Weekly Economic Update (July 29th – Aug. 2nd)

Economic Update

·         US Fed left interest rates unchanged while BOE cuts rate for the first time in 12 months

At its recently concluded meeting, the US Federal Reserve left its benchmark interest rate unchanged at 5.25%-5.50% for the eighth consecutive meeting due to elevated inflation. Although US inflation has declined consecutively in the last three months, it remains above the Fed’s 2% target (fell to 3% in June). However, the Fed Chair hinted at a potential rate cut in September if inflation shows signs of moderating in the coming months.

Meanwhile, the Bank of England reduced its interest rate by 25 basis points to 5% at its August meeting. This is the first rate cut since August 2023, supported by the ease in inflationary pressures. UK inflation steadied at 2% in June, aligning with the central bank's target of 2.00%. policymakers, however, emphasized that they would adopt a cautious strategy in further easing monetary policy until there is certainty that inflation will stay low.

Implications

The Bank of England's decision to lower interest rates, along with the potential for a rate cut by the Federal Reserve in September, is likely to offer some relief to Central Banks in many emerging economies. This would reduce the risk of capital flight, thereby easing currency pressures.

 

·         NASS passes bill to increase ways and means advances to 10% of FG revenue

The Senate and House of Representatives have passed a bill to amend the CBN Act, increasing ways and means advances threshold to the Federal Government from 5% to 10% of the previous year’s revenue. This facility allows the Central Bank to offer short-term financing to the Federal Government to address budget deficits and other financial needs. 

Notably, the ways and means advances to the Federal government have grown substantially, particularly in the last eight years, climbing to N26.97 trillion in May 2023 and consistently exceeding the 5% of the previous year’s revenue limit. In a bid to regularize, the Senate approved former President Buhari’s request to securitize N22.7 trillion of the ways and means advances with a 40-year tenor, a 3-year moratorium on the principal, and an interest rate of 9%.

Implications

While the ways and means advances will help the government avoid borrowing from the market at higher interest rates and ensure the smooth functioning of government operations without disrupting financial markets, excessive reliance on ways and means advances can lead to inflationary pressures and undermine fiscal discipline.

 

Market Update

Oil market – Bearish price movement as recession fears overshadow Middle East tensions

After eight weeks of trading consistently above $80 per barrel, Brent crude prices fell below this threshold in four out of five trading days during the review period. Oil prices initially declined in the first two days, partly due to demand concerns in China, the world's largest oil importer. However, it rebounded by mid-week as the killing of a Hamas leader in Tehran heightened tensions in the Middle East, coupled with a fifth consecutive week of declining U.S. crude inventories driven by increased summer fuel demand. Despite this, crude prices dropped again, ending the week at a seven-month low of $76.81 per barrel on fears of a potential U.S. recession, following a sharper-than-expected slowdown in job growth and a rise in the unemployment rate to 4.3%, the highest since October 2021. On average, oil prices fell by 3.22% to $79.09 per barrel from $81.72 per barrel in the preceding week.

On August 1st, OPEC and its allies met and agreed to stick to the current oil output policy, including the decision to gradually reduce production cuts from October. The cartel however stated that it would adjust the phase-out based on market conditions. Recall that OPEC is currently reducing output by a total of 5.86 million barrels per day (representing 5.7% of global demand) and agreed at the June meeting to gradually phase out 2.2 million barrels per day within a year, spanning from October 2024 to September 2025.

Outlook

The decision to maintain output cuts will provide some support for prices, especially at a time when the largest importers of oil, China and the United States are showing signs of economic slowdown.

Forex Market – persistent currency pressures due to seasonal demand

After strengthening to N1,055/$ in April and emerging as the best currency in the world, the Naira has faced renewed pressures in recent times due to seasonal demand from summer tourists and importers. During the week under review, the Naira traded within a range of N1,580/$ - N1,595/$ in the parallel market. Meanwhile, at the NAFEM window, it traded above N1,600/$ in four out of the five trading days, closing the week at N1,617.08 /$ from N1,611/$ at the start of the week.

The gross external reserves maintained its upward trend, gaining 0.79% to close at $36.8 billion on July 31, from $36.51 billion at the end of last week. Outlook

In a bid to ease currency pressures and stabilize the FX market, the Central Bank has announced plans to sell dollars at a retail auction this week. The federal government has also announced plans to begin the first issuance of its dollar-denominated security of $500 million in the next 3-4 weeks, aimed to attract foreign currency held by Nigerians abroad. Hence, we expect the Naira to appreciate in the near term.

Money market – Improved liquidity on injection of funds

Liquidity within the banking system improved significantly during the reviewed period, partly supported by the N570 billion funds released by the Federal Government to the 36 states. On average, banks’ opening position climbed by 237.61% to N544.66 billion long from N161.33 billion long the previous week. As a result, average short-term interbank interest rates fell by 342 basis points to 25.68% from 29.10% in the preceding week. Outlook

We expect liquidity position to be influenced by a significant injection/withdrawal from the system. This will in turn impact short-term interbank interest rate movements.

Fixed income market – Continued selloffs despite ample liquidity

Bearish sentiment dominated the FGN bond curve as selloffs continued across the short and mid-segments over the past week, despite ample liquidity. As a result, the average benchmark yield increased by 0.2% to close the week at 19.34%, up from 19.14% the previous week. Significant offers were observed for the 2026, 2027, 2028, 2031, and 2038 maturities throughout the week, though matching bids were limited, leading to wide bid-ask spreads. The upward repricing of bond yields has been influenced by the current economic environment and the recent rate hike by the central bank.

Similarly, there were selloffs across the mid to long segments of the treasury bills curve, driven mainly by offshore investors. Significant offers emerged for NTB maturities in February, March, May, and June, though the bid-ask spreads remained wide as investors demanded higher yields amid abundant liquidity. As a result, the average benchmark yield increased to close the week at 25.27%, up from 24.91% the previous week.

Outlook

We expect the bearish trend to continue this week as investors prepare for the primary market auction on Wednesday, August 7, 2024. The CBN will roll over N216.09 billion worth of maturing treasury bills at the auction.

Stock market - Bearish market sentiment

During the review period, the Nigerian stock market was largely bearish as the market lost in four out of the five trading days. The NGX All-Share Index (ASI) decreased by 0.46%, closing at 97,745.73 points on August 2, down slightly from 98,201.49 points on July 26. Similarly, market capitalization decreased by 0.2% to end the week at N55.50 trillion, compared to N55.61 trillion the previous week. This bearish sentiment is partly due to tight liquidity as investors rebalance their portfolios in favour of fixed-income securities due to high yield. The average trading volume decreased by 4.63% to 678.55 million units from 711.48 million, and the average trading value increased by 10.81% to N10.46 billion from N9.44 billion.

Market breadth for the week was relatively negative, with 37 stocks recording gains, 38 stocks experiencing losses, and 64 stocks remaining unchanged. RTBRISCOE led the gainers with a 25.37% increase, closing at N0.17 per share. OANDO followed with a gain of 24.32% to close at N4.95 per share, while CUSTODIAN rose by 19.61% to close at N2.00 per share.