Weekly Economic Update (Sept 2nd – Sept 6th)

• CBN PMI returns to the expansion territory in August (50.2 points)

In August, Nigeria’s composite Purchasing Managers’ Index (PMI), as reported by the Central Bank of Nigeria, moved back into expansion territory after 13 months of contraction. The index increased by 1.01%, reaching 50.2 points, up from 49.7 points in July.

Among the five sub-indices, only the employment sub-index remained in the negative territory at 48.7 points, reflecting the delayed impact of economic expansion on employment levels. The new orders sub-index saw the largest improvement, rising to 50.5 points from 48.8 points. This was followed by increases in the stock of raw materials to 51.3 points from 50.7 points and output to 50.8 points from 50.3 points. These gains are partly attributed to the anticipated improvement in consumer confidence and purchasing power, driven by the minimum wage increase and a decline in inflation. However, the rise in PMS prices and the resulting increase in transport and logistics costs could pose risks to aggregate demand and affect suppliers' delivery times. Sector-wise, the services sector continued its expansion for the third consecutive month, rising to 50.7 points from 50.3 points in July. The agricultural sector also showed expansion for the first time, increasing to 50.5 points from 49.7 points in July. Conversely, the industry sector remained in contraction, though it improved slightly to 49.2 points from 48.3 points in July Outlook The PMI reading is expected to stay near the borderline in the upcoming month due to the varied effects of recent economic events across different sub-sectors. The harvest season is likely to sustain positive conditions in the agricultural sector, while increased logistics costs may adversely impact suppliers' delivery times. Additionally, while the minimum wage increase is expected to boost new orders, stock of raw materials, and output, these gains might be countered by the recent rise in transport and logistics costs.

Market Update

Oil market – Bearish movement amid demand concerns During the review period, oil prices experienced a generally bearish trend due to concerns over demand in China, the world's largest importer. On average, Brent crude prices fell by 7.56%, dropping to $73.65 per barrel from $79.67 per barrel the previous week. Outlook Oil prices are expected to remain bearish as weaker demand projections from China offset any supply disruptions caused by the Gulf storm. The US Coast Guard has mandated the suspension of operations at Brownsville and other smaller Texas ports due to Tropical Storm Francine traversing the Gulf of Mexico, although Corpus Christi port remains operational with some restrictions. Additionally, the Organization of the Petroleum Exporting Countries (OPEC) has revised its 2024 global oil demand growth forecast downward to 2.03 million barrels per day, from the earlier estimate of 2.11 million barrels per day.

Forex Market – Renewed pressures as the CBN reduces market interventions The forex market faced renewed pressures this week, with the Naira ending the week at a six-month low of N1,645/$ in the parallel market, down from N1,635/$ at the beginning of the week. At the NAFEM window, the currency weakened to a six-month low of N1,639.41/$ on September 5, before recovering to close the week at N1,593.32/$. This recovery was partly due to the CBN’s sale of $20,000 to each authorized BDC at N1,580/$. The renewed pressure in the forex market can be attributed to an imbalance between the demand for and supply of dollars, as forex supply struggled to meet the rising demand. It appears that the central bank has reduced its market interventions, as evidenced by a gradual rise in external reserves. The increase in reserves might also have been supported by recently issued dollar bonds. The gross external reserves reversed their previous decline, growing by 0.22% to $36.39 billion from $36.31 billion at the end of the prior week. Outlook We anticipate that currency pressures will continue in the short term until there is a substantial influx of dollars.

Money market – Tight liquidity due to the funding for the OMO and treasury bill auctions The banking system experienced tight liquidity during the review period, with negative opening positions on four out of five trading days. This situation was primarily driven by the combined effects of the Open Market Operations (OMO) and Nigerian Treasury Bills (NTB) auctions. On average, banks’ opening position was N37.69 billion short compared to a long position of N630.55 billion in the previous week. The resulting impact of this was a sharp spike in short-term interbank interest rates to 27.37% from 22.74% in the prior week. Outlook

We expect liquidity to be influenced by major injections or withdrawals from the system.

Fixed income market – Positive trend as markets adjust to the recent NTB primary auction

The FGN bond market remained positive during the review period, with the average benchmark yield decreasing by 0.22% to end the week at 18.44%. Investors demonstrated strong interest in appealing yields across various maturities, with notable demand for short- and mid-term bonds.

During the week, a primary market treasury bill auction was conducted with total subscriptions of N1.13 trillion, reflecting a significant oversubscription rate of 484.08%. The CBN allocated the full N233.31 billion across different tenors. Notably, stop rates saw significant declines of 1.20%, 1.70%, and 1.96% for the 91-day, 182-day, and 364-day tenors, respectively, settling at 17.00%, 17.50%, and 18.94%.

The secondary market for treasury bills also displayed a positive trend, supported by the NTB primary auction results, which showed decreasing stop rates across all maturities. Consequently, the average benchmark yield dropped by 1.81%, closing the week at 19.84%, down from 21.45% the previous week.

Outlook

We anticipate that the positive momentum will persist in the near term, with a period of stability as investors prepare for the mid-week primary market auction. During this auction, the central bank is expected to roll over N161.88 billion in maturing Treasury bills. Additionally, we foresee bond yields decreasing as the market adjusts to the lower rates established in the recent NTB primary market auction.

Stock market – Mixed market performance The Nigerian local bourse recorded mixed market performance as the NGX ASI gained in three in three days and lost in two days. On a week-on-week basis, the ASI lost 0.15% to close at 96433.53 points on September 6th from 96,579.54 points on August 30th. Similarly, market capitalization lost 0.16% to close the week at N55.39 trillion from N55.48 trillion in the preceding week. The average trading volume decreased by 24.09% to 428.30 million units from 564.24 million units, while the average trading value fell by 3.49% to N10.24 billion from N10.61 billion. Market breadth for the week was negative, with 35 stocks recording gains, 41 stocks experiencing losses, and 63 stocks remaining unchanged. BERGER led the gainers with a 31.12% increase, closing at N18.75 per share. ETRANZACT followed with a gain of 20.59% to close at N6.15 per share, while UACN rose by 19.77% to close at N20.90 per share. The stocks that performed poorly included RTBRISCOE (-27.61%), FTNCOCOA (-18.38%), OMATEK (-18.18%), NSLTECH (-10.61%), and ABBEYBDS (-9.96%). Outlook We expect a positive outlook for the equities market in the short term, with buying interest likely to exceed profit-taking activities. Additionally, declining yields in the fixed-income market are expected to renew interest in equities.