, weak Chinese demand and easing geopolitical tensions During the review period, Brent crude prices experienced volatile movements. The week began with prices reaching a three-week high of $82.3 per barrel before declining to end at $79.68 per barrel. Although optimism about a potential US rate cut supported oil prices, concerns over weaker demand in China and easing geopolitical tensions weighed on crude prices. On average, oil prices increased by 3.46%, rising to $80.69 per barrel from $77.99 per barrel in the previous week. Outlook

We expect oil prices to remain volatile due to various factors. While the possibility of a US rate cut in September is likely to support oil prices, the ongoing ceasefire discussions and weak demand from China are expected to limit any significant price increases.

Forex Market – Relative stability due to a boost in dollar sales

The currency recorded relative stability at both the official and parallel markets during the week under review. At the official window, the Naira touched a 4-week high of N1,564.48/$ on August 15, before depreciating slightly to end the week at N1,579.89/$. In the parallel market, the currency fluctuated between N1,580/$ and N1,595/$, compared to the previous week's range of N1,585/$ to N1,600/$. This stability was largely due to an increase in dollar supply, with the average daily forex turnover rising by 15.29% to $160.95 million from $139.60 million the week before. The gross external reserves began to decline after the CBN conducted the retail Dutch auction, falling to $36.53 billion on August 15 from $36.87 on August 7. Outlook

The FGN plans to issue its dollar-denominated domestic bond this week, as it hopes to raise $500 million from local and foreign investors. This is expected to boost dollar inflows, reverse the downward trend in gross external reserves, and ease currency pressures.

Money market – Tight liquidity conditions pushing up short-term interest rates

Liquidity within the banking system declined during the review period. The week began with a short position but shifted to a long position by mid-week due to OMO and primary market repayments. On average, banks’ opening position was N182 billion short compared to a long position of N399.15 billion in the previous week. Consequently, average short-term interbank interest rates increased sharply by 644 basis points to 34.82% from 28.38% in the preceding week. Outlook

The upcoming primary market treasury bills and bond auctions are expected to heighten liquidity pressures this week, potentially driving up interest rates. 

Fixed income market – Bullish sentiment due to lower inflation and reduced bond offer

Bullish sentiments dominated the FGN bond market during the review period, with the average benchmark yield decreasing by 0.16% to close the week at 19.32%, down from 19.48% the previous week. The most notable yield decline occurred in the mid and long segments of the bond curve, influenced by the easing of July inflation and the DMO's cut in bond offerings for the upcoming auction

Similarly, the average benchmark yield across the treasury bills curve experienced a notable decline, dropping by 0.85% to end the week at 25.13% from 25.98% the week before. As system liquidity improved, market participants aimed to secure attractive yields throughout the curve, leading to more pronounced yield drops in the mid-section.

Outlook

We expect the market to shift focus to the primary bond market auction on Monday, with the results expected to influence sentiment and the direction of bond yields. Also, we expect selective buying to persist across the treasury bills curve at the beginning of the week, in anticipation of the primary market auction.

Stock market – Bearish sentiment on profit-taking and selloffs The Nigerian stock market was largely bearish during the review period. The NGX ASI declined all through the week, losing 1.51% to close the week at 97,100.31 points from 98,592.12 points the previous week. Similarly, market capitalization decreased by 1.52% to close the week at N55.13 trillion from N55.98 trillion the previous week. This was due to sell-offs and profit-taking activities. The average trading volume decreased by 24.1% to 406.61 million units from 535.71 million, and the average trading value fell by 13.98% to N8.43 billion from N9.80 billion. Market breadth for the week was negative, with 36 stocks recording gains, 44 stocks experiencing losses, and 59 stocks remaining unchanged. RTBRISCOE led the gainers with a 33.86% increase, closing at N1.70 per share. TOTAL followed with a gain of 19.69% to close at N511.90 per share, while JBERGER rose by 18.18% to close at N130.00 per share. The stocks that performed poorly included CUTIX (-17.50%), BUACEMENT (-14.82%), OANDO (-11.70%), LEARNAFRCA (-10.89%), and CHAMS (-10.22%). Outlook

We expect bearish sentiments to continue to dominate, with investors remaining cautious and showing limited interest in equities. Additionally, developments in the fixed-income market, such as the domestic dollar bonds, FGN Naira bond auction, and primary market treasury bill auction, may further influence investor interest and potentially dampen sentiment in the equities market.