Weekly Economic Update (Sept 16th – Sept 20th)

• US Fed Reserve slashes funds rate by 50bps, first rate cut since March 2020

At its recent meeting, the Federal Reserve cut the target range for the federal funds rate by 50 basis points to 4.75%-5%, marking its first interest rate reduction since March 2020. Although this decision was widely anticipated, most analysts had projected a more conservative 25 basis point cut. The decision to lower interest rates was driven by signs of easing inflation and a weakening labor market. Notably, inflation in the U.S. slowed for the fifth consecutive month to 2.5% in August 2024, the lowest level since February 2021, edging closer to the Fed's 2% target. Interestingly, the committee expressed increased confidence that inflation is on a sustainable path toward this target and projected a total of 100 basis points of easing by the end of the year, suggesting an additional 50 basis point cuts this year. For 2025, a 100 basis points cut is expected, with a final 50 basis point reduction anticipated for 2026.

Implications

Lower interest rates in the U.S. and other advanced economies will be beneficial for emerging markets like Nigeria. First, as the cost of funds decreases in international capital markets, the cost of servicing external debts will also drop, alleviating the financial burden on the government and freeing up resources for capital investments. Second, reduced interest rates in developed countries may encourage yield-seeking portfolio investors to look for opportunities in emerging markets with higher yields, leading to increased dollar inflows and less pressure on local currencies. Additionally, the rate cuts by central banks in advanced economies are expected to result in lower mortgage and credit costs, enhancing the ability of Nigerians living abroad to send money back home, thereby boosting remittances.

 

Market Update

Oil market – Prices surge as Fed’s rate cut signals a potential boost in oil demand Oil prices were bullish during the review period. It traded above $72 per barrel throughout the week, averaging $73.89 per barrel, up 4.01% from $71.04 per barrel in the preceding week. This bullish sentiment was bolstered by the U.S. Federal Reserve’s aggressive rate cut, which signals a potential boost in oil demand. The escalating geopolitical tensions between Israel and Hezbollah and a significant drawdown in U.S. crude stockpiles also lent some support to oil prices. However, concerns over weak demand from China remain a limiting factor, creating mixed sentiment in the market. Outlook

We expect oil prices to remain elevated as the Fed’s commitment to rate cuts signals a boost in demand. This would be further supported by an escalation in the Middle East tensions. However, weak demand in China, a major oil importer would slow the pace of oil price increases.

  Forex Market – Naira relatively stable amid a gradual boost in FX turnover

The Naira was relatively stable in the parallel market during the review period, trading within a tight band of ₦1,640/$ - ₦1,650/$. At the official window, the currency appreciated to close the week at ₦1,541.52/$ from ₦1,656.49/$ at the start of the week. This was supported by a boost in forex turnover at the official window. Daily forex turnover at the I & E window rose to $190.57 million on Friday from $100.39 million on Tuesday. The gross external reserves increased further to $37.39 billion on September 19 from $36.94 billion on September 13. Outlook

The Naira is expected to remain stable as capital flight stems owing to the interest rates cut in the US. The sale of crude oil to Dangote in Naira is also expected to ease forex demand pressures and enhance Naira stability.

  Money market – Tight liquidity conditions persist Liquidity within the banking system remained tight despite the primary market repayments. The opening position of banks was negative throughout the week, averaging -₦331.15 billion compared to -₦405.46 billion in the previous week. This reduction in the net negative opening position led to a drop in the short-term interbank interest rates to 30.91% from 31.26% in the prior week. Outlook

Liquidity squeeze in the banking system is expected to continue in the near term pending a significant injection of funds into the market.

Fixed income market

The secondary FGN bond market activity was predominantly positive, with the average benchmark yield falling by 0.04% to close the week at 18.45%, down from 18.49% the previous week. Early in the week, there were slight bearish trends as yields improved in the short and mid-range segments. However, after the DMO released the September auction circular on Wednesday, yields across the curve dropped owing to increased demand.

The Treasury bills segment displayed mixed sentiments over the past week, leaning towards a bearish bias as the average benchmark yield increased by 0.27% to close the week at 20.80%, up from 20.53% the previous week. Yields declined slightly at the short end of the curve but rose across the mid and long sections, with notable selloffs observed in the February, March, and May maturities.

Outlook

In the bonds market, we expect a calm session at the beginning of the week as the market prepares for the upcoming primary market auction. The results from this auction and the subsequent MPC meeting on Tuesday are likely to impact yield trends and overall market sentiment in the near term. Cautious sentiments are also expected in the treasury bill market at the start of the week as attention shifts to the FGN bond primary market auction and the MPC meeting ahead of the NTB-PMA on Wednesday.

Stock market – Bullish market sentiment   The stock market had a positive performance, with gains in three of the four trading days. The ASI rose by 0.81%, finishing the week at 98,247.99 points, up from 97,456.62 points on September 13th. Likewise, market capitalization increased by 0.61%, closing at ₦56.34 trillion, compared to ₦56.00 trillion the previous week. This bullish sentiment was partly fueled by the release of corporate results, which indicated strong performance. The average trading volume declined by 10.03% to 464.98 million units from 516.81 million units, while the average trading value fell by 6.15% to ₦9.61 trillion from ₦10.24 billion last week.

Market breadth for the week was positive, with 37 stocks recording gains, 39 stocks experiencing losses, and 63 stocks remaining unchanged. CAVERTON led the gainers with a 45.28% increase, closing at ₦3.69 per share. FIDELITYBK followed with a gain of 24.20% to close at ₦13.60 per share, while FIDSON rose by 21.76% to close at ₦15.95 per share. The stocks that performed poorly included NNFM (-18.97%), MECURE (-18.18%), TANTALIZER (-14.08%), RTBRISCOE (-12.88%), and NIDF (-9.93%). Outlook

We anticipate a positive outlook for the equities market this week, as investors are likely to direct funds toward stocks currently deemed attractive. In addition, the MPC is scheduled to meet on September 23rd and 24th. Expectations are that the committee would most likely maintain the status quo on all monetary parameters as inflation declined for the second consecutive month. This could lead to a further decline in fixed-income yields, making the equities market attractive.