Global Economy

According to the S&P Global/CIPS flash PMI survey data, the United Kingdom’s (UK) Composite PMI slowed drastically to 51.8 points in May (April: 58.2 points), marking the slowest rise in the private sector activity since the current recovery phase began in March 2021. We believe the sharp slowdown in business activity was primarily driven by the lingering geopolitical uncertainties and heightened inflationary pressures on consumer demand. Accordingly, the Services PMI (51.8 points vs April: 58.9 points) moderated to the lowest level since February 2021 (49.5 points). Elsewhere, factory activity as measured by the Manufacturing PMI (54.6 points vs April: 55.8 points) also lost momentum relative to the previous month, reflecting the intertwining impacts of (1) production bottlenecks related to the Russia-Ukraine conflict; (2) supply chain disruptions; and (3) escalating inflationary pressures. The unimpressive PMI readings suggest that the positive impacts of full economic reopening have faded with supply challenges, soaring inflation and labour shortages casting a shadow on the growth prospects. Consequently, we expect the business activities to remain tepid in the short term, even as the Bank of England maintain its pledge to fight inflation.

In May, the United States (US) private sector activity softened amidst lingering inflationary pressure and weaker demand growth. According to the flash estimates from S&P Global, the US Services PMI slowed to a 4-month low of 53.5 points in May (April: 55.6 points) while the Manufacturing PMI moderated to 57.5 points (April: 59.2 points). We understand that increased selling prices and concerns over higher interest rates weighed down the business activity. Similarly, the factory activity was undermined by supply shortages, albeit a faster upturn in employment and new orders ensured the activity remained above the series long-run average. Overall, the Composite PMI (53.8 points vs April: 56.0 points) was the softest in four months, signalling a weakened expansion rate across private sector firms. We expect private sector activity to slow further in the near term, consistent with the waning demand after peaking in March when the economy was fully reopened. Asides from that, we expect the growth to be hampered by higher interest rates, supply shortages and lingering inflationary pressures.  

Global Markets

Global stocks mounted a solid rebound this week as appetite for risk assets strengthened following (1) an upbeat retailers’ earnings outlook in the US, and (2) the less-hawkish minutes from the US Fed, which subdued fears over aggressive monetary policy tightening. Accordingly, US (DJIA: +4.4%; S&P 500: +4.0%) stocks were on track to close higher as positive earnings reports from retailers and a rally in tech stocks buoyed sentiments. European stock markets (STOXX Europe: +1.7%; and FTSE 100: +2.1%) were on course for a positive close buoyed by retail stocks, even as investors reacted positively to new fiscal stimulus measures in the UK. Asian markets posted mixed performances, as the Nikkei 225 (+0.2%) closed higher as investors’ sentiments were lifted by the rally on Wall Street amid tourism sector recovery hopes in Japan. Similarly, the SSE (-0.5%) reversed two-weeks highs as growing concerns about tech earnings and economic slowdown dampened sentiments. The Emerging (MSCI EM: -1.2%) and Frontier (MSCI FM: -0.3%) markets stocks declined following the downbeat mood in China (-0.5%) and Kuwait (-3.0%), respectively. 

Nigeria

Economy

According to the recently released data by the National Bureau of Statistics (NBS), domestic economic activities sustained their positive growth momentum for the sixth consecutive quarter. Specifically, real GDP grew by 3.11% y/y in Q1-22 (Q4-21: 3.98% y/y). Analysing the breakdown provided, we highlight that the Oil sector maintained its negative growth rate for the eighth consecutive quarter, declining by 26.04% y/y (Q4-21: -8.06% y/y) – the worst performance on record since the NBS started keeping current data series. However, the Non-Oil sector remains the overall growth engine, growing by 6.08% y/y (Q4-21: 4.73% y/y) – the highest in four quarters. While we project the Oil sector to remain in a declining state given the nature of challenges facing the sector, we expect Services and Agriculture to drive the Non-Oil sector’s growth in Q2-22 despite the unfavourable base effects from the prior year. Consequently, we expect growth to settle at 3.49% y/y in Q2-22 and revised our 2022FY growth to 3.51% y/y (Previously: 2.92% y/y).

The Monetary Policy Committee (MPC) voted to increase the MPR to 13.0% at its recently concluded meeting, the first-rate hike since July 2016. In terms of voting pattern, six members voted to increase the MPR by 150bps, four voted for a 100bps hike, and one voted for a 50bps increase in the MPR. The Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, liquidity ratio at 30.0% and asymmetric corridor around the MPR at +100bps/-700bps. In our opinion, the MPC has opted for a proactive stance by frontloading rate hikes at this meeting instead of a gradual increase in the MPR. We believe concerns about the domestic economy’s health and the need to ease the burden on government financing costs will make the Committee hold off on further rate hikes in the next two meetings in July and September. However, we have pencilled down a 100bps hike in the MPR at the last meeting in November. In the interim, we expect the CBN to sustain the use of its development finance initiatives to ensure the rate hike does not derail the fragile recovery.

