Weekly Economic Update (Sept 9th – Sept 13th)

• US inflation continues to decline, approaches Federal Reserve’s 2% target

In August 2024, the US inflation rate dropped to 2.5%, representing a fifth straight month of decline from 2.9% in July 2024. This marks the lowest rate since February 2021, edging closer to the Federal Reserve's target of 2%. The decrease was mainly attributed to falling energy prices, including reductions in gasoline, fuel oil, and natural gas. Furthermore, inflation rates for food and transportation also declined, while prices for both new and used vehicles continued to fall.

Implications

The continued reduction in US inflation strengthens the case for the Federal Reserve to lower interest rates, which have been at 5.25% since July 2023. A rate cut could ease currency pressures on emerging markets like Nigeria by reducing capital outflows and enhancing capital inflows. It would also likely lower borrowing costs in international debt markets, thereby reducing debt burdens for African nations. Furthermore, decreased debt service costs, including mortgages, could boost diaspora remittances to Nigeria, enhancing the purchasing power.

·         Nigeria’s trade surplus widened by 33.63% to ₦6.95 trillion

Nigeria's total merchandise trade reached ₦31.89 trillion in Q4 2024, representing a 3.76% decline from ₦33.14 trillion in Q1 2024, but a remarkable 150.39% increase from ₦12.74 trillion in Q2 2023. Exports made up 60.89% of this total, totaling ₦19.42 trillion, which is a slight rise of 1.31% from ₦19.17 trillion in Q1 2024 and a substantial 201.76% increase from ₦6.44 trillion in Q2 2023. This growth in export value is largely attributed to the depreciation of the Naira, which fell by 13.53% to ₦1,515/$ by the end of Q2 from ₦1,310/$ at the end of Q1. Crude oil represented 74.98% of total export earnings at ₦14.56 trillion, while non-crude oil exports accounted for 25.03% (₦4.86 trillion), and non-oil products made up 9.99% (₦1.94 trillion).

On the import side, total imports were ₦12.47 trillion (39.11% of total trade), down 10.71% from ₦13.97 trillion in Q1 2024 but up 97.93% from ₦6.30 trillion in Q2 2023. This suggests that the persistent currency depreciation is starting to deter imports. The combination of rising exports and falling imports expanded Nigeria's trade surplus to ₦6.95 trillion, a 33.63% increase from ₦5.20 trillion in the first quarter.

Implications

Nigeria's trade surplus is expected to stay positive in the short term, as the high exchange rate discourages imports while promoting exports. However, the downward trend in oil prices may negatively impact export values. A larger trade surplus could enhance investor confidence and bolster gross external reserves, improving the Central Bank of Nigeria's capacity to defend the Naira, which would help stabilize its value.

Market Update

Oil market – Prices fell to almost a 3-year low due to global demand concerns   Oil prices were quite volatile during the review period. It fell below $70 per barrel for the first time in almost three years as the weaker-than-expected growth in China’s imports raises concerns about global oil demand. OPEC has also revised its global oil demand forecast downwards, reflecting weak Chinese demand. The cartel lowered its 2024 and 2025 global demand forecast by 3.79% and 2.25% respectively to 2.03 mbpd and 1.74 mbpd. However, the disruptions caused by Hurricane Francine pushed up oil prices towards the end of the week. On average, oil prices reduced by 3.54% to $71.04 per barrel from $73.65 per barrel the previous week. Outlook

Oil prices are expected to remain bearish as reduced demand expectations from China counterbalance any supply disruptions from Hurricane Francine. Notably, Morgan Stanley has adjusted its Brent crude forecast for the fourth quarter to $75 per barrel, down from the previous $80 per barrel.

Forex Market – Persistent currency pressures as forex supply fails to keep pace with demand

During the review period, currency pressures persisted across market segments as dollar supply failed to keep pace with demand. The Naira weakened to an almost 7-month low of ₦1,660/$ at the parallel market. Similarly, the currency touched a record low of ₦1,649.76/$ at the official window before appreciating to close the week at ₦1,546.41/$.

The gross external reserves continued its steady accretion, gaining 1.32% to close at $36.87 billion on September 12 from $36.39 billion at the end of last week. Outlook

The Naira is expected to maintain a degree of stability in the near term as the Dangote refinery starts supplying petrol to the NNPC, alleviating some pressure on foreign exchange demand.

Money market – Tight liquidity conditions persist Tight liquidity conditions persisted in the banking system as opening positions were negative all through the week. On average, banks’ opening position was ₦405.46 billion short compared to a negative balance of ₦37.69 billion in the previous week. The squeezed system liquidity led to a spike in short-term interbank interest rates to 31.26%, up 389 basis points from 27.37% in the prior week. Outlook

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

Fixed income market

During the review period, the FGN bond secondary market experienced mild bearish pressure, influenced by tight liquidity and sell-offs, particularly affecting the shorter end of the yield curve. This led to a slight increase in the average benchmark yield to 18.49% from 18.44% at the end of the previous week.

There was a primary market treasury bill auction during the week where the CBN rolled over N161.88 billion worth of maturing bills. The auction saw strong demand, resulting in an oversubscription of 347.89%. Despite the high demand, the CBN allocated ₦161.88 billion, leading to an allotment rate of 28.74%. Stop rates for all tenors decreased, with the 91-day, 182-day, and 364-day maturities falling by 37bps, 50bps, and 35bps respectively, closing at 16.63%, 17.00%, and 18.59%.

The secondary treasury bills market experienced varied performance during the week under review. It began with a bullish trend but shifted to a bearish tone following the auction on Thursday due to increased liquidity pressures. As a result, the average benchmark yield rose by 0.89% to close the week at 20.53%, up from 19.64% the previous week.

Outlook

The fixed income market is likely to remain bullish in the near term as the sustained moderation in inflation increases market sentiment of a halt in interest rate hikes and consequently lower yields. However, the possibility of an uptick in inflation in September due to cost pressures from the PMS price hike, could trigger a cautious approach at the MPC meeting next week. Hence, fixed income yields are not likely to drop significantly as market participants continue to monitor these events carefully.

Stock market – Mixed market performance

The performance of the Nigerian stock market was somewhat positive as the market gained in three out of the five trading days. The ASI gained 1.06% to close the week at 97,456.62 points from 96,433.53 points on September 6th. Similarly, market capitalization gained 1.10% to close the week at ₦56.00 trillion from ₦55.39 trillion in the preceding week. The average trading volume increased by 20.67% to N516.81 million from 428.30 million units, while the average trading value was flat at ₦10.24 billion.

Market breadth for the week was positive, with 49 stocks recording gains, 29 stocks experiencing losses, and 61 stocks remaining unchanged. CAVERTON led the gainers with a 59.75% increase, closing at N2.54 per share. RTBRISCOE followed with a gain of 42.02% to close at N3.65 per share, while UPDC rose by 36.92% to close at N1.78 per share. The stocks that performed poorly included LEARNAFRCA (-22.15%), JBERGER (-17.89%), PZ (-17.63%), DAARCOMM (-12.16%), and SOVRENINS (-11.11%). Outlook

We anticipate that the equities market will end the week on a positive note, with buying activity expected to exceed profit-taking. Although macroeconomic developments and corporate actions may spark some moderate buying interest, investors are likely to continue selectively buying and seeking opportunities across various sectors. Additionally, we do not foresee a major shift toward the fixed-income market, as yields seem to be declining.