At the end of its second meeting of the year, the US Federal Open Market Committee (FOMC) elected to keep the key policy rate steady within the band of 0.0% and 0.25% for the ninth consecutive meeting. The Committee further stated that the Federal Reserve would continue to increase its asset purchase programme by at least USD120.00 billion per month until substantial further progress has been made towards the FOMC’s twin goals of maximum employment and price stability. We note that the Committee’s dovish tone is unchanged from its last three policy meetings. We think this may be connected to the fact that the sectors most adversely affected by the pandemic remain weak amid the slowdown in economic recovery. That said, we expect inflation to rise above 2.0% in the near term, given the low base in the prior year, albeit we do not think it will be prolonged. Consequently, we do not see a change in the monetary policy decisions of the FOMC in 2021.

Similarly, the Bank of England’s Monetary Policy Committee (MPC) unanimously elected to (1) keep the bank rate steady at 0.1% and (2) maintain the stock of its bond-buying programme at GBP895.00 billion. It further cited that its current monetary policy stance remains appropriate amid the broadly unchanged UK financial conditions since February. The Committee also hinted that it would revise its current short term growth forecasts in light of the better-than-expected decline in UK GDP in January. We understand that the Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made to eliminate spare capacity and sustainably achieve the 2.0% inflation target. We note that the Committee struck a dovish tone than market participants anticipated. Given the slacks in the labour market and the benign inflation outlook, we expect the Committee to maintain a status-quo throughout the year.

Global markets

Global stocks posted mixed performances as investors’ positive reaction to the dovish outcome of the US Fed meeting was deflated by the rise in US bonds yields and fresh concerns around Sino-US relations following a rocky meeting in Alaska. In the US, the DJIA (+0.3%) and S&P (-0.7%) clawed back gains accumulated earlier in the week as investors sold off tech stocks in the wake of rising treasury yields (The yield on 10-year treasury hit 1.75%, a level last seen since January 2020). In Europe, the STOXX Europe (+0.4%) and FTSE 100 (-0.3%) also gave up gains earmarked earlier in the week as the third wave of COVID-19 infections dampened hopes of a V-shaped recovery.   In Asia, the Nikkei 225: (+0.2%) managed to stay in the green territory despite sell-offs fuelled by the Bank of Japan’s announcement of an end to its purchases of Nikkei-linked exchange-traded funds. The SSE: (-1.4%) extended losses from the prior week as investors reacted to rising bond yields in the US. Emerging markets (MSCI EM: -1.1%) stocks also mirrored the weak appetite for global equities consequent on the losses in India (-2.1%) and China (-1.40%), while Frontier (MSCI FM: +0.8%) market stocks posted marginal gains, driven by gains in Kenya (+2.1%).

Nigeria

Economy

According to the National Bureau of Statistics (NBS), Nigeria’s unemployment rate rose to 33.3% in Q4-20 (Q3-20: 27.1%), the highest since at least 1980, while the underemployment rate rose to 22.8% (Q2-20: 28.6%). While the working-age population increased by 4.4% to 122.05 million (Q2-20: 116.87 million), we highlight that the number of those willing and able to work reduced by 13.2% to 69.68 million (Q2-20: 80.29 million). We note that youth unemployment was the highest at 42.5% (vs 34.9% in Q2-20) than the other age groupings. For us, Nigeria’s unemployment situation is a ticking time bomb that requires drastic and urgent policy actions to reverse the trend. We do not expect a dramatic improvement in labour market conditions over the medium term, given the slow progress in implementing structural reforms that will attract FDI and enhance businesses’ capacity to improve their demand for labour.

There is no respite in sight yet for Nigerians as the country’s headline inflation continues to trend upward. According to the NBS, headline inflation rose by 86bps to 17.33% y/y (January: 16.47% y/y) – the highest level since February 2017. On a month-on-month basis, the headline inflation increased by 5bps to 1.54% m/m (January: 1.49% m/m). We believe the uptick was due to (1) persistent clashes between farmers and herders, (2) lingering impact of supply chain disruptions and (3) FX devaluation and liquidity challenges. While food inflation remains at a record high of 21.79% y/y (January: 20.57% y/y), the core inflation increased by 53bps in the review month to 12.38% y/y, the highest level since June 2017 (12.46% y/y). For March, we expect the uptrend to be maintained across the food and core baskets due to (1) the prior year low base effect, (2) higher PMS prices and (3) food supply disruptions. Consequently, we forecast a 91bps increase in the headline inflation to 18.24% y/y in March.

