Weekly Economic Update (Oct 7th – Oct 11th)

Economic Update

·         US inflation moderates for the sixth consecutive month (2.4%)

The annual inflation rate in the US fell for the sixth consecutive month, reaching 2.4% in September 2024, down from 2.5% in August. This marks the lowest rate since February 2021, bringing inflation closer to the Fed’s target of 2%. The sustained moderation was largely due to significant decreases in gas prices that offset increases in food and transportation costs.

This positive inflation data follows a largely favorable jobs report, which showed that hiring increased in September and the unemployment rate dropped from 4.2% to 4.1%. Furthermore, the government indicated that the economy expanded at a strong annual rate of 3% in the second quarter, with similar growth likely continuing into the third quarter.

Outlook and implications

We expect a continued decline in inflation over the next few months, driven by lower gas prices and stronger employment figures. This raises the possibility of a rate cut at the upcoming FOMC meeting. However, heightening geopolitical in the Middle East could pose some threats to this outlook, as it is likely to keep oil prices elevated.

A decrease in US interest rates would help relieve currency pressures in emerging markets such as Nigeria by reducing capital outflows. Furthermore, borrowing costs in international debt markets are likely to fall, which would alleviate the debt burden on African economies.

Market Update

Oil market – Volatile movement due to Middle East tensions and storm in the US Brent crude prices experienced significant volatility during the review period, reaching an almost two-month high of $80.93 per barrel on Monday amid concerns about a potential escalation of conflict in the Middle East and possible disruptions to exports. However, prices dropped to $76.58 per barrel by mid-week following news of potential peace efforts in the region and the resumption of oil production in Libya. Prices then rebounded to close the week at $79.04 per barrel as Hurricane Milton approached Florida, raising fears of supply disruptions amid ongoing tensions in the Middle East. Overall, oil prices increased by 4.87%, averaging $78.63 per barrel, up from $74.98 per barrel the previous week. Outlook

Oil prices are likely to stay volatile, primarily driven by tensions in the Middle East and concerns about demand in major oil-producing nations, including the US and China.

Forex Market – Currency depreciation as dollar supply fails to keep pace with demand

Currency movements were quite volatile during the week, with the Naira depreciating to close at ₦1,690/$ in the parallel market, down from ₦1,660/$ at the beginning of the week. A similar pattern was seen at the official window, where the Naira weakened to ₦1,641.27/$ from ₦1,635.15/$ at the start of the week. This decline was partly due to a supply shortfall relative to demand. Average forex sales inched up by 0.30% to $262.56 million, compared to $261.77 million the previous week. Gross external reserves increased to $38.71 billion by the end of the week, up from $38.61 billion at the close of the previous week. Outlook

The Naira is expected to stay within the ₦1,650/$ to ₦1,700/$ range in the near term due to continued high demand for the dollar from manufacturers looking to stock up for festive sales. At the same time, attractive yields in the fixed-income market are likely to enhance foreign portfolio investment (FPI) inflows, contributing to relative stability in the currency.

Money market – Persistent tight liquidity conditions

Market liquidity remained largely tight during the reviewed week, with banks opening in a negative position on four out of five days. Specifically, the week began with a net negative position of -₦681.96 billion. However, liquidity improved by mid-week, with the opening position moving into positive territory, bolstered by OMO repayments of ₦54.45 billion and ₦397.85 billion on Tuesday and Wednesday, respectively. Nevertheless, the opening position slipped back into negative territory, closing the week at -₦702.83 billion. On average, banks' opening positions were ₦634.94 billion short, compared to ₦174.26 billion short the previous week. Consequently, average short-term interbank interest rates rose to 32.42%, up from 30.86% the prior week. Outlook

Interest rates are expected to remain elevated as the market funds for the OMO auction settlement this week.

Fixed income market – Bearish performance persist

The FGN bond market was largely bearish during the week, particularly at the short and long ends of the curve. The average benchmark yield along the curve increased by 0.18% to close the week at 18.65%, up from 18.47% the previous week. Notably, there were offers on the short end, as well as the long end, driven by profit-taking among market participants.  There was a primary market treasury bill auction during the week, where the CBN offered N81.9 billion. The auction was oversubscribed by 333.65%, with total subscriptions reaching N273.28 billion across the three tenors. Ultimately, the CBN allocated the full N81.9 billion. The stop rates for the 91-day and 182-day tenors remained unchanged at 17.00% and 17.50%, respectively, while the stop rate for the one-year bill decreased by 0.14% to 19.864% compared to 20% at the previous auction. In the secondary market, the average benchmark yield on the NTB curve increased by 0.25%, closing the week at 23.07%. Tight liquidity in the system led to selloffs, particularly at the long end of the curve, as investors prepared for upcoming auctions. However, post-auction, yields dipped slightly across the curves as the market adjusted following a small decline in stop rates at the auction.

Outlook

.We expect cautious cherry-picking to continue across the yield curve in the near term. Investors are likely to selectively target specific bonds that offer attractive returns, carefully considering the associated risks and market conditions. This strategy reflects a measured approach as market participants seek to capitalize on opportunities while remaining mindful of potential volatility and uncertainties in the broader economic landscape. As a result, we expect to see targeted interest in certain maturities, driven by individual assessments of value and risk.

Stock market

The stock market ended the week on a positive note, with the NGX ASI increasing slightly by 0.09% to 97,606.63 points on October 11 from 97,520.54 points on October 4. Similarly, market capitalization increased by 0.09%, closing at ₦56.09 trillion from ₦56.04 trillion the previous week. This upward trend was partly fueled by investors positioning themselves to capitalize on interim dividends before the qualification date. Average trading volume declined by 17.03% to 593.23 million units from 715.01 million units, while average trading value decreased by 80.97% to ₦6.31 billion from ₦33.16 billion last week.

Market breadth for the week was negative, with 26 stocks gaining, 50 declining, and 63 remaining unchanged. MECURE topped the gainers list with a 19.53% increase, closing at ₦10.10 per share. UPL followed with a 17.51% gain, closing at ₦2.55 per share, while LASACO rose by 17.39% to close at ₦2.70 per share. The stocks that underperformed included TRIPPLEG, which fell by 59.56%, DAARCOMM with a decline of 25.00%, AFRIPRUD down 13.15%, REGALINS dropping by 12.20%, and TANTALIZER, which also decreased by 10.45%. Outlook We expect the positive momentum in the equities market to persist in the near term, particularly with the listing of ARADEL’s shares on the NGX. Moreover, market activity could pick up as investors position themselves in expectation of the 9M’24 results for certain stocks. However, we may also witness some profit-taking on stocks that have performed well in recent weeks.