Capital markets

Equities

The local bourse closed in the green territory despite profit-taking activities in heavyweights in the telecommunications and consumer goods sectors, as the All-Share Index advanced by 2.1% w/w to close at 54,085.30 points. Notably, the positive performance this week was buoyed by foreign investors’ renewed interest in AIRTELAFRI (+20.2%) which proved sufficient in offsetting losses in GUINNESS (-11.2%), NB (-10.0%), and MTNN (-4.8%). Consequently, the MTD and YTD returns for the index increased to +9.0% and +26.6%, respectively. However, activity levels were weaker than in the prior week, as trading volume and value declined by 39.4% w/w and 14.5% w/w, respectively. Performance across sectors in our coverage was broadly negative, following losses in the Insurance (-6.3%), Consumer Goods (-3.9%), Oil and Gas (-0.9%), Banking (-0.8%), and Industrial Goods (-0.7%) indices.      

With the recent decision of the MPC to hike the MPR by 150bps, we expect negative sentiments to dominate market performance in the short term. Nonetheless, we think a short-term market correction will present opportunities for investors to make re-entry in stocks with sound fundamentals and attractive dividend yields. Overall, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

Just as we envisaged, the overnight (OVN) rate expanded by 150bps w/w to 14.0%. The OVN rate was elevated all through the week as the system was pressured with funding for CBN’s auctions (OMO, NTB and FX) and offset inflows from OMO maturities (NGN30.00 billion) and FGN bond coupon payments (NGN9.37 billion).

Next week, we expect a moderation in the OVN rate due to our expectations of improved system liquidity, as inflows amounting to NGN425.63 billion flow into the system from FAAC disbursements (c. NGN400.00 billion), FGN bond coupon payments (NGN5.63 billion) and OMO maturities (NGN20.00 billion).

Treasury bills

Proceedings in the Treasury bills secondary market closed the week on a bearish note on the back of the depressed system liquidity, and the adjustment in secondary market rates to reflect the higher stop rates from Wednesday’s NTB PMA. Thus, the average yield across all instruments expanded by 19bps to 4.0%. Across the segments, the average yield expanded by 40bps and 14bps to 4.4% and 3.8% at the OMO and NTB segments, respectively. At this week’s NTB auction, the CBN offered NGN153.03 billion – NGN5.36 billion of the 91-day, NGN3.78 billion of the 182-day, and NGN143.88 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN173.48 billion – NGN3.56 billion of the 91-day, NGN1.52 billion of the 182-day and NGN168.67 billion of the 364-day bills – at respective stop rates of 2.50% (previously 1.74%), 3.89% (previously 3.00%), and 6.49% (previously 4.70%). Elsewhere, at the OMO auction, the CBN offered and allotted NGN20.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions.

Next week, we expect bullish sentiments in the T-bills market, following the expectation of healthy system liquidity.

Bonds

Trading in the FGN bonds secondary market was bearish, as investors’ sell-offs in reaction to the MPC rate hike on Wednesday watered the gains recorded at the beginning of the week. Thus, the average yield across instruments expanded by 8bps to close at 11.2%. Across the benchmark curve, the average yield expanded at the short (+8bps), and long (+23bps) ends as investors sold off the JAN-2026 (+52bps) and MAR-2036 (+35bps) bonds, respectively; but contracted at the mid (-6bps) segment following buying interest on the NOV-2029 (-15bps) bond.

We believe the MPC’s rate hike will continue to drive aversion for long-dated bonds in the short term. Consequently, we reiterate our view of an uptick in bond yields in the medium term, as both the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserves decreased by USD125.53 million w/w to USD38.63 billion (24 May 2022). Across the FX windows, the naira was fell by 0.1% to NGN419.50/USD at the I&E window (IEW) and depreciated by 0.7% to NGN610.00/USD at the parallel market. At the I&E window, total turnover (as of 26 May 2022) decreased by 31.4% WTD to USD428.10 million, with trades consummated within the NGN410.00 – NGN453.55/USD band. In the Forwards market, the rate weakened on the 1-month (-0.3% to NGN419.66/USD), 3-month (-0.4% to NGN426.54/USD), 6-month (-0.7% to NGN437.61/USD) and 1-year (-0.4% to NGN458.67/USD) contracts.

In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be tepid given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels over the medium term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.