Capital markets

Equities

Losses recorded in the shares of heavyweight cement companies DANGCEM and BUACEMENT, on the final trading day of the week, wiped off the cumulative gains of 0.7% as of Thursday, as the local bourse suffered its seventh consecutive weekly loss. Specifically, the All-Share Index declined by 0.7% w/w to close at 38,382.39 points. Consequently, the YTD loss increased to -4.7%. Activity levels were mixed, as trading volumes rose by 44.7% w/w while value traded declined by 6.5% w/w. Notably, sell-offs in bellwether stocks BUACEMENT (-6.4%), NB (-5.3%), and MTNN (-0.6%) drove the weekly loss. Sectoral performance was mixed as the Banking (+2.1%), and Oil and Gas (+1.6%) indices posted gains while the Industrial Goods index (-2.6%) and Consumer Goods (-1.5%) recorded losses. The Insurance (0.0%) index closed flat.        

In the week ahead, we expect investors’ attention to be focused on the outcome of the MPC meeting as they seek clarity on the direction of yields in the fixed income market. We expect the choppy trading pattern that played out this week to persist in the week ahead, as investors continue to cherry-pick dividend-paying stocks and at the same time remain cautious about leaving gains in the market. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 11.33ppts, w/w, to 25.5% as outflows for CRR debits, FX auctions, OMO auction (NGN60.00 billion) and net NTB issuances (NGN14.84 billion) offset inflows for OMO maturities (NGN143.35 billion), and FGN bond coupon payments (NGN142.09 billion).

We expect the OVN rate to trend southwards but remain elevated next week, as outflows for CBN’s weekly auctions and arbitrary CRR debits, if any, are likely to offset inflows from OMO maturities (NGN50.00 billion) and FGN bond coupon payments (NGN18.12 billion).

Treasury bills

The Treasury bills secondary market closed the week on a bearish note, as the tight system liquidity continues to force sell-offs from banks. Also, there was some level of inactivity from market participants, as they shifted their focus to the PMAs in both market segments. Against the preceding, the average yield across all instruments expanded by 13bps to 5.3%. Across the market segments, the average yield declined by 19bps to 6.6% at the OMO secondary market and expanded by 64bps to 3.5% at the NTB segment. At this week’s OMO auction, the CBN sold NGN100.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions. At the NTB auction, the CBN offered NGN47.06 billion – NGN1.50 billion of the 91-day, NGN8.39 billion of the 182-day, and NGN37.18 billion of the 364-day – in bills and ultimately allotted NGN61.90 billion. The auction stop rates were unchanged at 2.00% and 3.50% on the 91D and 182D bills but increased by 50bps to 7.00% on the 364D bill.

With liquidity expected to remain tight in the coming week, we expect yields to maintain their uptrend.

Bonds

The Treasury bonds secondary market turned bearish, as investors (1) reacted to the weak economic data released early in the week – February 2021 CPI: 17.33%; Q4-20 Unemployment: 33.28% – and (2) traded cautiously in anticipation of MPC’s rate decision next week. Consequently, the average yield in the space expanded by 26bps to 9.5%. Across the benchmark curve, the average yield was higher at the short (+44bps), mid (+27bps), and long (+12bps) segments, following profit-taking on the JAN-2026 (+121bps), MAR-2027 (+56bps) and APR-2037 (+37bps) bonds, respectively.

In the coming week, we expect the outcome of the auction to influence the direction of yields in the bonds secondary market. At the auction, the DMO is offering instruments worth NGN150.00 billion through re-openings of the 16.2884% FGN MAR 2027, 12.50% FGN MAR 2035 and 9.80% FGN JUL 2045 bonds. In the longer term, we maintain our yield uptick stance, as the DMO’s intention to securitize the Ways and Means balance portends more supply.

Foreign exchange

Nigeria’s FX reserves position sustained its decline, as outflows from the reserves outstripped inflows. Thus, it dipped by USD151.21 million w/w to USD34.44 billion (17th March 2021). The naira weakened by 0.2% to NGN410.00/USD at the I&E window (IEW) but traded flat at NGN485.00/USD in the parallel market. At the IEW, total turnover (as of 18th March 2021) decreased by 24.3% WTD to USD329.74 million, with trades consummated within the NGN390.00 – 412.00/USD band. In the Forwards market, the rate was flat on the 1-month (+0.4% to NGN412.09/USD) contract, appreciated on the 3-month (+0.1% to NGN417.87/USD) contract and weakened on the 6-month (-0.2% to NGN426.18/USD) contract and 1-year (-0.1% to NGN442.45/USD) contract.

We expect improved liquidity in the IEW over the medium term, given the higher oil prices and an expected increase in crude oil production volume. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW. Similarly, we believe the CBN will devalue the naira by 5.3% to NGN400.00/USD at the interbank market to narrow the gap with the IEW rate.